Why Ken Fisher Is Wrong on Annuities: Milevsky, Finke

Ken Fisher hates annuities, and annuity experts aren’t exactly in love with what the famed money manager said about those retirement products in an interview with ThinkAdvisor last week.

The chairman and CEO of Fisher Investments, who runs a three-year-old annuity conversion program, likened annuity sales approaches to the too-good-to-be-true promises of Ponzi schemes and charged that annuity salespeople often lie to make high commissions.

He insisted they “rattle off whatever it is that they know is a lie” and that other salespeople say what “they believe to be true but isn’t.” Attacking variable annuities, he thinks they should not be legal in their current form and marketing mode.

For the most part, the experts vehemently object to Fisher’s take on annuities.

“A lot of advisors don’t quite understand what it is they’re selling when they’re selling annuities — but to tarnish the entire industry is ridiculous,” says Moshe Milevsky, associate professor of finance at York University in Toronto and executive director of the IFID Centre at the Fields Institute for Research in Mathematical Sciences, in an interview.

Fisher declined to comment for this article.

Other interviews with ThinkAdvisor found experts taking umbrage, in particular, at what they called Fisher’s overgeneralization of annuity products. There is a variety of annuities, with differing characteristics, and several are unique, they say.

“Lumping immediate annuities with all the other types is rather disingenuous,” says Wade Pfau, professor of retirement income at The American College of Financial Services and director of retirement research at McLean Asset Management in McLean, Virginia. Fisher “is trying to act like he’s doing his clients a service by paying their annuity surrender fees when he’s really just taking it out of the investment management fees he collects,” he says.

Fisher’s enmity was directed sharply at variable annuities, whose salespeople, he says, take advantage of consumers’ annuity naivete. Moreover, customers don’t understand VAs’ complicated contracts, a situation that works against their getting clarity about what they’re buying.

“Yes, as soon as you slap a living benefit onto an annuity, it becomes even more complex; but complexity doesn’t equal bad,” says Scott Stolz, senior vice president of private client group investment products at Raymond James, who is responsible for insurance and annuities, among other products. “Ken Fisher took a pretty drastic position.”

Annuity experts say that now, more than ever, Americans in retirement need the protection and income that annuities afford partly because of fast-disappearing private pensions and the planned elimination next year of some Social Security claiming strategies that can be used to boost retirees’ monthly checks.

“There is a magical, secret ingredient, a secret sauce, inside an annuity that can’t be replicated in any conventional financial product or synthesized by traditional money managers,” says Milevsky. “I’m a big fan of annuities that behave like pensions.”

Variable annuities can substantially benefit consumers, according to the experts.

“Dismissing variable annuities is like dismissing ETFs or mutual funds,” says Michael Finke, a professor and coordinator of the doctoral program in personal financial planning at Texas Tech University. In fact, Finke says, “VAs could serve as an ideal default for most Americans rolling their defined contribution assets into an IRA. A competitively priced variable annuity product is hard to beat compared to an unprotected investment portfolio, as long as the fees between the two are similar.”

New low-cost deferred variable annuities “deserve to get more respect,” insists Pfau. But he singles out the immediate annuity – also called an income annuity or a life annuity — as packed with the most potential because it offers “a ton of benefits to consumers.”

“This is a very important retirement tool,” Pfau says. “It’s very straightforward: a simple lump-sum payment, and you get income for life. It pools longevity risk across a large [group] of individuals; and because of its mortality credits, those who don’t live long subsidize those who live longer. The mortality credits are part of a [retiree’s] spending power. An income annuity can help preserve the remaining portfolio when someone lives a long time in retirement.”