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Advisors' Biggest Annuity Worries

Despite a tarnished reputation, annuities make sense for some clients.

Even so, advisors on a panel at the Insured Retirement Institute’s annual Vision conference in Chicago on Tuesday highlighted some of the biggest challenges they face in using annuities for clients.

One of the major hurdles is the increasing complexity of annuity products. Not only can they be difficult for advisors to understand, but explaining the ins and outs to clients represents an even bigger challenge.

Part of the problem is that there are so many types of annuities and attached rider options that can be customized for each person that it’s impossible to give clients a sense of what they will experience owning a given product, says Gus Stathopolous a Chicago-based Morgan Stanley advisor. “It's such a customized experience, the onus really does fall on the advisor,” he says. “The financial advisor has to feel comfortable enough to explain them to clients.”


Some advisors don’t even like to use the word "annuity" in conversations with clients, even when the product is suitable for them, panelists say.

Lisa Schomer, a Chicago-based LPL advisor, says, “If our clients don't understand it, we may not be as apt to make the recommendation and they may not want it.” Ultimately her clients trust her judgment, Schomer says, but they are sometimes put off when trying to understand the complicated details of annuity products and she’ll just as soon leave the word out.

Instead she talks to clients about ways to meet their “budget needs” so that the rest of the money is their “play money.” “If I say the word annuity, it's dead in the water," she says -- "but when I talk about budget, [the client] is OK with it.”


Another problem: Some planners simply don't trust the companies providing annuity products. Even if there is an inflation-hedge product tied to Treasuries, for instance, Schomer says she may not trust that the product will work as stated.

When asked what advisors would look for from annuity providers, panelists say that while there is no “silver bullet,” the most crucial thing is that companies actually pay out the benefits and riders to their clients when the time comes.

“We're all in this together -- and there might be a time when these riders really have to pay out,” says Paul Fousek, a LaGrange, Ill.-based principal with Horizon Wealth Management. “We're all on the hook, and the last thing I want is the insurance company not paying out or making it really difficult for my client.”

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Comments (9)
The biggest "worry" should be by the client, since most annuities are commissioned products and the agent is more concerned with making a sale. The advisor can say whatever they want, but you cannot rationalize professional objectivity when the only way you make a living is by selling somebody something.
Posted by DAVID A | Wednesday, September 25 2013 at 1:50PM ET
David A,

So charging them a 2% fee forever for your professional objectivity is
rational? You are "selling" fee so own up to it or do you just do charity work?
Posted by Greg M | Wednesday, September 25 2013 at 2:31PM ET
The reality is that many licensed insurance salespeople have indeed sold annuities with the principal aim of lining their own pockets. That doesn't make the products bad nor does it make someone who sells annuities bad or unethical.

I try to be very clear with clients about what they say they want and what tools can accomplish their goals. Everyone wants Social Security and a corporate pension. Sounds like an annuity to me.
Posted by Laird H | Wednesday, September 25 2013 at 2:47PM ET
Greg M - since you have no idea what we charge as fee-only advisors, your comment is incompetent and irrelevant. People shouldn't use an advisor who charges a 2% management fee on top of internal investment costs. I guess you're not aware that most of the serious money managed around the world - pensions, profit sharing, endowments, foundations - is not commission-based, or anywhere near a 2% fee. If an advisor cannot promise a fiduciary relationship with a client, then the client should go elsewhere.
Posted by DAVID A | Wednesday, September 25 2013 at 3:10PM ET
You are seeing the problem right here in these comments: People making gross exaggerations and generalizations about things they know very little about, and fighting like children.

The fact is, if you're a crook or you're incompetent, it doesn't matter how you're paid ... the client will lose. If you're honest and competent, it doesn't matter how you're paid ... the client wins.

Those who think that commissions have a corrupting influence on advisers are saying more about themselves than about the advisers they don't know.

Can they not imagine an honest adviser? Is it because they would be dishonest if a commissioned product were actually the best thing for their client?

Do these people need to wall themselves off from temptations like commissions because they know they would succumb to the temptation of being dishonest?

Does this say anything the advisers they're making generalizations about, or does it say a lot about the accusers and their inability to resist temptation?

These people doth protest too much, methinks.

And for those who think that a commissioned product is never a good thing, I'm afraid that shows more their lack of education than it does about the products they obviously know very little about.

I am an RIA, and I use many different products and strategies. I have found that I know as much or more about the market as any stock broker or money manager, yet they know very little about insurance products.

It's very sad. They call themselves advisers, yet they carry only half an arsenal for their clients to use. And then they "bad-mouth" things they don't understand. I guess that's how some people have to fend of the competition.

It's this lack of education, this bigotry, and this infighting that is hurting clients far more than any particular class of products.

As an aside, the annuities referenced in this article are actually very easy to understand. My clients have no problem. Albert Einstein said that if you can't explain it easily, it's because you don't understand it well enough.

And, from me, if you don't understand it, you're in no position to know whether it's good or bad for your client. And, to recommend against something you don't understand is malpractice. (I'm sure I'll howls of indignation from that one. The guilty always show themselves.)

Again, we are seeing more bias and lack of education than we are seeing anything of real substance.

It makes me sad for this business, and it makes me sad for the clients they profess to serve.
Posted by Marc S | Wednesday, September 25 2013 at 4:24PM ET
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