Fee Only Advisors Frown Upon Annuities

So, why do most fee only financial planners and investment advisors view annuities with disfavor?

Annuities are expensive products. The internal expenses inside a variable annuity routinely exceed 3% per year. Annuities contain administrative expenses (0.10-0.30%), mortality expenses (0.50-1.5%), investment expenses (0.35-2.00%), and, in many cases, riders (0.25-1.0%). Let’s assume the annuity earns an average of 9% (this would suggest a rather aggressive allocation within the annuities subaccounts). The owner will lose 1/3 of the annuities growth to expenses. It is easy to see why an advisor serving in a client’s best interest, and therefore concerned about fees paid by the client, may discourage the purchase of an annuity.

Annuities are generally not very liquid. The owner cannot readily surrender the annuity and move the money inside the contract without incurring substantial charges. Charges are typically applied for surrenders that occur for 3-15 years from contract inception. These charges typically decline over time, but can start as high as 10%.

Annuities are insurance products sold by licensed insurance agents. These agents earn a commission for selling annuities. Commissions are usually 3-10% of the amount placed in the annuity. So, assuming a 5% commission and a $100,000 deposit, the commission will be $5,000. This strikes most non-commissioned advisors as excessive.

Many advisors also feel that insurance agents sell annuities to people in situations where they are really not appropriate. Annuities with heavy surrender charges over lengthy periods have been sold to retirees in their 80s. Annuities are routinely placed in IRA accounts, which makes little sense from a tax perspective. Insurance agents too often move the vast majority of a person’s investable assets into an annuity instead of spreading the assets across different investment vehicles.

While annuities certainly have many attractive features, they are generally expensive and illiquid. It is no wonder that fee only advisors view them with suspicion.