Investment Products Are Not Always Investment Solutions

There was a crazy story in the Philadelphia Inquirer earlier this month about a financial advisor named Phillip Cannella. To say that Cannella is a fan of annuities would be an understatement. He promotes them on a radio infomercial every Saturday and Sunday in the Philadelphia area and believes in them enough to compare himself to MLK:

Some of his clients, Cannella said, are even worried that he’s putting himself in harm’s way for exposing “the atrocities on Wall Street.”

“If I get picked off for doing something great nationally, I’m OK with that,” he said. “Isn’t that how Martin Luther King died? They all died for a cause, and the cause still survives. … So, I’m not afraid to die.”

What is important to understand, he said, is that his product is safer than stocks and can earn bigger returns. At the Springfield Country Club last fall, he showed the crowd a version of a promotional chart that insurance agents across the country use to push fixed index annuities. Annuities, Cannella told his audience, out-performed the stock market “every year.”

The problem is some of his claims are a tad exaggerated:

The chart, by industry giant American Equity Investment Life Insurance Co., shows one of its fixed index annuities outperforming the S&P 500 index from 1998 to 2015. But there was a major omission:

What Cannella and other agents don’t mention is the S&P 500 returns on the chart do not include reinvested dividends. With dividends included, the stock market’s aggregate return handily outperformed Cannella’s favorite annuity product over the same period.

Canella is an extreme case and not representative of all insurance product pushers but his unwavering faith in these products makes for a good lesson for investors who don’t take the time to do their own research.

Annuities in and of themselves aren’t horrible investment products for the right client in the right situation. The majority of them are overpriced, carry huge commissions, are difficult to understand and cannot be easily sold (read: illiquid). Most annuities are created to be investment products, not investment solutions.

This doesn’t mean they can’t be used under the right circumstances but there is a certain subset of insurance salespeople and investment advisors who recommend them exclusively without ever performing the necessary due diligence to ensure they make sense for their clients.

It would appear that the DOL’s proposed fiduciary rule is having an impact on sales of these products. The following comes from a story that appeared on Investment News this week:

The variable annuity industry took a beating in 2016, with several of the top sellers inking losses upwards of 25% on the year and some exceeding 40%.

The Department of Labor’s fiduciary rule, issued in its final form last spring, played a big role in the industry’s bruising, observers said.

“I think what happened last year, with the significant drop, the DOL played a huge role in that,” said Bernie Gacona, senior vice president and director of annuities at Wells Fargo Advisors.

Variable annuities still sold more than $100 billion dollars last year but it was the industry’s lowest sales total since 1998.

My guess is that the dropoff in annuity revenues has less to do with the DOL and more to do with the increased amount of information available to investment consumers because of the Internet. The “trust me” generation of financial salespeople is slowing losing relevance. It will never completely go away because many people want that or don’t know any better but I’m hopeful things will continue to get better as more people become informed.

Again this isn’t necessarily a knock on annuities. They have a place in certain instances. But the flashy financial salesperson who sells them to unwitting clients in hopes of earning a huge commission should be a practice that slowly diminishes as investment consumers become more educated and aware of the potential drawbacks.

As with most entrenched firms and industries, my guess is this will happen very slowly and then all at once. Or at least that’s my hope — I guy can dream…

Magic or Unsuitable? (Philadelphia Inquirer)
Department of Labor’s fiduciary rule blamed for insurers’ massive hit on variable annuity sales (Investment News)