Always Talk To Seniors as if They’re 8 Years Old

Again, I remind you that these post headings are Myths.  And, again, this is one propagated by AARP’s financial entertainer, Allan Roth(UPDATE:  since the publication of this blog, AARP removed all reference to equity indexed annuities from Mr. Roth’s online article.  But if you have the paper version, please refer to it.)
In the April/May issue of AARP’s newsletter, Mr. Roth lumps equity indexed annuities (EIAs) in with “5 Bad Money Moves” such as oil drilling partnerships, time shares and private REITS.  Really?
I take issue with this ignorant and astoundingly inaccurate portrayal because I frequently recommend EIAs for a variety of  excellent reasons, reasons that dramatically separate them from the other risky investments mentioned:

  1. In today’s low interest environment, the minimum guaranteed interest rates in fixed annuities can equal or exceed other fixed interest alternatives, such as CDs or money market accounts.  For example, I just got a glossy postcard in the mail from a bank, bragging about its 1.75% 5 year CD.  Annuity company, Sentinel, has a 5 year fixed annuity paying 3.2%.
  2. And unlike CDs, the interest is tax-deferred and remains inside the annuity compounding interest until withdrawn.
  3. Principal protection.  No, annuities are not guaranteed by the FDIC.  But even better, in my opinion:  Because EIAs are issued only by insurance companies they are backed up by each state’s guarantee association (be sure you understand your state’s requirements and limitations).  No, Mr. Roth, the guarantees are not “mostly illusion”.
  4. Which is because they are regulated by each State rather than any Federal window-dressing regulator like the SEC, at the beck and call of the very industry it’s supposed to “regulate”.  Oregon is one of the toughest.  If an annuity product is available here, it’s probably pretty good.
  5. Flexible and customizable income guarantees.  None of the other “bad” products Mr. Roth mentions include these essential planning characteristics.
  6. Liquidity.  No, most annuities do not have 100% liquidity from day one.  That’s why fiduciary advisers use them for long term money, much like a personal Social Security account.  Virtually all are 100% liquid after 10 years.  And virtually all allow 10% penalty-free withdrawals before then.
  7. The ability to participate in market gains while avoiding the losses.  If an investor only received 30% of the S&P500’s gains, but avoided all the losses, he would beat the S&P500.  Not losing money matters.

That’s for starters.  Of the $84.9 billion investors placed in fixed annuities in 2013 only $8.3 bil. were fixed immediate annuities (the worst ones, which Mr. Roth likes because they are “simple”.  And maybe also because AARP sells them?)  $39.3 bil. were equity indexed annuities:

Courtesy of  Insured Retirement Institute

 Mr. Roth goes on to characterize those of us who use EIAs as greedy snake oil salesmen pursuing gigantic commissions through itinerant bait & switch seminars & classes.  If we eliminated all transactions that made a profit for someone, commerce would grind to a halt.  We don’t mind paying a 10,000% markup on bottled water, a 90% markup on the coffee we drink nor a 3.5-7% real estate commission.  Every savings and investment option also has pros and cons, costs and benefits.
As a fiduciary adviser, I have to be able to demonstrate that my recommendations are the best for my clients.  And we’re talking about long term, face-to-face relationships, Mr. Roth, not a mass audience that will forget your article in a week (in this case, fortunately).  Believe me, if insurance companies could sell their annuities online, by mail or through financial entertainers they certainly would.

Which brings me to the title of this blog, “Always Talk To Seniors as if They’re 8 Years Old“.  In his five “Warning Signs” Roth astoundingly states, “My rule is never to buy anything I couldn’t explain to an 8-yr.-old” because everyone- even educated adults -should avoid that high-falutin’ “fancy language”.  Yes, I know.  That is the prevailing journalistic standard.  It really is.  (Which explains a lot about the dumbing-down of Americans.)  But I would never treat a client the same way I would treat an 8-yr.-old child.  How pompous and insulting.  Many of my clients are professionals; lawyers, doctors, engineers, professors, carpenters, CPAs, managers.  They are capable of understanding the best options.

I do tell my classes and my clients to never make a financial decision without the two elements of TRUST:  evidence and understandingFame (such as appearing in the AARP newsletter), a nice suit and hair, toothy smiles, etc. are evidence of nothing.   Make your adviser explain everything you doubt or don’t understand.  Insist on evidence for all claims.  There are no stupid questions.  You deserve better than Mr. Roth.  Sometimes complexity is superior.  Otherwise we would all use horses instead of cars.

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