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Finke: Why Annuities (and Free Steak Dinners) Deserve a Second Chance

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There’s been some revealing chatter on Twitter this week about Ron Lieber’s recent column in the New York Times, “We Went to a Steak Dinner Annuity Pitch. The Salesman Wasn’t Pleased.”

In the piece, Lieber describes a controversial chart shared at the meal, featuring an equity indexed annuity performing almost 8.3% better than the S&P 500 from 1998 to 2016. As Lieber points out, when reinvested dividends are included in the index, stocks do nearly 34% better than the annuity.

This prompted the columnist to highlight the need for investors to do their homework before going to such an event, read the fine print, ask questions and get a second (and even a third) opinion before buying such products.

Michael Finke, chief academic officer for The American College of Financial Services, thinks this valuable perspective just tells part of a more complex story.

An article like this can be used to paint annuities as a financial instrument in a broad negative light. It gives advisors license to dismiss them and to feel they can do so ethically. As an economist, this makes me uncomfortable,” explained Finke on Twitter.

There is, of course, lots of literature that breaks down the financial ins and outs of using annuities. And Finke points to a good summary of these thoughts that finance professor Moshe Milevsky published in the December issue of the Journal of Financial Planning.

Most who do research on annuities,” like Olivia Mitchell of The Wharton School and Jeffrey Brown of the University of Illinois Gies College of Business, “agree that annuities are often an optimal choice for funding safe income in retirement. There’s no real argument about their value,” according to Finke.

Commenting on the shadier side of insurance-product sales, he said: “Insurance companies have the ability to limit abusive sales practices through self regulation. If they fail to do this, these types of articles will continue and consumer acceptance of annuities will be limited. This is also a problem.”

He continues:

“We’ve seen RIA firms use negative perceptions of annuities to drive their own business. This is a shrewd response to a failure to self-regulate.  But it isn’t in the best interest of consumers who are looking for secure retirement income.”

Presumably Finke was referring to Ken Fisher and his well-known anti-annuity stance, but he mentioned no advisors by name.

“It would be easy to demonize 200-basis-point expense ratio S&P 500 funds, but it would make consumers worse off if they then avoided all S&P index funds as a consequence,” he explains. “I would love to see Ron Lieber help consumers better understand annuities and the risks of failing to consider them.”

What can be done to accomplish that? Changes in the insurance field, he says.

“The U.S. has the largest market for consumer insurance in the world,” according to Finke. “An important reason for this is that consumers can trust sellers in a market with significant information asymmetry. Reducing asymmetry through oversight and information can make the market healthier and larger.”

End of story?

Not so fast, says Reuters retirement columnist Mark Miller.   

“Unfortunately, the insurance industry is its own worst enemy here, fighting fiduciary regulation. fostering product complexity, lack of transparency and using hacks to sell/distribute,” Miller remarked on Twitter.

But in the end, even he thinks Finke has at least some of the right ingredients for change: “Make annuities more simple and transparent, and weed out the bad products,” Miller added. “[T]hen, maybe they will have a chance.”


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