It seems as if fees are the center of every conversation surrounding any type of investment, particularly an annuity. Ken Fisher believes these annuity products have astronomical fees and that advisors recommend them to a client solely to collect a commission. Fortunately for investors this isn't the case. An annuity can have extremely similar commission options as a standard mutual fund investment. Sure, an advisor can elect to receive a one time up front fee or he could elect to have that fee paid out over the investments lifespan. So his argument as it pertains to egregiously high fees only paints the picture he tries to portray and does not give the whole story. Some of the fees associated with these contracts also pay for the added benefits directly associated with them. If you have an income annuity it only makes sense that you'll need to pay for the benefit of being able to draw lifelong income off of your protected value (discussed below) as opposed to your contract value.
Lack of Investment Returns
There are two meaningful values when your receive a statement from an annuity product. This section applies to annuities that have an income rider attached to them. The first is your contract value and the second is your protected or income base value. If you learn anything at all about your annuity contract please understand these two values. Your contract value is the value of your underlying investments within the product. This is the value that people like Ken Fisher will say earns lack luster returns. This money is purposely invested conservatively so that the insurance company ensures minimal volatility. The value that truly matters in an annuity contract with an income rider is your protected or income base value. This is the value that does not decrease and is typically credited simple or compound interest the longer you keep the contract without turning on income. This value is so important because it is what you will ultimately be drawing income off of once you're over 59 1/2 and decide you'd like to begin your life payments. In summation, it is true that your contract value can have very little movement but when you're using this annuity for income that value has little relevance. It's that value that people like Ken Fisher will try to focus on to make you believe your contract is giving you nothing for your money.
Surrender Periods / LiquidityLast but certainly not least is the surrender period or amount of time the money must remain in the contract if you decide you'd like to forfeit your annuity and walk away. To begin, let's discuss why they would even have such a thing built into these contracts? Well, the insurance company has their actuaries run the numbers and decide the amount of time money must be kept in this contract in order for them to be able to fulfill the guarantees that are associated with it. My argument on this is similar to the fee argument I discussed earlier. Many older contracts had these long surrender periods, however, the industry has been shifting and we've seen these time constraints diminishing or even disappearing altogether. Furthermore, no advisor should ever recommend to put all of your assets into an annuity product. They're simply used as a sleeve in your portfolio to give you some protection against market risk. It's another form of diversification or a way to supplement retirement income if that's something you believe you'll need more of.
My intention when writing this was not to attack Ken Fisher in anyway. I simply wanted to make it known that if your advisor recommends an annuity product to you that doesn't mean they're looking to exploit you for fees. More often than not they probably did so based off your risk tolerance or desire for more financial security. Believe me in saying I do not favor annuities over more traditional forms of investing, however, I do see them fit for certain circumstances. Being that Ken Fisher never uses them even in situations where they could be beneficial worries me that some of his clients may not be receiving the best advice. Ken states in one of his commercials that he has solutions to provide you with anything that an annuity can do, but I challenge him to find a solution that will continue to make income payments long after the money invested is gone. Don't get me wrong, there will be an additional cost to receive that safety but it's hard to put a price on peace of mind.
In closing, with perhaps the most controversial president of all time taking office this year, wouldn't it be comforting to take a portion of your investments and place them into something that can give you a guaranteed income regardless of what the rest of the market does? Our financial markets are at all-time highs and we now have a president who can send the whole economy into a tailspin with one tweet. For many, the mere thought of this makes them uneasy which is why I pose this question, are you more inclined to take a sure thing or a maybe?