Everyone I talk to, from new clients to longtime neighbors to business contacts, tells me the same story. I tell them I’m a financial advisor, and we start talking about money, investments, and eventually retirement. They say to me, “I also have this thing… I think it’s called an annuity? My guy at (fill in the name of a large broker dealer) told me it would make my retirement easier. ”.
That statement often makes me pause and take a deep breath. Why? Because I know that annuities are far from the simple, cure-all retirement solution they’re often presented as.
I’ll start with the spoiler alert: I (mostly) hate annuities. In my fifteen years in wealth management, I have yet to be excited about an annuity a new client shows up with. I’ve only recommended an annuity in a small handful of cases. Nine times out of ten, I think of annuities as a hammer in search of a nail. They are products that are hocked as solutions, unnecessarily complicated for consumers, extremely restrictive, and generally quite expensive. Those are four big negatives that are hard to overcome.
But the careful reader will note my use of the word “mostly”. I concede that there are circumstances in which annuities can be useful. It’s important for people to know when this is the case. What should you know about annuities? Most importantly, how do you know if annuities are right for you?
Have you ever thought about why your financial planner keeps trying to get you to buy an annuity? You’re not the only one. There is more to this pattern than meets the eye. I’ve seen it happen many times.
Financial salespeople (who often call themselves “advisors”) are pushing annuities harder than ever these days. With investors feeling nervous about their financial futures, these products are being pitched as the perfect solution But before you sign on the dotted line, let’s dig into what’s really happening
The Real Reason Annuities Are Pushed So Hard
To get right to the point, money talks. The main reason many financial planners push annuities so hard is
They make a killing on commissions.
Industry data shows that annuities give brokerages, banks, and their sales teams the most money. For selling an annuity, the average commission is a whopping 6% to 7%, which goes straight to the salesperson’s pocket.
Think about that for a moment. If you invest $100,000 in an annuity, your “advisor” could instantly make $6,000-$7,000 on that single transaction. That’s a powerful incentive to push these products, regardless of whether they’re the best fit for you.
The Cost Problem Most Salespeople Won’t Mention
Annuities are not only good for the people who sell them, but they’re also very expensive for you as an investor.
Why are they so costly? Simple – annuities are insurance-based products that need to make up the cost of whatever they’re guaranteeing. Many annuities promise you’ll never lose principal while still allowing you to make money through investment accounts similar to mutual funds.
But there’s a catch in that guarantee. When they say you’ll “never lose principal,” what they often mean is that your beneficiaries are guaranteed your principal upon your death – not necessarily you during your lifetime. This guarantee provided little comfort to many investors approaching retirement during the financial crisis.
The fee structure of annuities is where things get really painful:
According to Morningstar, the average expense of a variable annuity is 2.2%. That might not sound like much, but let’s look at what it does to your money over time:
- If you invest $10,000 into an annuity with a 2.2% fee and the market returns 8%, in 20 years you’d have $30,882.
- If you instead put that same $10,000 into an index portfolio with just 0.03% in fees, you’d end up with $46,351.
That’s a difference of $15,469 – over 50% more money in your pocket just by avoiding those high annuity fees!
The Tax Deferral Myth
“But what about the tax benefits?” I hear this question all the time.
For younger investors especially, annuities are frequently marketed as tax-deferral investment programs. And yes, a variable annuity will give you tax deferral – but at what cost?
For investors who have already maxed out their 401(k)s and IRAs and are looking for additional tax-sheltered retirement savings, there are better options. A taxable, tax-efficient portfolio is often the smarter choice.
With the popularity of Exchange-Traded Funds (ETFs) and direct indexing (for larger investors), you can build a very tax-friendly portfolio at an investment cost of less than 0.15% – a fraction of what you’d pay for an annuity.
How They Hook You: The Psychology Behind Annuity Sales
So why do so many intelligent people still fall for the annuity pitch? It comes down to the persuasive tactics of skilled salespeople combined with the financial industry’s expertise at playing on your fears.
Many consumers, especially those who primarily use banks for their financial services, might never invest in the market on their own, seeing it as too risky. The annuity seems to offer the safety they crave.
The sales pitch typically follows a predictable pattern:
- Highlight market volatility and economic uncertainty
- Create fear about outliving your money in retirement
- Present the annuity as a “guaranteed” solution that eliminates risk
- Downplay or completely ignore the high fees and commissions
- Use confusing jargon and complicated contract terms to obscure the downsides
Remember the old saying: if it sounds too good to be true, it probably is. There’s no such thing as a free lunch in investing, and those “guarantees” come at a steep price.
Types of Annuities You Might Be Pitched
Not all annuities are created equal, and knowing the differences can help you spot a bad deal. Here are the main types you’re likely to encounter:
Variable Annuities
These are the most commonly pushed products. They allow you to invest in market-based “subaccounts” (similar to mutual funds) while providing some form of downside protection. They typically have the highest fees and most complex structures.
Fixed Annuities
These pay a guaranteed interest rate for a specific period. The rates are often initially attractive but may drop significantly after the introductory period.
Fixed Indexed Annuities
These tie your returns to a market index like the S&P 500, but with caps on how much you can earn when the market performs well. You’re protected from losses, but your upside potential is severely limited.
Immediate Annuities
You give the insurance company a lump sum, and they begin paying you an income stream right away. These can sometimes make sense for retirees seeking guaranteed income.
Deferred Income Annuities
Similar to immediate annuities, but payments start at a future date. They’re sometimes marketed as “longevity insurance.”
Who Might Actually Benefit from Annuities?
I’m not saying annuities are always bad for everyone. There are specific situations where certain types of annuities might make sense:
- Retirees who want guaranteed income they can’t outlive
- Very conservative investors who prioritize safety over returns
- Those who have maxed out all other tax-advantaged accounts and want additional tax deferral (though better options may exist)
- People who struggle with investment discipline and might otherwise panic-sell during market downturns
Even in these cases, however, it’s crucial to shop carefully, understand all fees, and consider alternatives.
Better Alternatives to Consider
So if annuities aren’t the answer for most investors, what should you consider instead?
For Retirement Income:
- A well-diversified portfolio of low-cost index funds or ETFs
- A systematic withdrawal strategy designed by a fiduciary advisor
- Treasury bonds, TIPS, and high-quality corporate bonds
- Social Security optimization strategies
For Tax Efficiency:
- Tax-managed index funds
- ETFs (which are generally more tax-efficient than mutual funds)
- Direct indexing for larger portfolios
- Municipal bonds for taxable accounts (if appropriate for your situation)
For Downside Protection:
- Proper asset allocation based on your risk tolerance
- Diversification across multiple asset classes
- Treasury bonds and other high-quality fixed income
- Put options or other hedging strategies (for sophisticated investors)
How to Protect Yourself From Annuity Sales Pressure
The next time a financial professional starts pushing annuities, here’s what you should do:
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Ask about commissions and fees: Request a full breakdown of all costs, including surrender charges, mortality and expense charges, administrative fees, and investment management fees.
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Request alternatives: Ask what other strategies might achieve your goals with lower costs.
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Get a second opinion: Consult a fee-only fiduciary advisor who doesn’t sell commission-based products.
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Take your time: Never sign anything in the first meeting. Take materials home to review carefully.
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Read the fine print: Annuity contracts are notoriously complex. If you don’t understand something, don’t sign.
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Consider the source: Is the person selling you the annuity truly acting in your best interest, or are they motivated by commissions?
The Fiduciary Difference
This is probably the most important point in this whole article. There’s a fundamental difference between two types of financial professionals:
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Commission-based brokers/agents: Can recommend products that are merely “suitable” for you, even if they’re not the best option. They’re paid through commissions.
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Fiduciary fee-only advisors: Legally obligated to put your interests first and recommend what’s truly best for you. They’re typically paid through transparent fees rather than commissions.
If you want objective advice about whether an annuity makes sense for your situation, consult a fiduciary fee-only advisor. They can help you explore alternatives that will likely cost one-tenth of what you’d pay for the average annuity.
The Bottom Line
Financial salespeople push annuities because they’re incredibly profitable – for them. The high commissions create a powerful incentive to recommend these products regardless of whether they’re the best choice for you.
While annuities might make sense in specific situations, most investors can achieve their financial goals more efficiently with lower-cost alternatives. The key is working with a financial professional who puts your interests first.
Remember, when it comes to your financial future, the person giving you advice should be working for you – not for the insurance company paying their commission.
Have you been pitched an annuity recently? I’d love to hear about your experience in the comments below. And if you found this article helpful, please share it with someone who might be facing similar sales pressure.
Annuities vs. Direct Investing: Why Your Returns Might Suffer
Some types of annuities, like indexed annuities, let you share in market gains while protecting you from losses. However, this apparent win-win comes with a significant catch. While annuity companies shield you from market downturns, they also limit your potential gains when markets perform well. This cap on returns is how these companies manage their risk and ensure profitability.
It’s important to remember that despite short-term volatility, markets tend to rise over extended periods. Annuities may give investors who don’t like taking risks a sense of security, but this peace of mind often comes at the cost of much lower long-term growth potential. Lots of different stocks and bonds can often give investors a better balance of growth and stability than most annuities, which don’t offer much room for growth.
Decoding Annuity Complexity: Why These Contracts Are So Hard to Understand
I’ve seen annuity contracts that are nearly 100 pages long. That alone should give any consumer significant pause. What’s in all that fine print? Why do we need so many disclosures, graphs, exclusions, and riders? How does the annuity actually work? These are designed to be custom products, and few people fully understand how they work under different circumstances. Participation rates, yield caps, surrender fees… these products come with a whole new vocabulary set. Not to mention that once you’re in, there are very strict rules and costs associated with getting out.
Before signing an annuity contract, there are some important steps to take:
- Read the entire contract: Yes, all 100 pages. If you don’t understand something, ask questions. Don’t sign until you fully comprehend what you’re getting into.
- Talk to a fee-only financial advisor who doesn’t sell annuities to get a second opinion. They can give you an unbiased opinion on whether the annuity is really what you want.
- Know the fees and limits on your ability to get money out of the account. Ask for a clear list of all the fees that come with the annuity, such as administrative fees, death and expense fees, and rider fees. Also, understand the surrender charges and when they apply. Before you sign, make sure you won’t need the money during the surrender charge period and that you understand the restrictions on cash flow.
- Compare options: Ask how the annuity stacks up against other ways to invest your money. Could you get the same results with a strategy that was more flexible and cost less?
- Talk to a tax expert to find out how the annuity will affect your taxes now and in the future. Here are some things you should know.
Remember, an annuity is a long-term commitment. Take your time, do your homework, and don’t let anyone pressure you into making a decision before you’re ready. If an agent or advisor is pushing you to sign quickly, that’s a red flag. A good financial product will stand up to scrutiny and careful consideration.
Why Do Financial Advisors Push Annuities? – AssetsandOpportunity.org
FAQ
Do financial advisors make money on annuities?
Financial advisors can earn money from selling annuities through two primary compensation structures: commission-based and fee-based models.
What are the red flags for financial advisors?
When looking for a financial advisor, things to avoid are ones who don’t have the right credentials, whose fees aren’t clear, who doesn’t seem like a good person, and who tries to sell you products
Why does Suze Orman not like annuities?
“It never makes sense for tax purposes,” she said. Instead of locking money into an annuity or insurance-based investment product, Orman encouraged focusing on other strategies. She suggested continuing to invest in dividend-paying stocks, growth stocks, or value stocks.
