Annuity Wars Highlight Rift Between Factions

The prevailing tack for selling annuities is the same type of shifty pitch on which every Ponzi scheme is premised, according to top money manager Ken Fisher.

"Ponzi schemes' promised returns are at a level that you can get only with lots of variability and volatility. Annuity salespeople tell consumers that they'll get a smooth, high return on their annuities. You show me a great investor who hasn't had a lot of variability in their return, and I'll show you somebody who hasn't existed," Fisher told ThinkAdvisor.com in an October interview.

Indeed, for two years now the outspoken investor's ubiquitous print and online ads have trumpeted: "I Hate Annuities … and So Should You!"

Even Sen. Elizabeth Warren, D-Mass, in October blasted annuity sales tactics, saying that the responses by 15 of the country's largest annuity providers to her questions revealed "a widespread practice of offering agents kickbacks in exchange for promoting certain annuities."

What Fisher likes about annuities is his annuity conversion program, which buys folks out of their annuity surrender fees if they become long-term clients. The penalties incurred to liquidate are amortized against quarterly advisory fees.

Fisher kicked off his buyout program in 2012, and now has 15 annuity conversion counselors and plans to expand the team.

More recently, Fisher has been incensed over what he calls too-good-to-be-true promises made by annuity salespeople. They mislead customers to believe they're buying a smooth, high return on a "safe" investment, but what they receive in income stream is simply a return of their capital, Fisher maintains. On top of that, folks fail to read their lengthy, complicated annuity contracts.

"It's very rare that the customer understands the long, convoluted annuity contract, where magical words are used that have nothing to do with what the contract actually does," Fisher said.

Those "magical words" include "promises like 'guaranteed income, guaranteed principal, guaranteed return on investment.' […] Salespeople rattle off whatever it is that they know is a lie or that they believe to be true but isn't. If this were in my industry, it would be completely illegal."

FINRA AND FIDUCIARY

If the fiduciary standard under Dodd-Frank is imposed on Series 7 registered representatives, Fisher said "it would kill the sales of annuities by commissioned salespeople."

If a more watered-down version passes, Fisher still worries that commissioned salespeople will only be required to disclose "that they're getting a commission. It will be a form of 'fiduciary standard lite' and buried in some other disclosure."

Fisher said that "most people who call themselves 'financial advisor' use [the term] illegally. Series 7 registered salespeople are not supposed to call themselves advisors, but they do it all the time."

Allowing FINRA to oversee broker-dealers "opened the door" to those professionals using the title inappropriately, Fisher insisted. "FINRA is not the financial industry regulatory authority if you assume the totality of the financial industry. They are a small subset — the broker-dealer part."

Fisher conceded that "FINRA itself warns about the risks of annuities," but ultimately, it serves the broker-dealer world, he said.

VARIABLE VS. IMMEDIATE VS. FIXED

Fisher hopes — but doubts — that variable annuities will be made illegal in the next 10 years. They likely won't, though, because "the commissions that go to the salespeople are at such nosebleed levels that this is a tremendous market."

He isn't any fonder of immediate or indexed annuities. "The annuity world is like looking at a matrix with various flavors: You get indexed annuities that are variable. You get immediate annuities that are variable."

However, in a December 2014 column for Forbes, where he's been a columnist for 30 years, he wrote, "Some fixed types [of annuities] are okay." To which products was he alluding?

"A simple annuity that doesn't act very differently from what you think you'd get when you're buying a bond — a low return on investment and a simple return of your capital that's clearly disclosed — of which there are not many because that's not where the money is," he said in October.

BUT WAIT …

Fisher clearly hates annuities, but annuity experts aren't exactly in love with what he said about those retirement products.

"A lot of advisors don't quite understand what it is they're selling when they're selling annuities — but to tarnish the entire industry is ridiculous," said Moshe Milevsky, associate professor of finance at York University in Toronto and executive director of the IFID Centre at the Fields Institute for Research in Mathematical Sciences, in an interview.

Fisher declined to comment on critiques of his claims.

ThinkAdvisor.com spoke with several retirement experts who took umbrage, in particular, at what they called Fisher's overgeneralization of annuity products.

"Lumping immediate annuities with all the other types is rather disingenuous," said Wade Pfau, professor of retirement income at The American College of Financial Services and director of retirement research at McLean Asset Management in McLean, Virginia. Fisher "is trying to act like he's doing his clients a service by paying their annuity surrender fees when he's really just taking it out of the investment management fees he collects," he said.

Annuity experts say that Americans in retirement need the protection and income that annuities afford partly because of fast-disappearing private pensions and the planned elimination next year of some Social Security claiming strategies that can be used to boost retirees' monthly checks.

"There is a magical, secret ingredient, a secret sauce, inside an annuity that can't be replicated in any conventional financial product or synthesized by traditional money managers," Milevsky said.

Variable annuities can substantially benefit consumers, according to the experts.

"Dismissing variable annuities is like dismissing ETFs or mutual funds," said Michael Finke, a professor and coordinator of the doctoral program in personal financial planning at Texas Tech University.

In fact, Finke said, "VAs could serve as an ideal default for most Americans rolling their defined contribution assets into an IRA. A competitively priced variable annuity product is hard to beat compared to an unprotected investment portfolio, as long as the fees between the two are similar."

New low-cost deferred variable annuities "deserve to get more respect," insisted Pfau, but he singled out the immediate annuity — also called an income annuity or a life annuity — as packed with the most potential because it offers "a ton of benefits to consumers."

"This is a very important retirement tool," Pfau said. "It's very straightforward: a simple lump-sum payment and you get income for life. It pools longevity risk across a large [group] of individuals; and because of its mortality credits, those who don't live long subsidize those who live longer."

Fisher said that salespeople mislead annuity buyers into thinking they'll get a high return on their investment when actually what they receive is a return of their capital.

"That's blatantly wrong," Milevsky said. "It's not true. As soon as the account hits zero, you're getting money for as long as you live — and that's the insurance company's money."

Most portfolios can benefit from a mix: stocks and an annuity, academics say.

"By combining an income annuity and stocks, you get the most efficient outcome," Pfau said. "Annuities are [better than stocks] for protecting against longevity risk and investment volatility."

Milevsky pointed out that for about 40% of the U.S. population, an annuity makes no sense: That is, those who are receiving most of their income from Social Security and have only a small amount of savings. "They're already annuitized," he said.

As for the future of the annuities market, Finke holds that a variable annuity is "ideal because it allows a retiree to accept a certain amount of investment risk while providing that pooling and longevity protection."

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