Are Annuities Really That Boring and Bad | News or Noise

Annuities:

2022 has been a mess across virtually every asset class globally. Few asset classes have positive returns, and most of those that do, like energy and a few commodities, have had huge year-to-date volatility. Two asset classes that have not experienced high year-to-date volatility are Fixed Annuities (FA’s) and Fixed Indexed Annuities (FIAs) issued and guaranteed by insurance companies.

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” for your money.

This week we address the news and negative marketing campaigns by some RIA’s around investing in and using certain types of annuities as low volatility investment tools for retirees and pre-retirees.

Year-to-date, it’s been one of the most volatile markets for both stocks and bonds in decades. Although our team foresaw this volatile period in advance, rapid price swings still make most investors uneasy, particularly those in or near retirement. As CIO and a portfolio manager, I often wish I could do more for clients to mitigate market volatility while still achieving expected returns to meet retiree financial planning goals.

This is often where certain insurance-based tools can be best used and where teaming up with a financial planner, such as those on our Oak Harvest team, instead of a CFA, MBA, or finance guy like myself, is a great option.

Are Annuities Bad?

There is as much bad information on annuities as there are types of insurance. Some well-known RIA’s even advertise that they will never sell you an annuity product as part of their marketing schtick.

They state they will never incorporate an annuity into your retirement plan. They say this while, at the same time, they might invest a significant sum of money in insurance companies that derive much of their own business from annuity products. This, or the RIA directly contracts, structures, and invests clients’ money in “tailored” products whose fees are equal to or higher than many insurance companies guaranteed product fees. Go figure.

Why is there such a negative slant by the media on insurance products? Why is the term “annuity” often thought of as toxic? Why does it seem to be a 4-letter word amongst some investment managers who market themselves as financial planners but refuse to use some retirement tools available to them as options to meet planning goals?

Because we have all heard the stories, we’ve all read about how many older retirees, back in the 80’s, were pushed into products by unscrupulous one “tool” insurance salesmen who had no other solution for their financial situation.

We remember the stories about variable annuities promising “stock market” returns with no or low risk—all the returns with little to no market volatility, they said. We heard about the lack of flexibility and high fees embedded in variable annuities. So many of us blackballed the industry without studying the specifics and the full suite of products and tools for retirement.

Dollars dried on a clothesline with candlestick charts as a concept of stock background

Viewers, Listeners, there are many types of annuities. There are hundreds in the market at any one time. Just like there are hundreds of stocks. Hundreds of ETFs, hundreds of mutual funds.

There are many good annuities out there and many very good financial planners out there that use them on a limited basis as “tools” to round out a financial plan by providing an element of safety—a quantity of known versus unknown.

The entire annuity industry is insurance based. These are products of the insurance industry, designed as tools of safety first and upside return second. They are not and should not be compared directly to the equity markets and the tools of the brokerage industry, which is an industry of taking risk.

Annuity tools can often be valuable complements to a financial plan, not a supplement. Almost every retiree already owns one annuity in the form of their social security check. The Oak Harvest planning and investment team recognizes that all annuities aren’t bad, and all RIAs that use them should not be negatively lumped into the same negative advertising information bucket.

 

Why…?

Guess what? I have not had a single Oak Harvest client call me in 2022, in this year of both stock and bond market volatility, and ask or say, “Chris, why do I own this annuity?” None of them have said, “It’s too volatile. The pricing moves around too much, day to day, week to week, and month to month. I can’t sleep at night. Chris, get me out of this.” None of them have called me and told us to “turn off the guaranteed income stream,” the insurance company is providing them if that is the type of product they chose with their Oak Harvest planner within their comprehensive retirement plan.

Why? Because they are not tools of volatility and risk. They are investment, retirement, and planning tools for safety and downside protection. They are tools to address fear, not tools of greed. Insurance companies are some of the most regulated companies in the world. Insurance companies with high AM Best ratings are some of the world’s most highly capitalized financial institutions. As opposed to banks and brokerage firms, insurance companies’ financial leverage is amongst the lowest of any financial intermediary.

Why? Because regulators require it. Insurance companies own on their balance sheets to offset their liability of issuing you an insurance policy or annuity with what kind of assets? Their balance sheets are made up almost entirely of bonds plus real estate, whose component they use to fight future inflation.

What do these asset classes have in common? They have predictable, stable, or slowly growing cash flows. What don’t they own a lot of? Public equities and other volatile risk-based assets that may not return the cash needed to meet their own financial obligation back to their clients, their annuity holders, when their client needs it.

In laymen’s terms, when you purchase an annuity product, like a FA (Fixed annuity) or FIA (Fixed indexed annuity), you are securing a place in the safety of the insurance companies existing balance sheet and their current assets with a bit of future upside. In return for that safety of return, you must give up the notion of competing against the overall stock market.

Why? Because most insurance companies do not own large baskets of public equities due to their short-term volatility.

You give up upside return for the safety of lower risk. In addition to giving up upside return potential, you give up some liquidity.

Why? Because that insurance company who issued the annuity can’t sell those apartments, its invested in the moment you decide you want your money back because your friend’s stock fund is outperforming your safer annuity. In my opinion, fixed annuities are better thought of as fixed income substitutes, not as stock substitutes.

 

News? Noise?

With this, you should expect lower returns than the stock markets. If someone is promising you full long-term equity returns with little to no risk? They are probably not being honest. That business model or retirement tool doesn’t exist. If it did? Everyone would own it.

Pensive lady looking up and thinking isolated

What’s this mean in terms that a retiree or near retiree can understand? It means that firms that use blanket statements like “I’ll never sell a commissioned product” or “all annuities are bad” might limit your retirement plan from lower risk to a more stable, comfortable retirement. And in years, like the one we are in in 2022? That might be the difference between a good night’s sleep and a fitful, stressful night in retirement.

Are you trying to meet your needs or your greed in retirement? Give us a call and schedule an initial consultation with an Oak Harvest Advisor. We will sit down with you and help you and your family do the math to determine if you can meet your retirement goals and needs.

At Oak Harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future is always uncertain and that’s why our advisors and retirement planning teams, plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040, and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.

I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.

Summary
Are Annuities Really That Boring and Bad | News or Noise
Title
Are Annuities Really That Boring and Bad | News or Noise
Description

Are annuities really that bad and boring? 2022 has been a mess across virtually every asset class globally. Few asset classes have positive returns, and most of those that do, like energy and a few commodities, have had huge year-to-date volatility. Two asset classes that have not experienced high year-to-date volatility are Fixed Annuities (FA's) and Fixed Indexed Annuities (FIAs) issued and guaranteed by insurance companies.