Why five-year reset products still don't make Barry merry
By Kevin Startt
About one year ago I wrote an article on ProducersWEB explaining why the index annuity industry’s leading selling product was a dumb idea. I think it still is a dumb idea today.
The idea of locking any fixed product up for five years with the possibility of earning five consecutive years of zeroes makes Katherine Sebelius look like Marcus Welby, MD — especially in a historically low interest rate environment.
The main index crediting option offered was a soft and hard commodity index featuring a back cast year that just happened to be 2008, a year when seemingly everything went down except the Trader Joe index. Under the Chicken Little warning, “the sky is falling," thousands of insurance agents went out and imprudently put all of their client’s assets into the top-selling product.
Advisors too often recite the mantra, “zero is your hero,” and it has cost clients dearly since the product’s inception. The S&P 500 has returned over 140 percent, while the index used has produced zilch and remains at an all-time low. This option is a well-designed product with competitive income riders and accelerated benefits. The premise on which it was sold by many agents as a one-stop solution, is greatly flawed, even though it provides a means of diversification — especially in an inflationary economic environment or currency debacles and debasements. It reminds me of the little boy who greeted his aunt over Easter and said, “Maybe now Daddy can do the trick he said he would do.” The aunt replied that, “he would climb the walls if you ever visited again.” Bull markets climb walls of worries, and this has been true again from 2009 to the present.
One of these indexed annuity sugar daddies — we will call him Barry after another famous President Barry — is climbing the walls because his agency or marketing organization did not level with him about the possibility of five straight zeroes on a client’s statement, even though it is his job to know a bull market from a farmer's market and diversify even annuity crediting options. The story goes a little further because at one time, this agent actually became an investment advisor for about 24 hours with a registered investment advisor. Even though the commissions on the above product are substantially competitive, Barry felt that the RIAs were skimming too much of his commission to do homework that he should have been doing. In addition, the small override was eating into his ability to fund his prospect and client seminars at Ruth's Chris Steakhouse.
The moral of the story? Buyer beware of the scare of imminent debacle conveyed by annuity sellers when the market is down 53 percent. That’s the time to buy mutual funds, ETFs and managed money. Beware of first names like Barry. Indexed annuities have a place in a well-diversified portfolio but not for all of a client’s assets, even if it costs you a good steak to say no. Get your lifetime tax-advantaged income, locked in anniversary gains, and sleepful nights from a strategy that makes sense all the time not just when economic Armageddons are in full bloom — like Barry did.