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Financial planners and annuities
Old 01-02-2015, 10:37 AM   #1
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Financial planners and annuities

My siblings and I recently received a sizable inheritance.

With this large amount, many are seeking the advice of financial planners.

It seems each of their financial planners are suggesting annuities.

Would there be better advice to put some it ETF's from any of the advisors?
I'm kind of surprised by this.
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Old 01-02-2015, 10:39 AM   #2
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It seems each of their financial planners are suggesting annuities.
...
I'm kind of surprised by this.
Why? That's where the financial planners make the most money.
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Old 01-02-2015, 10:40 AM   #3
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The financial planners are compensated generously for selling annuities.
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Old 01-02-2015, 10:46 AM   #4
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It's frustrating. Maybe I'm getting more upset about this than I need to be, but don't financial planners have some sort of fidiciary duty to do what's best for their clients?

My older brother self-admittedly knows little about finances. I thought the advisor might suggest a blend of solutions vs just writing up a large annuity that my brother doesn't understand fully.
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Old 01-02-2015, 10:51 AM   #5
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The primary beneficiary of an annuity - especially the variable type - is the Financial Planner, not the client.

His compensation is way more generous than if he had recommended ETFs, mutual Funds, or almost any other type of investment vehicle.

My own conviction is to run, not walk, from annuities. Only exception is the SPIA - Single Premium Annuity, but even then I would be extremely cautious.

That has always been the case, I do not expect that this has changed much over the years.
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Old 01-02-2015, 11:21 AM   #6
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It's frustrating. Maybe I'm getting more upset about this than I need to be, but don't financial planners have some sort of fidiciary duty to do what's best for their clients?

My older brother self-admittedly knows little about finances. I thought the advisor might suggest a blend of solutions vs just writing up a large annuity that my brother doesn't understand fully.
This board is full of threads about "financial planners" that aren't working in your best interest. Many are flat rip offs but they convince uneducated investors it's good to buy annuties they don't understand, pay loads, 12b1 fees, and wrap fees. I know there are folks with fiduciary responsibility but not how to weed them out. Others here will.

If you don't understand an investment, don't walk away, run away. I keep a stock of road apples to throw at the aggressive ones.

The big fund companies(Vanguard, Fidelity, perhaps Schwab) will provide free planning services for having an account with them with a mid 6 figure balance.

My knowledge of annuties is minimal, but stay away from variables(complexity and cost). SPIAs might be OK, but I always thought they were tied to interest rates and you know we're in a low interest environment.


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Old 01-02-2015, 11:23 AM   #7
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This board is full of threads about "financial planners" that aren't working in your best interest. Many are flat rip offs but they convince uneducated investors it's good to buy annuties they don't understand, pay loads, 12b1 fees, and wrap fees. I know there are folks with fiduciary responsibility but not how to weed them out. Others here will.

If you don't understand an investment, don't walk away, run away. I keep a stock of (frozen) road apples to throw at the aggressive ones.

The big fund companies(Vanguard, Fidelity, perhaps Schwab) will provide free planning services for having an account with them with a mid 6 figure balance.

My knowledge of annuties is minimal, but stay away from variables(complexity and cost). SPIAs might be OK, but I always thought they were tied to interest rates and you know we're in a low interest environment.


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Sorry that was meant to be an edit.

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Old 01-02-2015, 11:24 AM   #8
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It's frustrating. Maybe I'm getting more upset about this than I need to be, but don't financial planners have some sort of fidiciary duty to do what's best for their clients?
Long and short answer, no.
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Old 01-02-2015, 11:27 AM   #9
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My siblings and I recently received a sizable inheritance.

With this large amount, many are seeking the advice of financial planners.

It seems each of their financial planners are suggesting annuities.

Would there be better advice to put some it ETF's from any of the advisors?
I'm kind of surprised by this.
I don't know if it has been covered in detail here, but I just stumbled on wealthfront.com in an article and have been browsing their site. It sounds like what one of the Engineers around here may build if they were to boil down the more prevalent investing strategies from this board and Bogelheads into an automated adviser for those not interested in doing it themselves.

I have no personal experience with it, but it looks like an interesting potential alternative to explore vs. the standard Financial Planner route (high fees), without the pressure for someone to learn how to DIY.
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Old 01-02-2015, 11:33 AM   #10
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I agree with the previous posts. Your advisers are pushing annuities because they make a lot of money from them. One extremely bad feature is that once you sign the annuity contract, your money is locked up and you have a choice of either paying the annuity expenses for a long period of time or paying the insurance company to break the contract. Either way, they've got you.

Annuities aren't investments per se, they are longevity insurance (eg insurance that you will live long enough to run out of money). As insurance products, they are expensive and the companies that sell them make them very complicated to hide the costs. I suggest you and your siblings read the following Forbes article on them: Annuities: Good, Bad Or Ugly? - Forbes

I also suggest they and you read the bogleheads wiki on how to deal with windfalls. The link is here: Managing a windfall - Bogleheads
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Old 01-02-2015, 11:44 AM   #11
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I've been managing my own in ETF's for some time. I've tried to provide advice to a couple of my family, but for them they "feel comfortable" with the person who is ripping them off.
I track my finances on mint and personal capital.
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Old 01-02-2015, 11:51 AM   #12
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Variable annuities are total rip-offs. The people that sell them are not financial advisers. They are insurance agents. They have no fiduciary obligations. They are free to steal your money through slick sales presentations filled with financial half-truths and emotional pleas.

Both my father and FIL fell victim to these people. I hope there is a special place in hell for this sort of scum. No reasonably intelligent person selling them can not help but see that they are the only ones benefiting from their sale.

I recommend you all park your money at Vanguard in money market funds. If large enough, you can get a free or very inexpensive financial plan from Vanguard. They do have a fiduciary responsibility but they will also only recommend Vanguard index funds. I believe this is the best thing for most individuals. They will incorporate special concerns you may have (college education, elder care potential, charitable goals, etc.) in their plan but you need to spell it out for them.

I also recommend everyone reading Andrew Hallam's Millionaire Teacher for a good view of index fund investing. For the more interested, also read William Bernstein's Investors Manifesto. They can be found on Amazon and in many libraries. Hallam's book is very simple. It actually opened the investing door to my DW.
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Old 01-02-2015, 12:09 PM   #13
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Variable annuities are total rip-offs. The people that sell them are not financial advisers. They are insurance agents. They have no fiduciary obligations. They are free to steal your money through slick sales presentations filled with financial half-truths and emotional pleas.
+1

Please do your best to prevent your relatives from being taken in by this sort of thing. Suggest that they consult with a fee-only planner who indeed is obligated to look out for their best interests. I suggest looking at the NAPFA website for references. But don't let insurance agents rip them off.
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Old 01-02-2015, 12:33 PM   #14
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I don't know how to reverse calculate these numbers, but we have a single payment fixed annuity that was taken out just 30 years ago. The initial amount was$8,000. The current annuity value is about $51,000, and the surrender value is just over $45,000.

It was our part of the "inheritance"... and the initial interest rate for 2 years, was 11 1/2%, with a guaranteed minimum interest of 4% after that, a rate to which it dropped immediately after the first 2 years.

It just happened, and we have done nothing with it over the years. I never hear about this, wonder if it still exists as a product, whether it's something that is still offered. (not at that initial rate).
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Old 01-02-2015, 12:47 PM   #15
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I agree with the advice offered to you already. There is only one application where I would consider a variable annuity and that is as a wealth transfer vehicle in tough market conditions for someone who does not plan to take ANY withdrawals and only if there is a guaranteed death benefit. Even then I would be cautious. The stock market is a better deal with tax considerations. You will pay ordinary income taxes on any growth in an annuity, rather than dividend and interest tax rates in market.

If your siblings insist on a variable annuity or seem "drawn in " by these salesmen, suggest they get the salesmen to run scenarios under all market conditions, especially one with a 50% or more decline in the markets. You will find any guaranteed death benefit you pay extra fees for, suddenly disappears. It is paramount the salesmen show you not just the accumulation phase but also the "withdrawal phases" under these conditions. It is an eye opener. Lastly, read the very fine print. If is the very fine print disclosing ALL fees during ALL phases is not included, ask for it. You will find all sorts of charges and fees….even when you start taking withdrawals. Analyze all of it. They are paying you back with your own money and feeing you to death. They are selling into our fear.

Sure they may tell you that you get what…an automatic 3%, 4% bump each year. That is all on paper and if you check the fees you come to realize you get the bumps so they can take their fees and charges or at least a larger percentage of it.

Lastly (again), you will NEVER be able to determine what the fees are for the mutual funds held in these annuities.

Be sure to check with your state in the event the company that sells the annuity goes bankrupt. Many of these things have blown up. I talked recently with another planner who said several did so just this year. I didn't ask which company.

I once had a salesmen offer to split his commission with me if I bought in. Highly unethical. He also told my then husband, "Gee, usually all I have to say is "you get a guaranteed 5% -8% and most people sign".

Run don't walk to the exit. You all can do better and have control over your money in other ways.
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Old 01-02-2015, 12:52 PM   #16
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My brother was highly worried about "not losing" what he was putting in. So that was what the salesperson ran with as well as it being "tax deferred".
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Old 01-02-2015, 01:30 PM   #17
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I've often thought when reading a thread like this, with a lot of definite and well reasoned thought included, would it do any good to print out the thread and share it with the OP relatives? As one person it's hard to reason with a relative being sold by sophisticated sales persons. Maybe trying to open their eyes with opinions here would do some good. I know, I know, this is the internet and all that; but still.....
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Old 01-02-2015, 02:31 PM   #18
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My brother was highly worried about "not losing" what he was putting in. So that was what the salesperson ran with as well as it being "tax deferred".
"Avoiding losses" is the prime sales gimmick for VAs. The "tax deferred" comes because it is not an investment. It is an insurance policy. The "avoiding losses" comes with an expensive rider that keeps the principle "secure" but these usually only come with the requirement that the principle has to be annuitized when withdrawals begin. That guarantees you won't get a good conversion to an annuity stream.

Here's a link to a recent article on VAs. The "defense" in very tongue-in-cheek. You may want to share this with your siblings. There are many other articles out there. Google "should I buy a variable annuity."

AssetBuilder - In Defense Of Advisors Who Sell Variable Annuities - AssetBuilder Inc., Registered Investment Advisor
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Old 01-02-2015, 02:56 PM   #19
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Variable annuities are total rip-offs. The people that sell them are not financial advisers. They are insurance agents. They have no fiduciary obligations. They are free to steal your money through slick sales presentations filled with financial half-truths and emotional pleas.

Both my father and FIL fell victim to these people. I hope there is a special place in hell for this sort of scum. No reasonably intelligent person selling them can not help but see that they are the only ones benefiting from their sale.

I recommend you all park your money at Vanguard in money market funds. If large enough, you can get a free or very inexpensive financial plan from Vanguard. They do have a fiduciary responsibility but they will also only recommend Vanguard index funds. I believe this is the best thing for most individuals. They will incorporate special concerns you may have (college education, elder care potential, charitable goals, etc.) in their plan but you need to spell it out for them.

I also recommend everyone reading Andrew Hallam's Millionaire Teacher for a good view of index fund investing. For the more interested, also read William Bernstein's Investors Manifesto. They can be found on Amazon and in many libraries. Hallam's book is very simple. It actually opened the investing door to my DW.
What 2B said.

I's also add "How a Second Grader Beat Wall Street", "Predictably Irrational", "Why Smart People Make Big Money Mistakes", "Your Money & Your Brain", "A Random Walk Down Wall Street", and if you want to get seriously into the psychology of money and investing, "Thinking, Fast and Slow". The author of that last one is the only psychologist to win a Nobel Prize in economics, and for good reason.

I found the books on psychology especially helpful in separating the emotional from the financial/logical issues. Everyone knows you should "buy low and sell high" but actually buying into a falling market is emotionally extremely difficult to do.
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Old 01-02-2015, 03:05 PM   #20
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I's also add "How a Second Grader Beat Wall Street", "Predictably Irrational", "Why Smart People Make Big Money Mistakes", "Your Money & Your Brain", "A Random Walk Down Wall Street", and if you want to get seriously into the psychology of money and investing, "Thinking, Fast and Slow". The author of that last one is the only psychologist to win a Nobel Prize in economics, and for good reason.

I found the books on psychology especially helpful in separating the emotional from the financial/logical issues. Everyone knows you should "buy low and sell high" but actually buying into a falling market is emotionally extremely difficult to do.
For people new to investing and index investing, I like to keep it simple. I'm concerned that if the family is suddenly hit with a big reading list they'll all shutdown and decide the only way to go is to turn it over to the "experts" that are pushing the variable annuities.
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