Why Ken Fisher Hates Annuities… He Loves Managed Money.
If you’ve done any searches online for investment products, retirement planners, annuities, and the like, you have no doubt seen the banner ads from Mr. Fisher’s firm. If you have somehow overlooked them, I’ve sprinkled a few examples into this post.
Mr. Fisher is a long-time contributor to Forbes Magazine and a bestselling author. Here is a link to his Wikipedia page. Oh, and let’s not forget billionaire investor. Billionaire investment manager certainly. Those fees on $500,000 accounts do add up!
So why does Ken Fisher hate annuities so much?
Much of his moral crusade against annuities is well founded. To his credit he correctly singles out “Variables” (Variable Annuities) as being “the cigarettes of the investment world.” He cites common advertising restrictions and decades of misleading consumers. Variable annuities are, in my humble opinion, a bad deal.
The insurance companies position them as a way for investors to participate in the upside potential of the stock market. Yes, there is investment risk. However, the benefits, according to the industry, allow one to mitigate the risk to principal with guarantees TO BENEFICIARIES, and by using riders to create and protect a lifetime income benefit.
The most compelling rationale put forth by the carriers is that by using a variable annuity, an investor can, because of the market upside potential, create a rising stream of income over time, that will keep pace with inflation. It is positioned as the miracle inflation hedge.
The drawbacks, as Mr. Fisher correctly points out in his December 2014 Forbes article, are many. One specific characteristic he and I both despise is the way in which these products are sold. Yes, they are complicated products. Yes they are difficult to understand. Yes, it seems as though they are intentionally written to confuse and befuddle both advisors and investors alike. Quite frankly, most investors eyes glaze over in a feeding frenzy when they hear things like 6% guaranteed. Even though the guarantee is only for income benefits and has nothing to do with account values. So yes, there is a lot of miscommunication and confusion in the sales process.
Here are a few reasons I encourage investors to avoid variable annuities.
- Fees. Yes, what you have heard is correct. The Wall Street Journal in a May 2012 article, “Are Variable Annuities a Good Investment?” said that fees side a variable annuity average about 4%. Mortality and Expense ratios, Administrative fees, Rider fees, and fees on the underlying investment sub accounts. It is almost impossible to keep up with, or outpace the markets with a 4% annual handicap.
- Limited Investment Choices. Having 60, 80, even 100 different investment choices inside a contract, may seem sufficient or even overwhelming, but there are literally tens of thousands of mutual funds and ETf’s available to you outside of the annuity.
- Guarantees. They simply aren’t what they seem. You would think that an insurance carrier would have to go out of business before the “guarantees” inside an insurance contract were up for debate. However, in recent years, major carriers such as AXA, MetLife and Transamerica have offered to buy their way out of death benefit and income benefit guarantees by asking contract holders to take a bonus to their account values in exchange for dropping these attractive benefits. The carriers stand to make additional profits as they can reduce their reserve requirements for these additional obligations. For many contract owner, the “guarantees” were the overriding factor in their decision to purchase the contracts. Here is the link to the Forbes article. Investment News also highlighted this offer From AXA
- Liquidity- Yes these are long term investments, but so should your equity portfolio be. These aren’t for your emergency money just as owning stocks shouldn’t be.
- Payout Options. Often the income payout options in a variable annuity simply aren’t competitive with comparable Fixed Indexed Annuities. Some force you to wait 10 years before you can begin taking income and still others force you to annuitize the contract in order to get income.
So Ken and I agree on Variable Annuities.
Mr. Fisher in his December 2014 article does mention that some “fixed annuities are OK”. Again he cites the complicated contracts and overstating of the guarantees by salesman as his primary drawbacks.
I agree here, but I would go one step further and say that some Fixed Index Annuities are spectacular.
Here is my rationale.
In a Fixed Index Annuity, also called an Equity Index Annuity, an investor benefits from participation in the upside potential of an index, without being directly invested in the index, and thus without any exposure to downside risk.
Now there are a lot of moving parts to these contracts, and they like variable annuities can be confusing and complicated. But the key thing to remember is that there is no risk to principal in a fixed index annuity. If you are willing to give up some of the upside potential of “the market” you can completely eliminate any downside risk!
In fact recent studies of investment performance inside some fixed index annuity contracts points to performance comparable or better than the S&P 500.
People seek annuities, and the accompanying guarantees, not because they are superior investments, but because the risk of loss in any alternative is simply too great.
Mr. Fisher says your better off just buying stocks. With stocks, his argument goes, “with simple securities you know the risk”. This is where Mr. Fisher’s argument, in my opinion, loses merit.
I submit most investors are completely unaware of the risks in their equity portfolio. Perhaps they choose to ignore, or refuse to accept that they could lose 40% of their account value in a year like 2008.
How many knew, were aware and made a conscious decision to accept the risk in owning bank stocks during the financial crisis? How many knew that high flyers like Enron and Worldcom were built on a mountain of falsified accounting?
I submit that there are risks in owning securities that we cannot be aware of, or that we choose to gloss over, because the reality of potentially losing 20, 30 or 40 percent of our portfolio in a short period of time, is simply unimaginable.
Investors seek the safety of principal protection and will happily give up the chance to make 10% or more in exchange for knowing they can’t lose. Those who buy a variable annuity, are either willing to take the risk, (combined with some income or death benefits) or don’t understand what they own.
The truth of the matter is that Ken Fisher unabashedly wants you and me to buy stocks. He is a Permabull. He believes its always a good time to buy stocks, and the market is usually poised for big returns. Oh by the way, he wants his firm to manage your portfolio, assuming it is at least $500,000.
Don’t take my word for it.
Mr. Fisher’s own words…
2/25/08 I seek a parallel and find it only ten years ago. And that makes me bullish. Early 1998 saw financial crises eerily similar to today’s and a lot of hand-wringing about institutions collapsing and setting off a domino chain of other collapses. But guess what? The S&P 500 was up 28% that year.
Wow! What a colossal miss! In the following year, the S&P was down 45.1%
3/24/08 We’re in the first full correction of the new leg of the bull market. …By midyear we will awaken to an ever shrinking supply of equity and a growing economy. The market will be led by big companies.
Again, in the depth of the financial crisis, he is calling for a market rally! A year after this prediction the market was down 39.7%
4/21/08 I’m bullish… I still think the year will end in the plus column. …Clearly folks are fearful now. So you should be greedy.
A year after this…-38.6%
6/16/08 Now that we’ve had a full-fledged correction that scared the dickens out of everyone, stocks look wonderful.
Yep, you guessed it, just keep saying things are improving, a year later the S&P 500 was down 32.5%!
Meanwhile, in the same time period, those invested in a Fixed index Annuity lost nothing! When the market finally bottomoed out in March of 2009, and started gaining, those invested in a Fixed Index Annuity immediately began gaining, as they did not have to recover from market losses.
As good as a Fixed Index Annuity can be, you should never put all your assets in an annuity.
Growth is a necessary of any financial plan, whether its to keep pace with inflation or to help with the possibility of increased medical and long-term care expenses. Liquidity is a necessary component as well.
The Fixed Index Annuity can be a solid foundation to a financial plan, particularly one that seeks safety of principal, with the potential for future lifetime income.
Managed money can be a great alternative for the investment of risk assets seeking greater growth potential and liquidity.
Investors should seek out money managers (investment advisors, Registered Investment Advisory Firms, asset managers) who offer low cost, tactical investment management.
Tactical management allows the money manager freedom to invest in asset classes where they see opportunity and avoid those where the risks are too great or opportunity is declining. Think of the simplicity and effectiveness of avoiding stocks and buying bonds in 2008.