Insight

This past weekend, Philly.com published two articles discussing fixed-index annuities and the potential harm they pose to elderly people and savers in general. Both articles can be found here and here and we highly recommend everyone read them. We almost never recommend that any of our clients purchase annuities at Blue Bell Private Wealth Management. We believe that people generally should avoid annuities or financial products that are offering any guarantee of principle.

First and foremost, annuities are contracts created by insurance companies and sold by salespeople to people typically as instruments of safety with a guaranteed payout or rate of return. Often, the people selling these products are using peoples’ fear of stock market crashes as a main reason to purchase. All annuities, along with most other financial products, are created by companies to be sold to customers. Their main purpose is to benefit the companies who create them and the people that sell them. Annuities are not always a bad investment choice for people and could potentially benefit them but it is important to understand the type of contract you are purchasing and if it will benefit you.

There are a few reasons we typically do not recommend our clients purchase annuities. They are often extremely complex to understand, salespeople usually earn high commissions to push these products, they are highly illiquid contracts and there is little regulation in the insurance industry for these products.

Fixed-index annuities, mentioned in the articles above are complex and difficult to understand not just for consumers but often for the people selling them. Many do not know the exact terms of the contract and what they are purchasing for their clients. Most of these annuity contracts have a rate of return tied to an index such as the Dow Jones or S&P 500 that will move to the upside if the index does up to a defined cap. They also can have a minimum value paid to out at the end of the contract. The SEC attempts to shed some light on these contracts here.

So why do these products exist and why are they sold to consumers?

Simply put, they are highly lucrative for the companies making them and salespeople selling them. Most annuities have commissions ranging from as low as 4% to as high as 10%. That means on a $100,000 annuity contract, the salesperson selling it to you could make $10,000 right from the beginning! These contracts are also highly illiquid and often have surrender fees that can be as large as 7-10% of the contract value if you attempt to take your money out before the end of the annuity contract.

Insurance contracts like annuities are not regulated at the Federal level therefore it is left to each individual state to regulate the products and salespeople. Rules and regulations also tend to differ between states. This leads to little to no protection for consumers purchasing these contracts. As stated in the Philly.com articles, states are responsible for monitoring these products and the people that sell them. Most states do not have the resources available to adequately understand these products and be sure that all agents selling products that are suitable for their clients. Agents also do not have to register with FINRA or file compliance documents with the Securities and Exchange Commission.

Insurance agents selling these products are not fiduciaries as some claim to be. Only Registered Investment Advisors, like Blue Bell Private Wealth Management and its advisors, are held to the fiduciary standard. This means that these insurance agents are not required to work in their clients best interests and simply have to make a case that the product sold to consumers is “suitable” for them. The suitability standard is the lowest standard within the financial industry and often leads brokers and agents to sell financial products that are most profitable to them, not what is best for their clients.

We have included some other links below to read more about annuities and the potential harm they can do to consumers purchasing them. We recommend that our clients should try to avoid using these insurance products and most other financial products similar to them at all costs.

At Blue Bell Private Wealth Management, we are a fee-only registered investment advisor that is held to the fiduciary standard, always putting our clients’ best interest first. Please contact us at (610) 825-3540 to learn more about our firm and how we can help you protect and grow your savings.

Other Links:

Forbes – Annuities Are Not Bought, They’re Sold

ValueWalk – Annuity Surrender Charges: Read the Fine Print

The Motley Fool – 4 Facts About Annuities Every Baby Boomer Should Know