Full-service advice can cut help investors cut through the clutter to make specific and appropriate annuity decisions.
Given the types, requirements and benefits of annuities, consumers are best served by informed and non-biased advisers to objectively decide if annuities are a fit for their retirement portfolios.
The decision to buy an annuity can be likened to a group of friends deciding on a restaurant for dinner. Both scenarios can be influenced market noise, along with participants who may be either informed or uninformed; passionate or apathetic; or have a desire for something traditional or cutting-edge.
While a disappointing choice of restaurant can be low-impact and easily forgotten, the same cannot be said of an annuity. Hence, the strong need to get it right the first time by making the most informed decision possible. Conflicting information about annuities abounds, and can be traced to at least three sources: the presenter; an understanding of the intended purpose or suitability of the product; and the evaluation.
The Presenter
An advisers’ lack of familiarity, experience or belief in a product like an annuity can undermine its potential success in a client portfolio. Negative biases and predispositions, often emerge as misinformation in discussions about annuities, and contribute to the confusion. Accordingly, the investor should seek an adviser who has access to all types of products, and who can understand and explain the specifics of annuities so that the investor can make an informed decision. Resources like brokercheck.com, LinkedIn, a state’s department of insurance or even the agent’s web site can help verify advisers’ qualifications, experience and more.
Product Suitability
As with any investment, the goal and purpose of the annuity allocation must be understood in order to make an appropriate decision.
Unlike a bond, which can narrowly serve a liquidity purpose, annuities serve various purposes, including income deferral, tax deferral and guaranteed lifetime distributions. Because each annuity type can vary in term, principal, payout and more, defining the purpose will reduce the scope of the discussion and the likelihood of conflicting information. The purpose of the annuity should connect to customization of the overall retirement plan. Family factors including spouse’s ages, variances, the presence of children, or a desired legacy are also to be considered. Perhaps most importantly, and in the absence of a one-size-fits-all solution, just how the annuity fits among other common elements including pensions, Social Security, insurance, stocks or real estate, must be addressed.
Evaluation
Annuities are evaluated by many factors, and the issuer’s ability to pay the promised distributions is at the top of the list. This can be judged by the provider’s balance sheet, history and rating, and can differ from how other investment options are measured. As annuities have gained presence in the market, more data and analytics have emerged to supplement the evaluation process. Among them are fees and surrender charges on the yield side, and beta and standard deviation for performance comparisons. Investors should also take note or the adviser’s willingness to be transparent, that is their openness to provide all available information related to the potential investment. Any unwillingness in this regard can eb a red flag regarding the agent and opportunity.
Given the many variables – and noise – around annuities, investors can be intimidated, confused or conflicted. However, by qualifying presenters and insisting on the full disclosure of transparency, investors can find clarity and make informed decisions about the benefits that a specific annuity can bring to their customized retirement plan.
Syndicated financial columnist Steve Savant interviews retirement income certified professional and investment adviser representative Tripp LeFevre on Who’s Telling the Truth About Annuities. Right on the Money is a weekly financial talk show for consumers, distributed as video press releases to 280 media outlets and social media networks nationwide.
