Imagine this scenario: You’re at a press party. Laughter. Margaritas. Suddenly huge, colorful piñatas float ominously above the crowd, like Goodyear blimps flashing this message: “Buy Annuities!” This sales gimmick unnerves the press. They start whacking at the piñatas. Colorful pieces fly through the air, cover the floor. Satisfied, the party mood returns. More laughter.

Although I rarely write about annuities anymore, over the years I’ve built a huge file of “colorful” articles on annuities. “Colorful” is my metaphor for some juicy and brutal headlines that sound more like they’re ripped from tabloids like National Enquirer. Actually, as you’ll see below, they’re from the Forbes, Bloomberg, BusinessWeek and Fortunes of the financial press. And the message is painfully clear: The press loves trashing annuities, year after year after year.

But what’s really striking is how the critics are still hammering away at the same old problems year after year, suggesting that all the bad press, criticisms, law suits and piñata whackings have had little effect on changing the annuity industry’s bad behavior. Indeed, sales have roughly doubled in a decade. And as InvestmentNews put it in a special report on insurance products last fall: “Acceptance of Annuities Seen To Be On The Rise.”

Nice product … but too many “bad apples” selling it

Don’t get me wrong, there really are honest annuity companies and brokers out there. And annuities do work for many investors: “We’re not condemning the product,” one senior executive at the Financial Industry Regulatory Authority (FINRA), the securities industry’s “self-policing” agency, was quoted in Business Week: But “we have concerns about the way they are sold.” Along with FINRA, however, there’s a vast patchwork of state agencies and insurance industry regulators that make effective policing tough.

In fact annuities have countless, hidden flaws that all too often remain undisclosed, until it’s too late: Excessive commissions, lower-returns, payout delays, surrender fees and long lock-ins. Still annuity sales climb. As Business Week puts it: “Potential buyers can ignore the sales fluff and dig into the fine print to figure out if an annuity is right for them. But that can be a real slog.” Some prospectuses can run “over 500 pages, so you know why most buyers wind up relying on a sales spiel.” The big reason annuities sell so well is simple: Sales commissions are so lucrative for annuity salesmen, some as high as 14%. As a result, the industry attracts aggressive hustlers with questionable ethics preying on vulnerable customers, especially the elderly, a pattern that gives the rest of the industry a bad name. In short: Greed breeds ethical compromises tainting marketing tactics, and that’s why annuities are selling well!

Save a buck! Buy the insurance and securities separately So the same criticisms persist year after year after year, in part because regulators’ bias favors industry insiders over investors, suggesting “self-policing” is more “self-protection.” No wonder then that journalists and critics like Ric Edelman are less than sympathic and not as subtle as FINRA in condemning the problems with annuities.

Press hates annuities? “Oh, let me count the ways!”

“All mutual funds charge a fee,” says Edelman, one of America’s largest financial advisers in The Lies About Money. “But when you invest in an annuity, you pay the fund’s fee plus the annuity company’s fee. That extra layer of fees can double or even triple your costs. What a rip-off.” Solution: Buy the insurance and the securities separately. Otherwise you’re just making your broker richer and yourself broker.

Bashing annuities has been major league sport among independent experts who’ve analyzed them. Here’s a montage from my files over the years, about how bad things have been for a long time: A staccato review of the relentless harsh headlines and soundbites that have appeared the past decade, not from National Enquirer, but from America’s leading financial periodicals. Scan them closely, then join the party and start whacking at your favorite piñatas:

Bloomberg: “Good for One Lady in Iowa”
“When I was in the insurance industry,” said finance professor and annuity expert Moshe Milevesky, “we used to joke that there probably was one lady in Iowa for whom the product was good.”
Wall Street Journal: “Treat Them Like Blind 12-Year Olds”
In a critique of the “Annuity University,” one of their trainers tells salesmen the best way to sell to potential senior-citizen customers: “Treat them like they’re blind 12-year-olds.”
Smart Money: “Can’t Get a Bigger Commission”
In “Ten Things Your Variable-Annuity Seller Won’t Tell You” you’ll hear that “legions of brokers, insurance salesmen and independent financial advisors are clamoring to sell them. Why’s that? ‘You can’t get a bigger commission for anything else these days’ … about twice what your broker usually gets for peddling a mutual fund.”
Investment News: “Sellers are Burning Consumers”
“Too many sellers are burning consumers … buyers of variable annuities have no idea what they’re actually buying, and many have been lured into an inappropriate investment vehicle. … Many, if not most, elderly will see little or no benefit from a tax-savings strategy that can take 10 to 15 years to pay off.”
Kiplinger’s: “The Great Annuity Rip-Off”
“Unscrupulous agents take advantage of seniors with risky investments that cost too much.” But the “smoke and mirrors can’t disguise the simple truth that most investors can do better elsewhere.”
AAII Journal: “Make a Different Choice”
“Deferred annuities are popular because returns are tax-deferred, but if the full cycle of accumulations and distributions are considered, most purchasers would make a different choice.”
Business Week: “The Fifth Best Option”
“They are the fifth-best option for retirement planning, behind everything else,” says one financial adviser. “Many of the tax benefits of variable annuities no longer exist, but the hard sell continues … don’t believe the hype.”
Money: “One Small Cheer”
Even “if you decide that the lifetime income option of the variable annuity makes sense for a small portion of your assets, that still doesn’t mean you should buy,” because in the end all we could give them was “one (small) cheer for variable annuities.”
Forbes: “The Great Rip-Off”
“The great annuity rip-off … They’re stupid investments for nine and a half people out of 10. The only people who benefit from these things are the people who sell them. … The average annuity is nothing you would want.”
USAToday: “Popular With Unscrupulous Financial Advisors”
“Variable annuities are popular with unscrupulous financial advisors, insurance agents, financial planners, and brokers. Too many of these advisors steer clients looking for simple mutual fund investments into variable annuities instead because of the fat commissions.”
Ticker magazine: “Golden Eggs for Commission Salesmen”
This publication for brokerage industry insiders called variable annuities “golden eggs” for commissioned salesmen.
Newsweek: Financial Guru is “Deeply Angry”
Personal finance guru Jane Bryant Quinn quoted John Biggs, a former chairman of TIAA-CREF: “I cannot imagine a situation where I’d recommend a variable annuity.” Quinn says annuities are one investment that makes her “deeply angry.”
Fortune: “Bad Investment, don’t answer the door”
They’re “bad investments for most people … The best solution: The next time the annuity salesperson comes calling, don’t answer the door.”

Unfortunately, over the years the bad news about the greed, conflicts-of-interest and unethical practices overwhelms the good news about annuities, suggesting that neither regulators nor industry’s “self-policing” is working. Yes, annuities many be perfect for some investors. And yes, many annuity brokers are honest and ethical. But the relentless bad news over the years fits into the general pattern—many annuity brokers target easy prey, manipulating naïve, vulnerable investors in order to get rich off them.

OrigPubDate: Apr’08