Many know Ken Fisher as the Chairman of Fisher Investments, but you might recognize more from his ‘I Hate Annuities’ campaigns. From attention-grabbing TV commercials to spirited digital ads, Fisher hardly runs from controversy.
“I would rather die and go to hell than sell an annuity,” he famously declares in one commercial. But does Fisher really hate annuities this much? More importantly, should you write off annuities for your retirement because of his criticisms of them?
Fisher Investments, a registered investment advisory firm, operates an annuity buyout program. In exchange for investors becoming clients of his firm, Fisher Investments will pay the surrender charges on the variable annuities which the investors are leaving.
As Jane Wollman Rusoff reported in a 2015 ThinkAdvisor interview with Ken Fisher himself:
“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.”
As financial writers have noted, some might call this a sort of business contradiction. Such is a small reminder of why it always pays to do your homework when considering any financial decisions, including when considering an annuity pitch for your money.
This isn’t the only takeaway with regard to Ken Fisher and annuities – and whether his advice is accurate. Here are some other key takeaways to remember as you explore whether an annuity might make sense for your retirement.
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1. Not All Annuities Are the Same.
Watch the Fisher ads, read the reports, and pay attention to interviews with Fisher. The ad campaigns, at times, paint all annuities as being the same and in a negative light.
However, annuities have as much variety and flavor as other assets, from stocks to mutual funds, do. You might buy stocks or different investment funds for goals of growth, income, or other investment goals, just as one instance.
Annuities aren’t an investment. They are insurance contracts. However, there are many different types of annuities, and each kind serves a different purpose.
What Do Different Annuities Do?
Some fixed annuities are built to give you a guaranteed, fixed interest rate that is higher than what CDs pay each year. Others are built for maximum accumulation, offering you interest-earning potential tied to an underlying benchmark. This is known as a fixed index annuity.
However, many fixed indexed annuity contracts are also built to maximize the guaranteed monthly income which they will pay you. People often use these sorts of contracts for income needs down the road.
On the other hand, immediate annuities will pay you a guaranteed monthly income that can start right away or up to a year after you begin the contract. As its name suggests, this sort of annuity is for immediate income needs.
Variable annuities have the unique distinction of being both an insurance and securities regulated product. They allow for the most growth potential among annuities.
However, the fund subaccounts that they invest the contract proceeds in will rise and fall in tandem with the markets. In other words, an annuity owner could lose money in this type of contract.
The point is that there are as many annuity types and contract designs as there are hills.
It’s a mistake to put them all into one corner and say how bad they are as one group. This limits options and solutions for you and other retirement savers.
2. Not All Annuities Cost You a Bundle.
Fisher criticizes annuities for their fees. However, even this well-known critic knows that things aren’t that simple.
Many annuities can cost you a bundle, with variable annuities at times charging as much as 2.5-3%. Many fixed annuities actually come with no or low fees. The cost factors for the insurance company are built into the contract design.
What do we mean by that? Fixed and indexed annuities give you the potential to earn interest above bonds, CDs, and other fixed-interest assets. They also provide the highly valuable benefit of principal protection by safeguarding your money from loss when equity markets drop.
Insurance Companies Have Weathered Storms
Life insurance companies are one of the most-capitalized organizations of all financial institutions today.
They must maintain dollar-for-dollar reserves for every annuity premium dollar they bring in. In exchange for this protection, life insurers have some ways they can limit the growth potential of your annuity.
With a fixed annuity, you are stuck with the guaranteed rate that you received when you started your contract. There are also growth controls with a fixed index annuity. Caps, participation rates, and spreads are all tools that are used to limit the amount of growth that the contract owner can receive.
You don’t have the complete growth potential of the underlying index benchmark, but this is a trade-off for the protection benefit.
The margins that the insurance company makes off its underlying investments — in large part Treasury securities, high-quality corporate bonds, other fixed-income investments, and small budgets for call options — are how it stays profitable and it shares some of that growth with you, instead of just providing a place of protection for your money.
This is how the costs can be built into fixed annuity contracts. Some fixed annuity contracts come with add-on benefits called riders. If you opt for one of these, these benefits can make a nice difference in your income strategy, but they might come at additional cost or premium.
Your financial professional can walk you through the details of any annuity rider options you have.
All of Your Money Goes to Work for You
Fixed annuities have a one-time payment that goes from the life insurance company to your agent or financial advisor who initiates the contract for you. In exchange for your financial professional finding an annuity solution for your needs, this is how they are paid by the insurer.
However, all of the money you put into your annuity — 100% of every penny — goes to work for you right away. To be clear, the insurance company pays the agent or advisor directly from its expansive general fund.
No money is ever taken from your fixed annuity premium money for this payment.
3. Annuity Companies Once Had a Certain Group’s Attention.
Fisher Investments actually held positions in annuity and life insurance companies at one point. This other article discusses it in more detail.
Fisher Asset Management is the legal business name of Fisher Investments. At one point, it held rather sizable positions in American Equity Life Insurance Company (an insurer offering fixed index annuities) and in Prudential, the parent holding company of Jackson National Life Insurance Company (another annuity insurer).
At a certain point, insurance industry experts saw a possible conflict.
“Does he really hate annuities?” Sheryl Moore of Moore Market Intelligence said in a 2018 interview with InvestmentNews. “If he hates them so bad, why does he have so much money invested in companies that sell annuities?”
4. Few Things Can Provide a Guaranteed Income as Annuities Can.
Insurance companies also stand behind their annuity policies and contractual guarantees in very strong ways. They pool the risk among their thousands of annuity policyholders in the company general fund.
Then they use expected mortality data for every single policyholder. Those estimations are factored into calculations of how much income they might pay to policy owners.
Between these processes and their dollar-for-dollar reserve requirements, insurance companies manage risk with quite a few safeguards in place. They have maintained a very good track record of upholding these promises for hundreds of years.
Should You Explore Annuities or Shun Them?
Everybody’s situation is different, so annuities won’t be a good fit for the needs of everyone. But they also shouldn’t be dismissed entirely out of hand.
Many leading investment and financial researchers who are Ken Fisher’s peers — from Robert C. Merton, Larry Kotlikoff, and Wade Pfau to David Blanchett, Moshe Milevsky, and even Roger Ibbotson — have recognized how annuities can help bring more certainty and stability in retirement.
For that matter, a number of these economists and commentators own annuities so they will be able to maintain their preferred lifestyle in retirement. This is also with possibly less conflict of interest as various annuity naysayers might have.
Unique Guarantees for More Retirement Confidence
All of this being said, should you consider annuities for your financial future?
Do annuities make sense for your situation? Ultimately, it’s up to you, but apart from Social Security, few things can actually give you financial guarantees as annuities do.
The hallmark guarantee for lifetime income. Other guarantees for protection, growth, death benefit proceeds, or a guard against costly long-term care spending. These are some areas in which these guaranteed contracts can strengthen your overall plan.
Of course, you trade off some things for these benefits, such as not having 100% liquidity with your money. If these unique guarantees sound appealing to you, an independent advisor or agent can help you explore your options.
Are you looking for someone to help guide you through your retirement what-ifs? Many experienced financial professionals are available at SafeMoney.com to assist you. They are familiar with retirement, its unique financial challenges and nuances, and financial vehicles that can help solve these problems.
Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.
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