Fee-only advisors don’t like them! Suzy Orman does not like them! Many investors regret investing in them! We are talking about annuities. However, many Americans invest in annuities for one reason…their commissioned based financial advisor loves annuities.
Commissioned based advisors commonly recommend annuities to clients for one reason and one reason only – a huge commission. It is not uncommon for an up-front commission of 6% or even greater to be paid to a commissioned based advisor. This means an advisor will receive a paycheck of $6,000 if they place a client with $100,000 in an annuity. In addition, the advisor will continue to receive additional commission trailers annually. Who pays for this? The investor – and most the time clients do not know they are paying hidden fees typically ranging from 2% to 4% within the annuity. With high hidden fees eating away at investment returns, it is hard investors to realize potential returns.
Most annuities have a back-end charge. This is a charge for taking a distribution out of the annuity for any reason including a cash withdrawal or transfer to another annuity. A typical back-end charge or surrender schedule is over a ten year period and the charge decreases from ten percent to zero over the course of the ten years. This significantly inhibits the flexibility of an investor in an annuity. Often many investors feel trapped.
Many commissioned based advisors are selling indexed annuities which promise a seemingly high fixed rate of return. Often, the annuities are so complex even the advisor does not understand how the annuity works. Unless an investor follows the rules associated with the annuity exactly, the promise of a guaranteed return rarely pays off.
Annuities can have a place within an investor’s portfolio. For investors in a high tax bracket, an annuity may make sense after tax deductible accounts are maxed out and significant assets are liquid in case of emergency.
What Can I Do?
As with all investments, some are better than others. The same is true of annuities. There are currently a limited number of low cost annuity providers such as TIAA-CREF and Jefferson National. If an investor finds themselves in a high-fee annuity, they can complete a 1035 tax free exchange to another annuity.