Last week I shared with you the real reason advisors push IRA accounts into variable annuities: the commission. If youre getting ready to retire with a large IRA rollover, or your current IRA account is nearing the end of any surrender penalties, chances are youll be pitched this product. So this week Im going to reveal more secrets about the truth behind the variable annuity sales pitch. Guarding Your Wealth" is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.
(PRWEB) February 14, 2005 -- One of the biggest draws advisors use to get you to take the plunge is the promise of the big bonus. Theyll pay you 6%, 8% or even 10% extra, right up front, just for putting your money into their variable annuity. Sounds great, doesnt it? Who wouldnt want such a big boost to their nest egg, especially with the stock market returns of late? But remember, theres no such thing as a free lunch.
In return for this lovely bonus, you end up paying higher recurring annual fees, usually .15% higher (or more) than regular variable annuities. These fees are charged on all of the money in the annuity and are a continued drag on performance. Surrender penalties are higher and longer, too. The truth is that when you take into account the increased fees and the extra years you have to stay in the annuity, you really arent getting a ‘bonus at all!
These bonuses arent just used to entice you to invest your original IRA rollover when you retire. Theyre also used to encourage you to transfer out of an annuity you already own thats still in the penalty period. Advisors will tell you that the bonus on this ‘new-and-improved annuity will ‘pay you back for the penalty youll pay to get out of your old commission-based investment. The truth is, by getting you to switch to the ‘bonus annuity, they earn a fat fee up-front. You end up with pretty much the same thing you had but now are locked into it for much longer. What kind of a ‘deal is that?
The promise of multiple investment choices is another feature of the variable annuity sales pitch that doesnt live up to its claim. Its true that many variable annuities offer a multitude of mutual fund choices in various sub-accounts, including funds investing in bonds, small companies, large companies, international stocks and more. Surely out of all of these choices, anyone could create a balanced well-performing portfolio, right?
Not necessarily. Its sort of like fishing. Who wants to fish in a pond full of minnows? Wouldnt you rather drop your line where you have a greater chance of catching the big one? The mutual fund universe is full of thousands of choices. But only a small group of them are consistent top performers. Unfortunately, few variable annuities offer these big fish.
Some variable annuities feature a well-known fund already offered to the general public. But beware. This same fund will have much higher management fees within the annuity than it does outside of it, hampering its performance. I believe insurance companies make special deals with mutual fund companies to gain access to their management and then charge higher fees.
When you invest your money into a variable annuity, youll no longer have control over the choices at your disposal. The insurance company can change the investment choices whenever they want to and you have no recourse. Since your money is locked in for years, it will be very costly to change course a few years down the road should you be dissatisfied. What kind of choice is that?
So heres the bottom line: variable annuities make big promises but dont really deliver. Every feature they offer -- be it a big bonus, a multitude of investment choices, death benefit, or a guaranteed income stream -- comes at a very high price. High management fees and long, costly surrender penalties hinder your performance and rob you of your flexibility and control. The ones making the most money off of variable annuities are the advisors and the insurance companies. It turns out that variable annuities are a great investment—for them.
If youd like free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com. Also, see answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com.
Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com
Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, contact Christine Lavender at (877) 827-1463 or email christine@guardingyourwealth.com.
Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive:
Equity Indexed Annuities: There Are Better Growth Alternatives
Equity Indexed Annuities: There Are Better Alternatives (Stability)
Better Alternatives Than Equity Indexed Annuities
Equity Indexed Annuities: Agents Prey On Unsuspecting
Consumer Alert: Equity Index Annuities.
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