I recently read a serious takedown of variable annuities. The author began saying that variable annuities are the “most misunderstood investing strategies…” I could hardly carry on. Annuities aren’t strategies. Conflating “strategy” with “solution” is an old semantic problem, and it probably isn’t an innocent mistake.
The notion of “annuity” as ”strategy” isn’t new. Old-school “sales ideas” and “annuity strategies” have papered registered rep and agent inboxes for more than 20 years. These concepts were imagined with annuities as the whole solution — where a large asset might be located for the promise of high returns and no risk.
Historically, these “annuity strategy”‘ slicks and brochures were presented at free steak dinners along with hard-sell slide decks and scary charts aimed at retirees and pre-retirees. They were designed to obliterate investor objections and boost annuity sales, not to help solve real-world problems for investors.
Appealing to client fears (or greed), they could be touted as one-size-fits-all solutions to protect against market downside, provide guaranteed retirement income, and also leave a lasting legacy. Yes, all three at once.
And they give all annuities a bad name. Which is a problem, because annuities solve important problems. Nearly 10,000 boomers retire every day — many without traditional pensions. Economists agree that annuities may help them meet the retirement income challenge.
Multiple Needs, Not One Solution
When designing annuity “strategies,” client needs often take a back seat. Commission-compensated sales of these products decouple the advisor’s success from that of her client and encourage high-pressure sales tactics. These annuity “strategies” grew up around the commissioned sale of the product. As the appetite to sell more annuities grew, ever more complex features and benefits bloated them into complex and costly products many folks revile today.
In this one-size-fits-all concept of strategy, benefits have been sold to investors even when in conflict. For instance, paying an additional fee for an income rider in an annuity to solve an income need, and also paying an additional fee for an enhanced death benefit rider like Return of Premium can be in conflict. Those two needs may best be met with different tactics. But that’s not always how they are positioned. The danger here is that if you think an annuity “strategy” can efficiently meet many of your client’s goals, you risk missing all of them.
The Engine Isn’t the Boat
If and when an advisor places her clients’ well-being at the center of her practice, the annuity is never the strategy. It is possibly a tactic (if appropriate).
Using an old example: If your mission is to travel between two towns separated by a river, your strategy may be to cross the river, and your tactic could be to use a boat. The annuity could be the boat in this metaphor, but it isn’t the engine in the boat.