One of the main reasons I started Atlas Financial Strategies almost 7 years ago was that I wanted to understand what was happening on the “other side of the table.”
You know, what is the whole story? Why do certain advisors recommend certain products over others? What’s in it for them? What is their motive for advising me to keep my money in a certain asset class, like stocks? Instead of moving to another, like annuities?
Well, unfortunately, I can tell you with a great degree of certainty, that most of the time their motive is just to make the sale. Yes, that includes advisors that claim to be “fiduciaries.” And a lot of times, it’s not just enough to make the sale, they want to maximize their management fee and/or commission. So, they recommend something that is completely inappropriate.
This is not to say that every advisor thinks this way, but I believe the majority of them do. Sadly, it’s the nature of the business.
Why do I think that? Because on a weekly, if not daily basis, I have people call me a say, “another advisor recommended XYZ Annuity. And it comes with a bonus!”
I think I had this very same conversation at least 4 times this week alone. And I’ll tell you exactly what I told them – “There is almost never anything wrong with the product or the company that is being recommended. The problem is that product does not even come close to addressing the purpose of your money.” i.e., the annuity is irrelevant to their situation and what they need it to do for them.
Most advisors will try and sell you on hype. Such as a bonus or hypothetical returns that are based on the past ten years.
An early mentor of mine told me something profound about this industry. He said, “There are no deals in the insurance industry. Everything is based on math.”
What he was telling me was that if you are getting something on the front-end of an annuity, it has to come from somewhere. You will be sacrificing in another area of the product which may be more beneficial to what you actually need.
So, let’s take a look at these bonuses and how they work. And then we’ll go over some important criteria that you should look for when selecting an annuity.
What things will you want to look for or ask if an advisor is trying to sell you an annuity because it has a bonus?
- Does the bonus count towards the “Income Value” or the “Accumulation Value” of the annuity?
That means, does the bonus money only reflect the amount that my income will be calculated on, or is it money that will end up in my pocket one day, or the pocket of my beneficiaries? There is a big difference in that scenario. If the bonus is attached to an Income Annuity and you are going for the highest income, then the bonus could be beneficial. If you are going for the maximum amount of accumulation/growth, then the bonus is completely irrelevant.
- Will I pay a fee for receiving the bonus?
Again, there are no deals in the insurance/annuity business. A lot of times when someone excepts the bonus there could be a fee attached to that product. If the bonus goes toward the “Income Value” for an annuity, then most likely there is an Income Rider attached to it, and you will be paying a fee for that guaranteed income anyway, so it’s a moot point. But, you should look for the annuity that will pay you the highest income, regardless of if it comes with a bonus or not.
If you are going for straight accumulation and/or growth, then paying a fee just to get a bonus could have an adverse effect on that growth. It’s highly unlikely that you will get zero growth whatsoever, but it’s important to look at the “guaranteed values” on the illustration to verify that you will not have a negative balance at the end of the agreement. i.e., make sure it’s guaranteed that you’re not going to lose money because you accepted a bonus.
- Will I have to accept lower participation in growth if I accept the bonus?
Sometimes there will not be a fee for accepting a bonus with your annuity, but you could be agreeing to a lesser opportunity for growth. Double-check the “Disclosure Statement” to verify that you are not going to receive a reduced indexing credit (Lower Cap and/or Participation Rate, or a higher Spread) if you accept the bonus.
These are 3 of the biggest things to be leery of when an advisor hypes up a bonus to try and convince you to transfer your money to an annuity of their recommendation. But really the best way to find out the whole truth is to click the “Schedule A Call” button and let me answer your questions about a quote you have received.
What are some other important things you should take into consideration when looking for an annuity:
- Does the annuity that is being recommended fulfill the purpose of your money?
Time and time again I see people being pitched income annuities when they are really looking for safety of principal and opportunity for growth. And, time and time again I see people being pitched growth annuities when what they really need is guaranteed income.
Always, always, always ask yourself, “does this annuity fulfill the purpose of the money I am dedicating to it?”
- Financial Strength of the Annuity Company:
Letter grades are important, but they are not the end-all-be-all. Normally, you should be totally fine with a B++ company or higher. However, there are other important aspects of a company that should be taken into consideration:
- Solvency Ratio
- Risk-Based Capital
- Renewal Rates
- Customer Service
- Length of Term:
Another common theme I see is advisors recommending annuities that have terms that are way too long. Annuities come in all different term lengths. Anywhere from 2 years to 20 years. If you are looking for an annuity with an income rider, then the term length is somewhat irrelevant because if your plan is set up correctly, this is something that should be used for the rest of your life. However, make sure that you can activate the income in the time frame that you will actually need the income to start.
If you are looking for accumulation, then normally there is no reason to go beyond 10-years. Depending on your age and the number of assets that will be outside of the annuity. I constantly see people being pitched annuities that have 12-, 14-, or 16-year term lengths. Totally unnecessary almost all of the time. The only reason I could see putting someone into an annuity with a term length greater than 10-years is if they are young and plan on contributing to the annuity until the time they retire and want to use the money for income.
I spoke with a lovely woman last year who was in her early 80s and was desperately looking for a way to get to her money. The problem was some moronic @$$hole put her into a 16-year accumulation product, and she was only in her 4th year of the agreement. So, her surrender charges would have caused her to take a sizable hit to her principal.
She did not need accumulation. She needed income! It broke my heart that I could not help her, but I did tell her to report that advisor to the Department of Insurance. Someone like that has no business being in this industry. He obviously did not find her true purpose of the money, or he did not do a full assessment of her situation. Totally unprofessional and totally unacceptable.
So, how do you prevent a situation like the one this lady found herself in? And how do you prevent yourself from being placed into the wrong annuity because of hype?
Well, that’s pretty simple. The first thing you should do is watch my video series, “How to Get 20% More Spendable Retirement Income with Annuities”, and then click the “Schedule A Call” button in the top right corner of this page to find a time when we can have a short conversation so I can help you determine the best strategy that will fulfill the purpose of your money!
All the best,