Halloween And Annuities Both Should Scare You!

Annuities are usually sold to investors.  But in our view, rarely are they ever bought by them. There is a huge difference between these two statements and here's why.

Annuities typically are sold as the ultimate solution to retirement security. They promise stable, guaranteed income for life or better yet, protection on the downside with ability to still participate in the upside of the markets. What could be safer or better than that, right? But here’s the inconvenient truth: annuities are not the safe haven they’re made out to be or as glamorous as they are portrayed to be. Much like a well-practiced illusion, annuities are designed to distract you with promises of security while hiding the real costs and risks buried under layers of fine print. These complex financial products are filled with fees, conflicts of interest, and terms that leave investors—especially middle-income retirees—at a huge disadvantage.

And the annuities industry? They’re fighting tooth and nail to keep things that way.

The Fiduciary Standard Showdown

The annuities industry is in an uproar over the possibility of being held to a fiduciary standard – a regulation that would force them to act in the best interest of their clients. Sounds reasonable, right? You may think that would already be a given, but no. The pushback comes because a fiduciary standard threatens their bottom line. Why? Because it would restrict their ability to sell products that benefit them more than you. Annuities—especially the complex, high-fee varieties—are a goldmine for brokers and insurance agents. They are concerned that being required to prioritize your best interests, which includes disclosing all of the costs, fees, performance caps and surrender charges, could cut into their bottom line. My company, LCM Capital Management, a federally registered investment advisory (RIA), is held to a fiduciary standard when dealing with our clients, as are all RIA's, and it is one of many reasons why my firm does not sell annuities.

One annuity industry representative actually claimed that imposing this standard on his industry salespeople would cause 56% of them to stop serving middle-income clients altogether. Besides this being a blessing in disguise, ask yourself this: if they're not willing to serve you or the middle class in general, unless they can continue to rake in commissions at your expense, were they ever really working in your best interest to begin with?

Annuities are a tax-deferred investment, meaning, any growth accumulates without taxes being paid, until you take the money out. I won't go into all the intricacies here, since we would need another 5 pages to explain everything, I've learned over the last 37 years. I mention this because, my partner and I many times see annuities held within IRA's, which are also a tax-deferred investment. So why would someone own a tax-deferred investment inside a tax-deferred investment? Do they receive double tax-deferred status for this? No, the reason is, this is where the middle-class investor usually has a bulk of their investable assets. As a fiduciary, this would be a real difficult sell to a regulator.               

Commissions: The Dirty Secret Of Annuities

Here's the deal with commissions: they create a built-in conflict of interest. When a broker or insurance agent sells you an annuity, they pocket a hefty commission.  If you've ever bought one, my guess is that you did not know this. That's why they are so eager to push these products onto retirees and especially their IRA's. If a fiduciary standard were in place, it would limit their ability to take advantage of you because they would have to explain how much they are getting paid prior to you buying it.  We believe there are much better, lower-cost alternatives available than buying an expensive annuity and if they were held to this fiduciary standard, they would have to tell you this.

The annuities industry argues that they need commissions to stay in business, especially when serving middle-income Americans. But the numbers tell a different story. A study of Certified Financial Planners (CFPs) – who operate under a fiduciary standard – found that they're actually growing their businesses and making more money while serving middle-income clients. So, the argument that brokers will abandon retirees if they're forced to act in your best interest is just a scare tactic, plain and simple. My firm has a stated minimum of $25,000 and while our average client has much more money invested with us, we have been able to grow our firm "in spite" of being held to a fiduciary standard. 

Regulatory Gaps: Who's Really Protecting You?

There's a huge hole in the regulations surrounding annuities right now. Unlike investment products regulated by the SEC or FINRA, many annuities are subject only to state insurance regulations – rules that are far more lenient and do not prioritize consumer protection. This weak oversight attracts brokers who can't make it in the securities industry because they have too many black marks on their record.

In fact, research found that 93% of brokers who lose their securities licenses due to regulatory issues just shift over to selling annuities. That stat alone should scare you. These "bad actors" know they can keep doing business under the radar, peddling high-cost, high-commission products to unsuspecting retirees. One of the reasons this can happen is because they are not a fiduciary. If they were, they would have to disclose this to you, it's a requirement. Wouldn't you want to know that the person trying to sell you a product has a rap sheet that caused them to lose their securities license? The annuities industry defends their regulatory system, but it's clear that it’s designed more to protect them than you.

The Real Risk to Middle-Income Americans

The annuities industry loves to claim they're helping middle-income Americans by offering these "safe" products. But are they really safe? Annuities are often riddled with high fees that chip away at your retirement savings over time. These fees aren't always obvious—they're often buried in the fine print—and can significantly reduce your returns.

For many investors, there are better alternatives that provide more flexibility, lower costs, and greater transparency. But as long as the annuities industry is allowed to operate without a fiduciary standard, brokers and agents will continue to push these suboptimal products because it's profitable for them.

The bottom line from our perspective:  annuities are usually a poor investment for individual retirees. While they may promise lifetime income, the costs and conflicts of interest associated with them make them far less attractive than they appear. If the annuities industry is so afraid of a fiduciary standard, it should make you question whether they're really working for you—or just looking out for their own wallets.

So next time someone tries to sell you an annuity, ask yourself: who's really benefiting here and then, please reach out to my firm or any Registered Investment Advisor and ask for their opinion and analysis on the particular annuity you are being sold. More than likely, the answer will scare you.