Debating the validity of traditional fixed annuities, Pt. 1Article added by Lew Nason on May 2, 2012
Joined: October 13, 2006
Ranked: #2 (22,609 pts)
I recently wrote an article, Selling annuities to boomers and seniors: the missing ingredient, which I also posted to a LinkedIn group. What follows is an interesting conversation I had with a financial planner about the validity of using annuities. I think it will give you an insight as to why we have a problem in this industry and what you can do to combat the naysayers.
Dave xxxxx, RFC:
The real missing ingredient to selling annuities to boomers is an interest rate rise of about 4 percent. We boomers are maybe just a little smarter than you might believe when it comes to fixed income investing.
Hi Dave, Thank you for your comment. However, I think you might have missed the point of the article. The point of the article is that most agents, advisors and RFCs are selling products instead of solutions to the prospect's problem(s). You'll set many more appointments if you first help your prospects see and understand the problems their facing (and you'll close more sales). This lack of getting the prospect emotionally involved in understanding and solving their problems is why most agents and advisors are struggling to set appointments and close sales in this business.
Dave xxxxx, RFC:
You can't help them, if you don't get the appointment or can't get them to take action. Whether you like it or not, people buy based on emotions and then justify the decision based on logic. Even baby boomers!
My only point was most people don't understand the damage they are doing to their clients, selling them annuities in this type of environment. I would easily say that 99 percent of the investing public does not need to be in annuities. No disrespect to those that sell these products and believe they are helping people, but I have plenty of work getting people out of these products once they realize they have been sold a product that is going to underperform just about everything else out there.
Hi Dave, I totally disagree with your statements. I'll put it this way, using your words, in rebuttal to your statements.
Dave xxxxx, RFC:
Many financial advisors don't understand (or are ignoring) the damage they are doing to their clients by not offering them traditional annuities in this type of environment. Most people cannot afford to put what little savings they have at risk. If they can't afford to lose their money, then they cannot afford to be putting their money in the stock market or other risk investments. And that especially goes for most seniors who are totally dependent on what little income they have.
Traditional fixed and indexed annuities with their tax deferral, guarantees and many other advantages are saving vehicles that belong in almost everyone’s portfolio. Everyone needs safe money. Any financial advisor that is not considering traditional annuities for their clients (or is indiscriminately replacing existing traditional annuities) is doing a great disservice to their clients.
Financial planning is not just about investment returns (where you will make the most money). It's about helping people to get what they want (not what you think they want.) People are looking for financial independence and security. Most people are concerned about having their money there when they need it the most — about providing a secure guaranteed income for all of their retirement years!
It's not how much money you make, but how much money you'll get to spend.
Lew, I hear what you are saying, but it also appears that you work for an insurance company, and in the financial planning world, that could be a slight conflict of interest. At least it probably means most of your training and literature comes from the insurance industry, which I have found tends to put only one slant on the story.
Maybe some fee-only advisors can chime in who have not been "trained" by the insurance industry.
Have you ever stopped to think that most people in retirement (at say age 65) have at least 20 to 25 years left in which they need to be able to at least overcome inflation? In 24 years, a $1,000 income need would turn into $2,000. In most cases (not all), that annuity payout is not going to double over that time frame, as the payouts are fixed once the annuity is annuitized.
Also, in retirement, the clients you say need a safe investment can't afford to lose any of their money, but they also can't afford to have the only disposable income they have (for emergencies) to be locked up up in an annuity. "Sorry Grandma, you can't pay your medical bills because you just locked up your last $100,000 in an annuity paying you $500 a month."
One final thought for you to ponder, and I really hope you can get this answer right. Would any financial advisor worth his or her salt suggest that a 65 year old put 100 percent of their savings into the bond market? That is essentially what you are doing if an individual has the majority of their retirement income coming from fixed income devices, such as pensions, Social Security and annuities.
As financial advisors, it is our job to educate the client in ways that will help them minimize their risk, while still maximizing their returns, for their particular situation. This should also allow the most flexibility in future years to reallocate their money to different investments or "life events" should the need arise.
Hi Dave, No, I don't work for an insurance company. I am a marketing and sales trainer, coach and mentor for insurance agents, financial advisors and financial planners. And, yes, I did get my training from the insurance industry, along with taking financial planning courses through the American College, CFP, IARFC, etc.
Consider, Loren Dunton, one of the original founders of financial planning, stated, “Financial planning is about helping middle income families to spend, save, invest, insure and plan wisely for the future, to achieve financial independence.” Isn't that also the mission statement of the IARFC? And it's a major part of the mission statement of our organization.
The problem with the financial planning industry today is that the training they receive has gotten away from the original mission. In your words, “it tends to put only one slant on the story.” It's become all about investing and working with the affluent.
Financial planners would be well advised to get more training from the insurance industry to have a well rounded approach to financial planning, to help middle income families.
You asked, “Have you ever stopped to think that most people in retirement (at say age 65) have at least 20 to 25 years left in which they need to be able to at least overcome inflation? In 24 years, a $1,000 income need would turn into $2,000. In most cases (not all) that annuity payout is not going to double over that time frame, as the payouts are fixed once the annuity is annuitized. “
Using your words, have you ever stopped to think about split-funding of annuities (laddering)? This can provide more liquidity, more tax advantages, more guarantees, more safety and an increasing income throughout retirement?
Also, using your words, one final thought for you to ponder, and I really hope you can get this answer right. Would any financial advisor worth his or her salt suggest that a 65 year old put 100 percent of their savings at risk in the stock market? Or even 50 percent of their money if they need it for income?
I do agree that "as financial advisors, it is our job to educate the client in ways that will help them minimize their risk, while still maximizing their returns, for their particular situation. This should also allow the most flexibility in future years to reallocate their money to different investments or 'life events' should the need arise.”
And that is why traditional fixed annuities and immediate annuities should be a major part of their plans in retirement.
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