The variable annuity: Has it lost its mojo?

Receiving a 200+ page prospectus when you place your life savings into a product can cause drops of sweat to form on one’s brow. Not all VAs suffer from such complexity, but many do. But does complexity make something a poor choice? After all, how many people can repair a new Honda Accord themselves these days? They may be really complex, but still really good cars, right?

3. Lack of focus 

This is much more subtle than cost and complexity. If one product can allegedly provide three or four benefits simultaneously, can it actually be the best choice for any of those needs? For example, is it the best pure investment vehicle? Is it the best method to defer taxes? Is it the best way to provide lifetime income for a retired client? How can it be all things to all people and truly be the best at anything?

Now, in all fairness, any investment or product one chooses will have numerous drawbacks. Pick any one thing and it’s easy to pick it apart. While the VA is not inherently bad, in light of the above concerns, the question I encourage you to ask yourself in each situation is weather the variable annuity is a viable solution for each individual client you offer it to. This is especially relevant now, in this modern era, because there may be many other compelling choices available.

THE GOOD

Is there a good side to VAs? Yes! It is very viable, but it must be for the right person.  Who in particular? Well, the variable annuity can be the very best choice for the client who is looking for a Swiss Army Knife because they are not yet clear on what their adventure holds in store for them.

Let me explain it this way: If I were to send you into the woods and challenge you to survive for a week, with no knowledge of what’s in store for you, would you prefer a Swiss Army Knife or a chainsaw? I would think a Swiss Army Knife because of its many useful tools, all-in-one.

What if the game changed and you were challenged to enter the same woods and cut down the largest tree you could find, as quickly as possible? Would you prefer the knife or the chainsaw? I would imagine the chainsaw would be your choice.  Its best attribute, its specific purpose, is to cut down trees.

In the financial planning realm, where lack of clarity exists in the mind and plans of the client, the Swiss Army Knife, the variable annuity, may serve them better than other, more specific and focused, financial products and investments.  When the plan warrants a very specific need, the chainsaw is best.  For example, a retiring client with a very specific lifetime income need may be better suited with another form of guaranteed income annuity or a bond ladder than with a variable annuity that has other attributes, that cause the income benefits to be somewhat diluted, compromised.

Ultimately, the best use of a product is determined by the quality and focus of the planning we are able to do with and for each specific client. The better we can articulate the target goal, the more clearly we can articulate the product or investment choice. The variable annuity is a very powerful tool when used in the right circumstances. Used poorly, it can underperform and disappoint those it was intended to benefit, just the same as with any other financial product. Again, it’s all about choosing the right tool for the job.