What Happens When an Annuity Salesperson Reads My Security Benefit Annuity Review?
I've written a few annuity reviews on my blog, which frankly, have been a huge hit. I get complimentary emails every day from people all over the USA - which is a great feeling and one of the reasons I continue to review new products and explain how they really work. I've also gotten great feedback from clients, who ultimately are who I really serve each and every day. But it's not all roses.
Often I get emails from angry agents, calling me names, and making ridiculous proclamations about how I'm wrong (even though I fully show all my research) and how they are so much better.
Oh the joy when I get those emails ;).
So today I thought I'd share one of those emails, if for no other reason than to help readers of my blog to see the warning signs of an advisor who has either:
A) Lost his/her marbles; or
B) Could be leading clients down a path of financial calamity
Hopefully by sharing these warning signs you won't find yourself signing big-time financial commitments across the table from one of these advisors. This post is long, and I'm sure it will offend some people. I'm willing to share it though because I believe it will help people, even if it makes me look like a bit of a jerk.
It all started when I wrote a review on the Security Benefit Secure Income Annuity...
A few months back I wrote an unbiased review on the Security Benefit Secure Income Annuity (SIA). You can read that review here if you wish.
Since then I've gotten a number of emails and even a few rather nasty voicemails from agents who "lost a sale" because of my review. For full disclosure, everything I share in the review is 100% factual. I even verified the data I tested directly with Security Benefit representatives before publishing the post. So if anyone "lost a sale" it's because they proposed the product would work differently than what I revealed in my review, which would have been wrong on their part. Go figure.
In any event, here's the latest complaint from an annuity salesmen who didn't like what I had to say. First I'll put the whole email down, and then I'll break down each of their claims and share the facts. The point of this is so that readers of my blog can see the things annuity salespeople say, and then what the actual facts are. It comes from Mr. Michael Davis of Davis Financial Services in Orange Park, Florida
**Warning - the agent's grammar is not perfect. Below is his actual text, not mine**
The full email:
In reference to your article about the Security Benefit Secure Income Annuity Another inaccurate comparison from a market biased so called fee only advisor. Why do you use current caps which are at historic lows and use returns dating back 60 years. There are also other strategies such as the annual point to point which you fail to point out. Don't just pick the years or strategies that suit your self serving purpose. Your real purpose is to capture assets under management at a 1%per year whether the account gains or looses. I think that is more in 10 years than the annuity commissions and the annuity commission does not come out of your initial investment. If you don't know or have failed to research your product fully don't mislead people into thinking you are an authority. My clients in retirement prefer GUARANTEES rather than the IF'S and HOPE that equities have given over the years. I welcome your comments. Michael Davis ChFC ,IAR
Just makes me warm and fuzzy reading it! To be clear, I have no issue with annuities in general. I think when they are used correctly and meet an investors needs they can be quite useful. What does irk me though, is when agents mislead investors into thinking they will work better than how they really will. That's what I highlight over and over in my annuity reviews.
When the agents don't even know how the products work, Watch Out!!
Let's break this email down piece by piece now.
In reference to your article about the Security Benefit Secure Income Annuity Another inaccurate comparison from a market biased so called fee only advisor.
Ok, I'll give the guy a little leeway here. Maybe he just hasn't read the 100 or so market updates and monthly features I've written on Tactical Asset Allocation? If he had, however, he'd know that I always advocate conservative investing.
I would never suggest anyone, especially people who are retired or close to it, put a high percentage of their assets in stocks (which is what he presumably is implying by saying "market biased"). My general stance, and recommendation to clients, is to use as little stocks/traditional growth investments as possible in order to reach their financial goals. For many people this means somewhere between 0% and 50% in growth investments, with each person's unique goals and risk propensity factoring into the right portfolio allocation for them.
Why do you use current caps which are at historic lows and use returns dating back 60 years?
Here Mr. Davis sort of embarrasses himself.
His first question is why I use current caps when illustrating the potential of annuities purchased today? What kind of question is that? I'm not sure what he would rather be illustrated, maybe caps that are double what they really are?
For those not familiar with "caps" on index annuities, here's the simple explanation. Index annuities offer an accumulation based on a percentages of the market's upside without dividends. The most common market used is the S&P 500, though there are others. Each year an annuity holder has an annuity their credit methodology is applied to the market (S&P 500, for example) and the annuity holder is given a portion of the upside, but never any of the downside. The upside is limited, however, to a "cap".
Because interest rates are low issuers of index annuities offer low caps. They want to limit how much they have to payout to annuity investors because the insurance company actually invests most of the money in bonds. Since bonds are not paying high interest rates the insurance companies are limiting the percentage of market upside. Pretty simple.
Since the caps are what they are, and they're set by the insurance company, the only reasonable thing to test is how the products would perform based on how they are built right now. Since index annuities have not been around for 50+ years there is no long term data on their performance. But the formula used to calculate returns is printed and readily available.
So when I test their potential performance I just use the real data on the S&P 500 going back to 1950 (the earliest available data) and apply the current formula to it. It's easy and accurate. Illustrating anything other than that would be irresponsible and inaccurate.
He then asks why I would test 60 years (62 is actually how far back I test them). The answer is pretty obvious - that's how much data is available to test. Maybe he'd like me to test just the best time periods, I don't really know. But again, testing for anything but the longest possible time frame would be irresponsible.
There are also other strategies such as the annual point to point which you fail to point out. Don't just pick the years or strategies that suit your self serving purpose.
When I tested the Security Benefit Annuity performance I used a form of interest crediting called "monthly averaging". Most index annuities actually have multiple ways they credit interest, like Annual Point to Point, Monthly Sum, and others.
Here, Mr. Davis is suggesting that other crediting methods would have had better returns for investors when illustrated for 62 years. Unfortunately for him, he shows again how little he really knows about the products he evidently sells. I have tested every imaginable crediting method for index annuities. And they all come out around the same.
Here's what I mean:
Monthly sum with 2% cap and no fees: 2.86%
Monthly average with 100% participation, 4.5% spread, and no fees: 3.0%
Annual point to point with 4% cap and no fee: 2.73%
These are all close to the high end of crediting methods available today. As you can clearly see, I actually illustrated the best of the three! The worst was the method he suggested would be better. Good grief, how's that self serving?
Your real purpose is to capture assets under management at a 1%per year whether the account gains or looses. I think that is more in 10 years than the annuity commissions and the annuity commission does not come out of your initial investment.
Perhaps this is where the agent really loses his cool.
This blog has about 3,000 readers, of which less than 50 are my clients (less than 2%). Absolutely, I do publish research to help those clients stay informed and make good decisions with their resources. And yes, I do work on a fee only basis. But clearly Mr. Davis has no idea what I charge and what I do for clients.
I write this blog to help a lot of people. There's no way I, or anyone for that matter, could ever serve all investors. By sharing information I can help a lot of people who otherwise would not have access to it.
The real interesting point though I'd like to elaborate on though is Mr. Davis' assumption that people who buy annuities are not paying anything for what they get. And that annuity commissions are somehow not paid out of the investors principal.
Let's examine that theory...
When someone buys an annuity they have what's called a surrender period. This is a time frame that if an investor wanted to get their money back they would be charged a penalty. Some annuities have long surrender periods and high penalties, whereas others are shorter and more modest. It's common, though, for surrender periods to last 6-10 years and start off with penalties of 6-10% which decline as the annuity gets closer to the end of its surrender period. In plain english, this is one of the costs of the annuity. If you want your money back after 1 year it could cost you 5%, 10%, or more of your principal.
Another cost is the very complicated nature of how index annuities pay interest to account owners. For those not familiar, and as I've sort of pre-eluded to, when you buy an annuity the insurance company invests your money in regular market securities. In most cases the vast majority of their investments are in bonds.
Here's an example of how one company (American Equity) currently has their annuity investors money invested:
This is taken directly from the American Equity Insurance Companies website. I'm using it as an example because they specialize in annuities, particularly fixed indexed annuities.
As you can see, when you buy an annuity from them they take the money and invest it. In their case mostly in corporate bonds. There are some other moving parts too - like some options contracts and other derivatives they invest in to allow for unusually good market years - but the bread and butter of how they make money comes from the interest they earn on the bonds they invest in.
The math is actually really simple:
You give the insurance company money and they earn interest (minus) The insurance company pays for their costs of doing business, like commissions, staff, offices, legal/accounting, lobbyists, etc (minus) What they pay annuity holders in interest (equals) Their profit
According to YCharts (http://ycharts.com/companies/AEL/gross_profit_margin) over the last few years American Equity has averaged a gross profit margin (what I very loosely illustrated above) of 30%. This is pretty common for life insurance/annuity companies.
If they earn 6% on their bonds, then we can see their cost of running the annuities is 1.8% per year, and we can surmise they cannot pay their annuity holders more than 4.2% per year on average. Since we know they issued a lot of annuity policies back when rates, and thus caps, were higher - we can then conclude that those buying the policies today will not earn the 4.2% as some of the older policy holders could be earning 6% or more. This is likely why when I test most annuities using rates available today they tend to average somewhere close to 3%.
So what is the real cost of buying an annuity when compared to other investments? Well, it's complicated, but it sure looks to be in the neighborhood of 1.8% or more per year. If interest rates eventually go up, but the gross profit margin stays at 30%, then the costs will be higher. Maybe 2.5% or more.
Since the cost is always a percentage (in this example 30%) of the insurance companies gross portfolio return, no matter how you shake it the fees go up the more interest rates go up. On the contrary, if an investor just side-stepped the insurance company, bought a highly diversified bond portfolio at a fixed percentage fee, they would stand to get a better return with a comparable level of risk. If bonds are paying 5% and the fee is 1% than it's only slightly better than the annuity alternative. But if bonds are paying 8% and the fee is 1%, then it's a much, much better deal.
That's just my rather analytical way of looking at costs. And it's also why I think any insurance agent who touts annuities as a low cost investment is full of baloney. There is absolutely a cost for the benefits they provide, so why not just be honest about what it is?
What's really sad about this rather long topic on fees, really has nothing to do with fees. What bothers me is that many agents use bogus math and very misleading advertising material claiming guaranteed rates of 6%-8%. That's just wrong, regardless of what the real cost is, and unfortunately happens every day.
If you don't know or have failed to research your product fully don't mislead people into thinking you are an authority.
Unintentionally I have become pretty well-known nationally for my annuity research. Back on my first ever annuity review I wrote the following:
So with no real source for objective, fact based research I thought, "why not write the first ever truly independent research on the most popular annuities out there so people can finally see how they really work, and if they actually do make sense?"
Since that first post I've had over 10,000 people read my annuity reviews and watch my annuity videos. It's been an awesome, yet very humbling experience. I've gotten nearly 1,000 emails from people all over the country sharing their experiences and asking questions about annuities. I've been invited to speak to large groups of investors, and recently was contracted to train agents by one of the largest insurance companies in the world.
I'm sure Mr. Davis doesn't know me from Adam. Since we live in a country where we can freely speak our mind and share our opinions, he is certainly entitled to whatever opinion he'd like of me and my research. I do think, however, that I've more than proven my ability to properly research complicated financial products, and explain them accurately and clearly so it helps people.
Enough said about that.
My clients in retirement prefer GUARANTEES rather than the IF'S and HOPE that equities have given over the years. I welcome your comments. Michael Davis ChFC ,IAR
For fun (just couldn't resist):
But on a serious note:
I'm glad Mr. Davis knows what his clients want, and clearly he feels index annuities fit that need. I hope that is true. I also hope he closely follows the free annuity research I provide on this blog, communicates the real pros and cons of annuities, and always places his clients interests before his own.
There's absolutely no single right way to manage money. Nobody is really ever right, nor is anyone ever 100% wrong. When Mr. Davis, myself, or any of the hundreds of thousands of financial advisors are given the incredible responsibility of helping people manage what they saved a lifetime to accumulate, we owe it to our clients to do the best we can - all the time. That includes owning up to our shortcomings, studying our trade, working hard, and always seeking to do what is right.
I would guess that based on his email he feels very strongly about what he does. I'm equally sure the many insurance salespeople out there do too. However, when it's your money, and your future; always be extra careful to get all the facts and only do what you feel truly comfortable with.
My purpose in sharing this email and writing this rather long post was only to educate regular investors as to some of the ways financial advisors differ in their views on financial products, how they really work, and the dangers of bad information. In no way am I trying to elevate myself by putting someone else down. If I've offended anyone, my apologies. The only allegiance I have is to my clients, and blog readers - by trying my best to provide impartial information that benefits everyone.
If you ever find yourself being pitched a financial solution that sounds too good to be true, well, you know what that usually means. If you have questions and would like to get my take - feel free to reach out. There's two easy ways to get in touch.
Just use the Contact Form on this site to send me a private message
Feel welcome to use my online calendar to schedule a free phone consultation
My schedule is usually pretty hectic, but I do block off a couple hours each week just for answering questions from blog readers. Nothing is for sale on those calls, just some feedback to help people out. Also, I'd love to know what you think about this post. Good, bad, or even really bad! For public feedback feel welcome to just use the Comment section down this page a bit. Regards, Jason Wenk