Insurance sales: investment advisors ignore the obvious
By Dan Vinal
WebPrez Insurance & Annuity Videos
We've all read about the recent surveys that tell us retirees are far more concerned with protecting their income than they are with maximizing their income by taking on the risk of higher earnings or yields on their savings and investments. That's why fixed annuities are being purchased by more and more retirees, despite advisor efforts to the contrary.
Fixed annuities are an obvious, common sense solution to their fear of losing or running out of money. And a well-balanced annuity laddering strategy would further address both tax and inflation issues for the retiree.
However, many financial advisors are reluctant to recommend either a fixed deferred or a fixed immediate annuity to their clients, much less a strategy of annuity laddering. Maybe it's because annuities are insurance products and not investments; because they are guaranteed and conservative (in the literal sense); and because they keep it simple and make it easy for their clients.
But (in my humble opinion) investment advisors, financial planners and retirement specialists do everything but "keep it simple and make it easy" for their clients. In fact, I think they have bought into the complexity of asset management theories and practice because it justifies the fees they charge and the investment they've made in their own education.
However, the statistical evidence, as well as my personal experience (and that of everyone I've discussed it with) is that despite all these "investment strategies" and asset management practices, the results have been for the most part underwhelming.
For example, J.P. Morgan reports that the average investor in equities earned only 2.6 percent annually for the past 20 years,from 1990 to 2010. The Dow earned an average annual rate of only 5.3 percent from 1900 to 2000, a period of 100 years, by growing from 66 points to 11,497.
Peter Lynch’s Magellan Fund posted 17 percent returns for upwards of 20 years. However, in a later study it was discovered that most investors in the fund actually lost money due to getting in and out at the wrong times.
Now, if you're one of those advisors who charges a fee for asset management (which seems to be the Holy Grail of financial service business models) you may certainly disagree with me. And of course there are still many people out there who continue to pay these fees and accommodate this model.
But it seems to me that very few people have achieved their financial objectives using these services, in spite of having paid considerable fees year after year. I can certainly understand the appeal of this model to the financial advisor, because you get paid every year even if you don't produce any positive results or achieve the clients objectives.
What I don't understand is why clients continue to pay these fees even when they lose money. And why they don't seem to realize how much it all adds up to.
For example, in addition to 401k or 403b administration fees, and in addition to mutual fund management fees, a client might also pay their advisor an asset management fee of maybe 1 percent. And if they pay that 1 percent every year for 20, 30 or 40 years, they would essentially pay the advisor 20 percent, 30 percent or 40 percent of their money, regardless of performance or results.
Of course the understanding is that the advisor (as well as the plan administrator and the fund manager) is bringing value to the client, ostensibly justifying his or her fees by exceeding standard market returns. But if or when they don't, what's the justification? Am I missing something here? Does this make sense, or "does the king wear no clothes?”
If retirees are most concerned with protecting their annual income, with assurances that they will never run out of money, wouldn't it make more sense to adopt an annuity laddering strategy that combines both deferred (indexed) and immediate annuities that include both tax and inflationary advantages?