5 things that Ken Fischer has wrong about annuities

Watching CNBC 60 hours a week, I get to watch a lot of commercials geared toward people who are deciding on how to allocate their retirement assets. Perhaps you’ve seen Ken Fisher’s one minute commercial that starts “We don’t sell annuities. I would die and go to hell before I would sell an annuity.” In case you’d like to see it in its entirety,  click here to view it.

I guess we know where he stands when it comes to annuities. However, his knowledge of annuities is somewhat challenged as there are at least 5 things that Ken Fisher has wrong about annuities. Each is detailed below with the time the quote starts in the commercial.

1. (0:06) “Most annuities have nose bleed level fees …”

What does he mean by a nose-bleed level fees? 3%, 5%, 10%? Is he talking about one-time, up front fees or ongoing fees?

Most of the annuities that I offer have no explicit fees, either annual or up-front. Obviously, neither the insurance company nor the agent work for free so you know that there are expenses built into the contract. Even so,  the returns, and most importantly, the protection of principal that annuities offer, are net of all these costs. In addition, the life insurance company guarantees your principal will never goes down.

As an example, let’s assume that an investor has $500,000 that is managed by Ken Fisher’s firm, Fisher Investments, which charges a 1.25% management fee.  In a 10% down year, that $500,000 shrinks not only from the market losses but by the management fee too.

In contrast, most annuities that I offer would have a value of $500,000 at the end of a year where the index that it was allocated to was down 10%. No potential for loss of principal here!

 

2. (0:09) “… don’t do what the customer thinks they do …”

How does he know what the customer is thinking? In proposing annuities to my clients, I provide a written illustration which is prepared by the life insurance company that contains guaranteed (minimum expected) results and hypothetical results.

The guaranteed results are there in black and white so they know what the minimum this annuity will provide to them each year. The hypothetical results are there to show the potential return the investor may receive.

And speaking of the customer’s expectations, what are the customer’s expectations of having Fisher Investments manage their money. With the exception of the annual management fee being deducted from their account, the customer and Fisher Investments have no idea what the minimum expectation is after one year. Theoretically, Fisher Investments could lose 100% of your principal.

 

3. (0:12) “… have tremendous tax problems …”

This one perplexes me. For retirement assets in a qualified plan such as an IRA, there is no difference to the customer between having the funds invested in an annuity or having it managed by Fisher Investments as all gains are tax-deferred until they are distributed from the IRA.

For non-qualified accounts such as a personal or joint account, there are no taxes consequences for any of the gains in an annuity until they are distributed. For a managed account at Fisher Investments, the customer will receive an annual 1099 which details all the income (some fully taxable, some partially taxable, some not), all trades (some short-term, some long-term) that must be deciphered by either themselves or an accountant to properly fill out their tax return.

It seems he’s got this one backward to me!

 

4. (0:14) “… hard to get out of once you’re in them…”

Annuities are not hard to get out of. There is one distribution form that needs to be filled out and submitted to the insurance company for most of the annuities I offer.  Funds normally arrive within a week either wired, ACHed or mailed to the contract owner.

 

5. (0:25) “… anything you want to do with annuities, there’s a better way to do …”

In my opinion, this statement shows a lack of understanding of what annuities are designed to provide.

For example, if a customer came to Fisher Investments and asked “Can you guarantee me that I will not lose any of my principal over the course of any year?” he would have to say “No.” because the returns to his investors are determined by the markets and Fisher Investments provides no guarantees.  What is the better way here?

Another example: a customer wishes to guarantee lifetime income for themselves and their spouse for as long as they live. An annuity can be purchased to do just that whether either spouse lives to age 85 or age 125.  What is Fisher Investments better way to do this?

 

Conclusion

Fisher Investments is a company that manages billions of dollars and has a marketing budget to support it.  It seems that in his zest to market his firm’s services, he has used his firm’s heft to smear the perceived competition of annuities with these statements which are misleading at best.

In my opinion, it is not an either/or — either purchase an annuity or have the money invested in the stock market.

The annuities I offer are more like longevity insurance – providing principal protection, potential for growth and lifetime income options for as long as you live and/or your spouse lives. This comes with a guarantee of no loss of principal, but usually some cap on annual earnings.

Stocks have historically produced higher returns but do not come with a guarantee of principal protection or lifetime income.

Annuities are not for everyone, but they are for some. Once a client understands these distinctions, they can decide whether they want to allocate a portion of their portfolio to annuities or not.

"Education is the key to making informed financial decisions." -- Elliot Goldberg, Independent Registered Investment Advisor (610) 999-3599
“Education is the key to making informed financial decisions.” — Elliot Goldberg

Please call me at (610) 999-3599 or click here to learn more about annuities.

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