Annuities Part 5

Ms. Carleton English is the last panelist to speak. She is a reporter at Barron’s covering financial markets and asset managers. She was previously the hedge fund reporter at the New York Post and covered energy and banks for The Street. Prior to moving to journalism, she worked in wealth management. There is nothing in her background indicating any actual study or experience with annuities other than that of an observer. Nevertheless, she is the only panel member attempting to raise the level of discussion in this hapless Barron’s Roundtable video. She responds to Mr. Otter’s request for a “high-level view of the Barron’s list by wisely ignoring the list and attempting to broaden the professional reach of the video. She replies: “I think the thing to start with is simple is best, which is the fixed structure, where you’re putting in a lump sum now which either in a deferred level or immediately, you’re getting a fixed amount over that time.” 

Kudos to Ms. English for mentioning deferred annuities for the first time. By then she begins to shade the facts somewhat. 

Ms. English continues: “Now, within that you also have variable annuities where, if you want to take a little bit more market risk—because the problem with fixed is it’s fixed—well what happens?—inflation and a bunch of other things that kind of eat away at the spending power of the money—the purpose of that money is to supplement your income so that you have enough to live off of.” Another word salad! 

While sounding a bit like a skipping record, she introduces variable annuities that are somehow “within that”. I’m not sure what “that” she is referring to here. She should have mentioned that variable annuities are deferred and not immediate annuities. But at least she got variable annuities into the discussion. I think she is trying to say that fixed deferred annuities may under perform variable annuities in a bull market. If so, the growth provided by a variable annuity will offset inflation eating away at the yield of fixed annuities. That approach didn’t work last year.  

She also suggests that the advantages provided by variable annuities can be had by taking on “a little bit more market risk”. This is disingenuous. Variable annuities come with massive downside market risk. I’ve spoken to widows who lost over 20% of their investment account value last year (for which they were charged brokerage fees of 1 to 3%). The same thing can happen with variable annuities. That is why we do not recommend variable annuities for retirees under the current economic circumstances. We instead recommend Fixed Indexed Deferred Annuities which provide upside gains where and when they occur while also guaranteeing your principal.  

She continues: “Now, if you’re looking at something like variable annuities, you might get more upside but with that you’re going to have greater expense. So, I think the most important thing with this is you have to think about why do you want this product, what is its purpose in your portfolio, what are your concerns, whether it’s for your life or potentially heirs that might be getting some of these payouts as well. And figure out are you paying the right fee for that sort of thing. So just understand the purpose of it in your financial plan and are you actually getting what you’re paying for with it.” 

Here she gets the fees associated with variable annuities right. But she does not happen to mention what they are or what they are for. One type of annuity fee unique to variable annuities is the fee charged by each of the mutual-fund clones available withing a variable annuity. There are often over 50 of them available to the purchaser. They are called separate accounts. These fees usually range from 1 to 3 percent depending on the account and are joined by a separate overall management fee of 1 to 2 percent charged by the insurance company. They are not punitive costs but rather fees charged to sustain the structure of these sophisticated contracts. Overall, then, they total about 4% which is deducted from the yield generated by the internal portfolio allocation chosen by the purchaser to arrive at one’s net yield. 

In the Halcyon days of the late 90’s variable annuities were routinely doing 20-25%. I know. I sold a lot of them at the time. These were the days of “irrational exuberance”. With gross returns so high, a 4% drag didn’t matter too much. It was the cost of admission and well worth the price. But times changed and so did the attractiveness of the product. 

She follows with a string of prudent suggestions that would apply to any financial decision, not just annuities. Despite her lapses and awkward way of speaking, she is the most thoughtful person on the panel. They should have started with her rather than Ben. 

After this rational segment Jack Otter takes back the mic for the wrap up of the “Deep Dive” into annuities. But wait! There is no wrap up. What Jack says is this: “If you want to avoid them, Jack (Hough), we’ve got about 30 seconds left, you were taking about bonds this week…” Jack Hough closes out by giving a bit of sketchy advice about how to react to the inverted yield curve while buying bonds. 

A dismal conclusion to a dismal Barron’s Round table. 

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