I would like to get into the habit of posting a quote of the day every day but for now I’ll post them when I come across them.
Today’s (rather long) quote comes to us from the pages of The Ultimate Financial Plan: Balancing Your Money and Life* by Tim Maurer and Jim Stovall in the chapter on annuities:
In the realm of personal finance, no word has been dragged through the mud more times than the A-wordâ€”Annuities. Yet annuities survive and even thrive. How they do is not a mystery.
There is not an outcry on the part of consumers demanding annuity products. The reason for the continued vibrancy of annuity sales is that they pay a big honkinâ€™ commission to the selling broker or agent. And, as most of the financial sales tactics exposed in this book, Iâ€™m especially qualified to make such a statement, because I have sold them myself. I wasnâ€™t a bad person in those days, conniving to separate people from their hard-earned money for my own selfish benefit. Conversely, every time in years past when I sold an investment product to a client for a commission, I did so thinking it was in their best interest. My recommendations met all the legal requirements of suitability required of a broker, but I acknowledge to you now that in hindsight there is no question my judgment was partly influenced by the amount of money I could make (or not make) on the sale.
And how could it not be? Letâ€™s say you, as a salesperson, had three different products to sell with the following characteristics: one would pay you one percent for every year that the investment continued to be held by the client, one would pay you 5.75 percent up front followed by .25 percent each additional year, and another would pay you 12 percentâ€”all up front. Which one would you be likely to pick, all things being considered equal?…
He goes on to say that the, “…sale of annuities is justified entirely too often because of the massive commissions going ot the broker or agent selling the product.”
I couldn’t agree more. It’s almost like, “Sell first, justify later.”
My belief is that if high cost annuities (variable and the like) were that great for customers, they would have the same payout as a traditional mutual fund.