Ken Fisher Shows His Ignorance of Annuities (Again!)
If you didn’t see my newsletter on the just released 2019 DALBAR Study (my favorite industry study), click on the following link to download the FREE version. The study indicates what the average investor returned over the last 5-, 10-, 20-years.
Yep, he’s at it again. Mr. I Hate Annuities recently had an article in USA Today titled:
Why I still hate annuities: Here are the reasons these investments are bogus
A while back I did a newsletter titled: Should We Hate Ken Fisher. To read my past article, click here.
My past article basically went over some of the dumber things Ken has recommend in various article he’s had published and I also critiqued his Definitive Guide to Retirement Income (which is a scary read).
Ken’s new USA Today article-classic Ken stuff I suppose. But in this article he really showed his ignorance and any advisor who has to sell against Ken can use this article against him. He stated:
“Indexed” annuities are loosely linked to stock market indexes. Their pitch: Get stocks’ upside without the downside – with little to no fees. But the upside is severely limited. Returns usually omit dividends. Then, most use a “participation rate,” providing just part of the index’s return. If the index rises 10%, your participation rate is 50%, your return is 5%. The insurer keeps the rest.
These often include “performance caps” – maximums you get in any month, quarter or year. Problem: Stock returns bounce big time. Envision a 10-percent annual cap. You miss most of all the bigger up years – which is where most of history’s gains come from. Monthly caps are even deadlier. Again, you miss big “up” months, like recently. Long-term, these annuity returns often look like fat-fee Certificates of Deposit (CDs).
What jumps out at you as misleading?
-A no cap but 50% participation rate FIA, in big up years, would do well (in a 20% up year the FIA would return 10%). Also, some products come with VCIs (Volatility Control Indexes) that have a 100%+ par rate with no cap.
To learn more about VCI indexes, click on the following link to read my VCI White Paper:
-Also, insurance companies who offer a par rate product don’t make money from the spread. This is misleading and more so it makes the insurance companies look bad (which is what it seems he’s always trying to do).
How do insurance companies make money with FIAs? From their general account investments. A company’s general account investments are designed to make about 2% annually. The majority of a company’s general account is made up of high grade bonds.
For example: assume a client has an FIA with a 50% par rate and the S&P 500 without dividends returned 15%. The client would be credited with a 7.5% as growth on cash in the annuity. If the next year the S&P without dividends returns 0%, the insurance company still makes whatever it makes on its general account investments (it doesn’t matter what the index returns).
FIAs with VCIs can have significant yield-Ken probably doesn’t know or if he did he wouldn’t say it, but some of the new FIAs with VCIs can generate significant yields (although comparing FIAs to the stock market makes little sense (the comparison should be to bonds, CDs, or money markets)).
My favorite product uses a VCI with a 100% par rate and NO cap. In our OnPointe software I can both back test the product and run a Monte Carlo simulation on what it is reasonably expected to generate as rate of return over time.
Back test 20 years
Best 10-year period 9.02%
Worst 10-year period 5.75%
Forward Monte Carlo 10-year return
Best forward test 7.37%
Worst forward test 5.65%
If you would like to learn about the FIA with the back tested and Monte Carlo tested returns, click on the following link (the product is also a flex product that has a 1% trail option for commissions):
Why would anyone, including Ken Fisher, hate such a product?
No one should hate the annuity I just described above. It has no downside, no risk, and locks the gains in annually. It’s a terrific product.
The only advisors who will say they don’t like such a product are ones who don’t really understand FIAs or ones who do but have something that prevents them from evaluating them in an unbiased manner.
As for Ken, he appears to hate anything that doesn’t support his marketing/sales pitch of ‘I hate annuities.’ You wonder how long his ‘always be invested’ empire will continue? Probably until the next major market crash is my guess.
Roccy DeFrancesco, JD
Founder-The Wealth Preservation Institute