We are constantly bombarded with sales messages in various forms - billboards, TV and radio ads, and even subtle online advertisements cleverly embedded within educational articles. We have come to accept this pervasive presence of marketing in our lives as part of being consumers. However, what becomes more challenging to accept is when we encounter deception or even worse, unethical practices.
Unfortunately, the financial services industry is loaded with individuals and firms who sell dreams of high returns with little or no chance of loss. These individuals usually have a few things in common. They are licensed to sell securities and/or life insurance products; they often claim to be fiduciaries but also sell high-commission products through third party affiliates; and their qualifications are focused on sales and marketing - not finance, investing or tax planning.
These financial firms or "advisors" prioritize maximizing their revenue from clients rather than providing genuine financial advice. These firms, which are much more prevalent than true fiduciary firms, heavily rely on emotional manipulation to persuade consumers into making ill-informed decisions that ultimately benefit the advisor at the expense of the unsuspecting consumer.
“Annuities Are Not Purchased, They’re Sold”
This line is well known in the financial advisor community. The meaning behind the quote is that there is very little actual demand for these confusing and expensive insurance products, yet people keep buying them. To quote from a Forbes article titled Annuities Are Not Bought, They’re Sold: “The reason for the continued vibrancy of annuity sales is that they pay a big honkin’ commission to the selling broker or agent.”
Earlier this year I attended a free dinner retirement workshop. I decided to attend this workshop only after receiving many invitations in the mail - I figured they must really want me to attend. Even though I was quite sure this was going to be mostly a sales pitch, I was hopeful there would be some small amount of educational content to the presentation.
As usual, the presenter gave all their “credentials” which included licenses and many years “in the business”. Here is my interpretation of these “credentials”: Other than a Series 65 license, a license is only issued so that the holder can sell a product. I would argue that the best financial advisors have no licenses. This is because they view their business as helping and advising - not selling. As far as the “years in the business”, should anyone really care how long they have been a salesperson? Maybe “years in the business” should be directly correlated with how quickly the potential victim should run away.
It did not take very long into the presentation for my blood pressure to increase. The presenter did his best to stir up emotions in the audience. “Did you know that you can lose 50% in your investment account and your advisor will probably do nothing about it?” “Are you sick of your advisor telling you to stay the course?” “Did you know there is a better way?” “If your advisor isn’t talking to you about a better alternative, they obviously do not care!” Wow.
Initially, I was uncertain about the product being pitched during the sales presentation, but more often than not, these sessions tend to promote annuities or life insurance. As expected, after building up the narrative around the volatile stock market and uncaring financial advisors, the presenter revealed the annuity bombshell. According to him, his indexed annuities would be the savior, ensuring a blissful and secure future for all attendees.
The presenter neglected to mention the numerous drawbacks associated with the product, including limited liquidity, complex terms, lack of transparency, high fees, potential tax issues, caps on market gains, participation rates, surrender charges, and more. These factors can result in a significantly lower rate of return, negatively impacting one's retirement income.
The reason most “free dinner” retirement presentations pitch insurance products is that these confusing products are very lucrative (remember big honkin’ commissions?) for the advisor selling the products. They do not pay for these dinners out of the kindness of their heart.
The Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and the Consumer Financial Protection Bureau (CFPB) have all come out with “buyer beware” warnings about annuities. Their warning is usually for the purchaser to do their own homework before entering into one of these expensive and confusing contracts.
Hot Markets for Annuity Sales
When markets are volatile or dropping, annuity salespeople shift into high gear. They know their pitch of lower volatility will resonate with concerned investors. The year 2022 set records for annuity sales. Before 2022, the record was set during the financial crisis in 2008.
If any real planning were done with realistic return expectations using the annuity strategies versus the stock and bond markets, the investor would be shown that their financial picture in retirement would most likely look worse by opting for a lower risk/lower return strategy at the worst possible time.
The Bottom Line
There are cases that can be made for the inclusion of certain kinds of annuities in portfolios, but usually as a small percentage of the overall portfolio and not as a replacement for equities. What is not acceptable are the sales tactics around annuity and insurance products that use overblown promises and scare tactics.
As an investor, it is important to grasp the concept of the risk and return tradeoff. Most people need to earn a return greater than the rate of inflation to retire comfortably. To do that, they need to take on some short-term risk, and no investment has delivered better than the stock market. The greater risk, and one that is not short-term, is locking into an annuity product when things get bumpy. Unfortunately, there are many forces at work to convince investors to do the wrong thing at exactly the wrong time.
Proud to help investors “stay the course”
Tony Robbins: Video - Explains a True Fiduciary
What is a Fiduciary and Why Is It Important (September 7, 2022)