Time to Fire Your Financial Advisor? Here Are 5 Red Flags

Karen Riccio

Disclosures

October 18, 2017

In This Article

Red Flag 2: Your Advisor Pitches an Annuity in a Tax-Deferred Account

A report by the staff of Senator Elizabeth Warren (D, Massachusetts), called "Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry,"[1] suggested that companies often sweeten the pot for salespeople by dangling exotic trips, tickets to sporting events, golf outings, and cash as incentives to sell their products.

All of the media attention on this issue has made investors become acutely guarded with respect to annuities. And with good reason: They come with steep "surrender fees" (read: penalties) should you need to access any of the money before a specified period has elapsed, and sellers of annuities often pocket as much as 12% of the total amount invested. So an annuity is a very lucrative product for an advisor—whether you really need one or not.

One place where annuities definitely don't belong is in an existing tax-deferred retirement plan, such as a 401(k), 403(b), or individual retirement account (IRA). That's because retirement assets are already protected under a tax-deferred umbrella, making the purchase of an annuity within a 401(k) unnecessary and expensive.

The two most common types of annuities are fixed annuities and variable annuities. The variable annuities come with steep fees and costs, and high surrender charges. Their payouts depend on the performance of an underlying security or the stock market. Fixed annuities offer a specified payout.

Gordon says, "Don't believe in hypothetical accounts that accumulate a 'guarantee' that has nothing to do with your actual principal's value. In the end, it pushes the owner to annuitize the product down the road because of the incentive of taking the hypothetical accumulation value versus the surrender value. The insurance company's goal is to keep your money forever—which they probably will. Now, you will spend years getting back your money in a return of principal, not returns from investments. And only if you live until an extremely old age would you even begin to talk about some sort of rate of return."

That's not to say annuities have no place in an investor's portfolio. According to Kiplinger.com, the ideal annuity candidate is "someone making the maximum contributions to other retirement plans, who can live without the money until after age 59½, and who is in at least the 25% tax bracket to take advantage of the tax deferral."[2]

A person also might be a good candidate, Kiplinger.com says, if he or she is "concerned about outliving savings because annuities can provide a guaranteed stream of income in retirement."[2]

"I can make a case for immediate annuities for those who want to protect against living too long, but never variable annuities," said Gordon.

If your advisor suggests an annuity for you and doesn't ask a number of questions to determine whether it's the right fit, think twice about whether they have your best interests at heart.

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