Last posted by David Stone | ThinkAdvisor
I recently read a serious takedown of variable annuities. The author began saying that variable annuities are the “most misunderstood investing strategies…” I could hardly carry on. Annuities aren’t strategies. Conflating “strategy” with “solution” is an old semantic problem, and it probably isn’t an innocent mistake.
The notion of “annuity” as ”strategy” isn’t new. Old-school “sales ideas” and “annuity strategies” have papered registered rep and agent inboxes for more than 20 years. These concepts were imagined with annuities as the whole solution — where a large asset might be located for the promise of high returns and no risk.
Historically, these “annuity strategy”‘ slicks and brochures were presented at free steak dinners along with hard-sell slide decks and scary charts aimed at retirees and pre-retirees. They were designed to obliterate investor objections and boost annuity sales, not to help solve real-world problems for investors.
Appealing to client fears (or greed), they could be touted as one-size-fits-all solutions to protect against market downside, provide guaranteed retirement income, and also leave a lasting legacy. Yes, all three at once.
And they give all annuities a bad name. Which is a problem, because annuities solve important problems. Nearly 10,000 boomers retire every day — many without traditional pensions. Economists agree that annuities may help them meet the retirement income challenge.
Multiple Needs, Not One Solution
When designing annuity “strategies,” client needs often take a back seat. Commission-compensated sales of these products decouple the advisor’s success from that of her client and encourage high-pressure sales tactics. These annuity “strategies” grew up around the commissioned sale of the product. As the appetite to sell more annuities grew, ever more complex features and benefits bloated them into complex and costly products many folks revile today.
In this one-size-fits-all concept of strategy, benefits have been sold to investors even when in conflict. For instance, paying an additional fee for an income rider in an annuity to solve an income need, and also paying an additional fee for an enhanced death benefit rider like Return of Premium can be in conflict. Those two needs may best be met with different tactics. But that’s not always how they are positioned. The danger here is that if you think an annuity “strategy” can efficiently meet many of your client’s goals, you risk missing all of them.
The Engine Isn’t the Boat
If and when an advisor places her clients’ well-being at the center of her practice, the annuity is never the strategy. It is possibly a tactic (if appropriate).
Using an old example: If your mission is to travel between two towns separated by a river, your strategy may be to cross the river, and your tactic could be to use a boat. The annuity could be the boat in this metaphor, but it isn’t the engine in the boat.
If any kind of annuity is the strategy, you can bet the mission is not necessarily coupled with the success of the client. You also can bet that selling the annuity may be the actual mission.
Also, if you think annuities are strategies, in the above analogy you might cross that river, but with wet shorts.
Annuity Tactics: Managing Risk
Annuities are not necessarily appropriate in all situations, but they can be in the right situation. For example: for a person in the so-called “retirement red zone,” a variable annuity with income rider can help manage sequence of returns risk. The five years just before and first five years of retirement also are called “the fragile decade.” That’s because poor market returns in this period, while retirees start taking withdrawals, can be difficult to make up in the future.
The mission, in this example, could be to prevent clients from outliving their retirement assets (longevity risk). The strategy could be to avoid sequence of returns risk in the fragile decade, and the tactic could be to take a portion of assets and invest them in a variable annuity with an income rider — maybe nonqualified dollars that have accumulated in a variable annuity already, or qualified dollars from a traditional IRA.
Proper execution would depend on finding a no-load VA with low fees. Deploying annuities in client portfolios depends on understanding their role(s) in the plan and using them for their primary values: tax deferral, principal protection, guaranteed income, and/or wealth transfer.
It’s simply inappropriate to prescribe an annuity strategy before the client’s needs have been considered, because, as the saying goes, every problem looks like a nail if you’re a hammer.
In this way, an annuity isn’t always right or wrong. A good plan will consider cost, taxation, liquidity, investing horizon and other things when choosing any investment. Annuities should be no different.
This isn’t intended to impugn the character of all folks who offer “annuity strategies.” Many of their intentions may be noble, but we would all be better served if we didn’t conflate “strategy” with “tactic.” It’s an easy mistake to make, but it could be damaging to client portfolios.
David Stone is Founder and CEO of, an independent platform for fee-based insurance solutions. Prior to RetireOne, David was chief legal counsel for all of Charles Schwab’s insurance and risk management initiatives. He is a frequent speaker at industry conferences as well as an active participant on numerous committees dedicated to retirement income product solutions.