In the past, I’ve written about Variable Annuities and how I don’t care for them for many, many reasons.
Another product I put into a similar category is the Equity-Indexed Annuity. These are products that claim to provide “equity-like returns” with no possibility of loss. Really? Years ago, I analyzed the prospectus for one such product and found that what they called an Equity-Like return was anything but. The calculation for a given year’s return was taken by adding the 12 monthly returns, with a maximum credit of 2% in any one month. Then, if the year was positive, this was your return. The seller of this product said that in good years you could make as much as 24%, but with zero risk on the downside.
Now, in the two years, 2009 and 2010, you would think that since the index (S&P 500) rose 52% you’d have seen at least in the mid to high teens in your account, right? Hardly. You see, 13 of the 24 months were more than 2% up. In fact, four of those 13 months were over 7% to the positive, so that these 13 months of highest gain averaged 6%/mo. Since each of these months’ returns gets cut to 2%, that’s 4% * 13 or 52% skimmed off the top. The punchline is that in two excellent years, the EAI return was zero based on the crediting equation used. Now, you may ask, what about 2008? Well, zero there as well, of course. Which prompts the question – with high fees, 2%/yr or greater in most cases, and zero returns in stellar years, why botther with these products at all? Why not just stick to treasuries if you are market-phobic? Why, indeed.
Joe
Great post, Joe. These Equity Indexed Annuities are T.R.O.U.B.L.E. for everyone but the insurance companies (and their agents) that sell them.
Why would someone buy these? Because the marketing message works, even if the product doesn’t fulfill the promise of zero downside with majority of the upside.
Also, many insurance agents literally scare people, particularly senior citizens, into buying these pieces of junk. And since they can’t rely on the facts – because, as you said, who would buy these if they understood them – they instead rely on emotional sales tactics and stories.
And to add insult to injury, most of these things have very expensive, long-term surrender charges associated with them. So once you realize what you’ve been sold, it will cost you dearly to fix the problem by getting rid of it.
Yet again, if it sounds too good to be true . . .
Thanks, Russ! I find it tough to easily get the prospectus for most of these, the one I referenced was for a product sold to a friend of a family member. I suppose with some diligence, I can make a hobby of analyzing and exposing these.
Full disclosure: I am a fee-based financial planner, licensed insurance agent and registered investment advisor. So that means I am in the business and do, on occasion, use Fixed Indexed Annuities with my clients.
All right, that being said, Joe, your article isn’t really a fair (or complete) presentation of this product. Do you readers a service and break it down in some detail before dispensing your opinion.
I won’t argue the fact that this particular product has be mis-sold by agents that were either dishonest or too stupid to know better or both. But let’s not confuse the product itself with the salesman! Nor will I try to defend every single FIA as a “good” product. But sometimes a particular FIA is just what the doctor ordered and fits the need of the client quite nicely.
Oh, and I’d be happy to get you any prospectus you need, except that these are insurance products and are thus not sold by prospectus. Regardless, if you want to look at the detailed literature of any particular FIA, I can probably get that for you too.
If you have a prospectus specific to an Equity Indexed Annuity that you like, I’m happy to review it. My objection to the one I referenced was twofold – when backtested over the two best ever (in my life, anyway), it produced results that lagged CDs over the same period. I understand clipping the high end of the bell curve and clipping the low end as well, so you trade some return for downside protection, but this one had no upside at all. The salesman represented it in a way that bordered on misrepresentation, and the client had no idea what she bought.
Joe, I understand. It sounds to me from what you’ve said that the agent was more of a salesman than he was an advisor. As far as I am concerned, agents that misrepresent like that should be drummed out of the agency. I don’t know which FIA you are referring to in your article, but I am familiar with the crediting strategy that was used. It’s a shame that the agent didn’t recommend splitting the investment into several crediting strategies. That alone would probably have made a difference.
Would you be interested in doing a more thorough analysis of how these products work for your readers? I’d be happy to help, provide you with any information that you need, etc. Let me know.
You have the soapbox if you wish. I’d be happy to give you the floor and guest post the other view.
Or if you send me a detailed prospectus, I’ll be objective. That means looking at how the product performs over certain periods, good or bad. I’m willing to give up some gain for downside protection, but again, if I run numbers that average 15%/yr, I don’t expect an EIA to lag treasuries/CDs.
OK, I will write it up. But I can’t even say that it’s going to be “the other point of view”. A fixed indexed annuity is a “proceed with caution” product (as are, IMHO, most all financial products). There are some agents out there that pitch these things like they are the best thing since sliced bread. They aren’t.
Regardless, I think it would be a service to break this product down and take a look at the realities of what they are, how they work, the positives, the negatives, etc. For me, the best client is an informed client. I like to work with people that know what they are getting into; it makes for a much better relationship! The worst client, on the other hand, is the misinformed (or “partially” informed) client. The ones that come into my office and tell me “I hate annuities because Suze Orman told me they are ‘bad’ and besides, Dave Ramsey told me I can get 12% if I buy good quality mutual funds with a long track record…” are the clients that I just can’t work with.
Give me a few days and I will get back in touch.
I look forward to it, Richard. My own opinion was completely independent of what the TV/Radio stars were saying. I prefer to do my own math, read the prospectus or whatever I can to understand the performance, and come to my own conclusion. When it came to VAs in particular, I was contacted by Jefferson National, and hosted their article. A $20/mo flat fee for their product. So .25% for a $100K account, as compared to the 1-2%/yr fees. That had me change my view a bit, at least on that particular VA.
Ah, yes…I am familiar with their “Monument Advisor” product. Great sub-account options, no surrender charges and you can’t beat the $20 per month fee. There are some real “stinkers” out there in the VA space (as there are in the IA space). Fortunately, I don’t have to worry about that too much anymore. Since I gave up my “registered rep” status and went “fee only” on the investment side of the business there aren’t a lot of those “stinkers” that I can even use with clients. I will go to work on the IA analysis. Enjoy the Super Bowl.
EIA is the old term. Proper is Fixed Indexed Annuity or FIA. Since these are not securities products, there is no prospectus, only brochures that SHOULD comply with NAIC guidlines (national assoc of Ins commissioners)Fear is driving people to do irrational things in this market. As an advisor, I’m not a fan of these, but coupled with the riders they can be enticing. Question: did you use a backtesting program simulator or did you calculate yourself? (disclosure: riks opinions are not to be construed as advice)
I used S&P data and a spreadsheet, nothing more sophisticated than that.