Annuities have a terrible reputation. Rather than incorporating them into retirement plans to solve specific problems for investors, some salespeople overstated their features and benefits—selling them as ‘strategies’ rather than tactics. Writing in ThinkAdvisor, RetireOne CEO David Stone says this semantic difference is important.
These are complex instruments that help investors achieve important goals, but to think of them as ‘strategies’ overemphasizes the role they may plan in a larger plan.
Often, by the time an investor is aware of what they’ve been sold, and how they may have been misled about the problems the annuity may solve for them, it may be too late to do anything. Surrender penalties (common in many annuities sold for commission) can lock an investor’s money up for 7 or more years, leaving them feeling angry and betrayed.
The problem isn’t always that what an annuity can do is overpromised, but that the transaction may have been predicated on a misunderstanding. Selling anything to a consumer knowing that they are making the decision because they expressly don’t understand how it works is unethical.
What’s bad about annuities isn’t the annuities themselves. What’s bad about annuities is how they’ve been sold, and how their sales have been incentivized. Just as people have confused ‘strategies’ with ‘tactics,’ annuities have all been indicted because of their association with bad actors.
A new generation of no-load offerings have come to market, and competition among insurers promises to keep improving them. It’s time to think differently about how they may function in wealth management.