For those working as financial planners, that we will eventually be humbled by the recognition of a faulty thought process is not just likely, but a foregone conclusion. One of the financial products that I was trained on intensely was annuities—fixed annuities, variable annuities, equity indexed annuities and immediate annuities. And it wasn’t until I was in the industry over seven years that my continued research began to reveal that the benefits of annuities to consumers were exaggerated and the drawbacks, downplayed. As that truth began to settle in, I had to acknowledge that I was wrong. That was humbling, but I wouldn’t trade my initially faulty thought process for anything, because learning “the hard way” has helped me grow through experience and it makes me a better planner today. Here’s my confession, which kicks off Chapter Twelve in The Financial Crossroads:
From Chapter Twelve, The “A” Word:
In the realm of personal finance, no word has been dragged through the mud more times than The “A” Word—Annuities. Yet, annuities still survive and even thrive. How they do is not a mystery.
There is not an outcry on the part of consumers demanding annuity products. The reason for the continued vibrancy of annuity products and sales is that they pay a big honkin’ commission to the selling broker or agent. (There, I’ve said it.) And, as most of the financial sales tactics exposed in this book, I’m especially qualified to make such a statement, because I have sold them myself. I wasn’t a bad person in those days, conniving to separate prospects from their hard-earned money for my own selfish benefit. Conversely, every time in years past when I sold an investment product to a client for a commission, I did so thinking it was best for the client. My recommendations met all the legal requirements of suitability that are required of a broker, but I declare to you now that in hindsight there is no question that my judgment was partly influenced by the amount of money that I could make (or not make) in the sale.
And how could it not be? Let’s say you, as a salesperson, had three different products to sell with the following characteristics: one would pay you 1% for every year that the investment continued to be held by the client, one would pay you 5.75% up front followed by .25% each additional year, and another would pay you 12%—all up front. Which one would you be likely to pick, all things being considered equal? Hmmmm. Let’s add to the scenario the assumption that you were selling in the midst of an economic downturn which had resulted in a significant loss of revenue for you and your family. Is it possible that in that circumstance you may be inclined to favor the product that pays 12% up front over the one that pays 5.75% up front? And forget about the one that pays 1%, because in tough times, that simply isn’t going to butter the bread. These aren’t imaginary numbers that I’m using. One percent is a slightly below average amount that a financial advisor may charge for discretionary management of your investment assets; 5.75% is the average commission paid to a broker who sells a mutual fund (A share); and annuity products pay up to—and in some cases over—12%!
The sale of annuities is justified entirely too often because of the massive commissions that go to the broker or agent selling the product. Powerful organizations have made it their lives’ work to decry this very notion and have built elaborate systems designed to convince themselves, their brokers and agents, and the consuming public to believe in the justness of their actions. I was a part of one such group and was encouraged—along with a room full of other financial folks who had been invited to San Diego for an all-expense paid trip to hear what this organization had to say—to join the ranks of the “Safe Money Specialists.” Other people were selling products. We were selling peace of mind and getting paid 10 times as much!
I repeat: people who sell annuities aren’t bad people. But, they are sales people. You expect timeshare salespeople to have an economic bias to sell you a timeshare. You expect a phone solicitor who interrupts your dinner to keep you on the phone to convince you to buy something before you hang up the phone. You don’t, however, expect someone who refers to themselves as a financial planner or advisor or professional to have the primary aim to sell you something. Unfortunately, many of them do. Your broker or agent may have drank the company Kool-Aid and genuinely believe that he or she is doing the best thing for you, so treat them with respect when you tell them you’ll be moving your business. As I learned growing up in the Baptist church, we should, “Hate the sin, not the sinner.” We will be discussing in much greater detail the ways that financial services employees and financial advisors are compensated and what you should look for in Chapter Seventeen.