Advisors, be very wary of what you read about annuities, for it may be devoid of any meaning.
That warning comes from Moshe Milevsky, just back from a visit to England, where he poured through dusty documents in the British National Archives, examining the actuarial assumptions of the life annuities issued by the Chancellor of the Exchequer in the 17th and 18th centuries.
While he saw evidence of mispricing that accrued to the disadvantage of the Royal Treasury, when AdvisorOne caught up with him the subject of discussion was today's sensationalized characterization of annuities as products of unremitting evil or of unsurpassed virtue.
Back in London's Globe Theatre, such assessments are typically uttered by "a poor player that struts and frets his hour upon the stage and then is heard no more."
Too often, according to Macbeth or Milevsky, "it is a tale told by an idiot, full of sound and fury signifying nothing."
For a little wisdom—make that a lot of wisdom—on understanding retirement income, the York University finance professor and Research magazine contributor cautioned that advisors (and financial journalists even more) should pay particular attention to the first mention of annuities in an article or discussion.
"That opening sentence has got to be clarified before you can have an intelligent conversation about it," said Milevsky (left), speaking by phone from his office in Toronto.
"Are you talking about a pension that you put money into to get an income out of…or an equity-indexed annuity that functions like a savings account?" he asks, noting there are six or seven types of products that regulators, lawyers and journalists all refer to as annuities but which to economists are all different.
"Imagine if someone came to you asked you, "Do you think 'funds' are a good idea?"—the first of many hilarious analogies that emanate from the professor like water flows down Niagra Falls.
What kind of funds—stock funds, bond funds—and what kind of stock fund and whose stock fund, an advisor would respond. "That's what's happening," Milevsky laments.
"It's like saying all mortgages are bad," noting the plethora of high-rate, low-rate, floating-rate, teaser-rate products available. "You can't just condemn an entire industry."
He notes that the popular financial columnist Jane Bryant Quinn was outspoken in her hostility to "annuities" for years and years until she discovered an annuity product she praised as being good.
"Words matter. Let's call some pensions and some variable annuities," Milevsky intones, noting the significant difference between a $200 billion-a-year variable annuity market and a trifling $10 billion in annual sales for income annuities.
To clarify some of the essential distinctions among the different sort of annuities, Milevsky has just published a monograph for the CFA Institute that answers in straightforward question-and-answer format some critical retirement income questions.
That is because even CFAs, despite all their technical financial expertise, don't understand insurance and the Institute is trying to offer more of a wealth management perspective to CFA designees, Milevsky says.
In one enlightening part of the CFA monograph, Milevsky sorts through the vast scholarly literature that attempts to explain why people should not annuitize: because of high interest rates; high embedded loads and costs; Social Security; even marriage.
He says he's even seen the argument that if you buy an annuity you will discourage your kids from taking care of you.
"The audience for these arguments are PhDs," Milevsky cautions, warning that popular press accounts often wildly misinterpret their meaning. Offering another analogy, he says that the medical literature is filled with the notion that exercise is healthy. "Then somebody comes along and says if you have arthritis exercising is very bad for you."
And then comes a sensation-seeking expert or ignorant journalist to announce: "Exercise is bad for you, you might have arthritis."
