The annuity business buyer beware |

The annuity business buyer beware

To start this discussion, lets suppose that youre a less-experienced investor, which, unfortunately, correctly identifies the vast majority of the investing public. For the most part, all these folks have to work with when it comes to making investment decisions is their common sense.This circumstance isnt all that bad. Knowledge certainly trumps ignorance when it comes to investing wisely, but a healthy dose of some rational thinking isnt bad for starters. Lets test that theory with a specific example. What would be your reaction to my recommending that you put your hard-earned dollars in an investment with the following characteristics: A prospectus for this product can run several hundred pages quantum physics is easier to understand. The purported benefits are questionable. Many investment experts believe investors can do better in plain-vanilla index mutual funds. Many of the tax benefits no longer exist. Training schools for agents selling this product are prevalent (Denver has one of the best). Its a product thats sold particularly to seniors not bought. In the investing world, thats not a healthy position for individual investors. The expenses are high and you pay the fees. The average annual expense charge is 2.32 percent compared to less than 0.25 percent for any number of index stock/bond mutual funds. Selling agents earn huge commissions deducted from your investment upwards to 10 percent. Anytime you dangle that kind of money in front of an investment intermediary, objectivity goes out the window. Youre locked in for years and you pay big bucks to exit before its maturity. So-called surrender charges are generally 10 percent of your investment. State regulatory agencies, the Securities & Exchange Commission and the National Association of Securities Dealers are all investigating selling practices, disclosure, supervision and the training of broker-dealers selling the product. The number of consumer complaints has been escalating at an alarming rate. If it takes you more than a nano-second to take a pass on this investment opportunity, your common-sense skills arent functioning properly.

Welcome to the trillion-dollar deferred annuity business. Deferred, or tax-deferred, annuities come in two forms: Variable annuities fluctuate over their lifetime according to the value of the underlying investments, which are generally a mix of stock and/or bond mutual funds that the investor selects. Fixed annuities are, as the name implies, made up of securities that provide a fixed-income return. Both of these annuities also provide some sort of death benefit along with the investment account. The deferred annuity product is meant to provide investors with tax-sheltered investing during their accumulation period prior to retirement. In contrast, and not to be confused with the deferred type, an immediate annuity simply takes any amount of money from an investment or cash holding and converts (annuitizes) it into a steady stream of income for a given period of time or for life.The bottom line on deferred annuities is simply this dont believe the hype. This might be a somewhat severe criticism on my part, but when I read articles with headlines about the pros and cons of deferred annuities, Im hard pressed to find any pros.My research files are filled with a wide variety of investment information. The file on annuities is far and away the largest of them all, and its filled with many years of negative, critical opinion from numerous sources. Investors should be aware of and prepared for an aggressive sales pitch when the subject of deferred annuities comes up. Just remember that there are alternatives to this category of investment that are infinitely easier to understand, considerably less expensive, and equal to or better on a risk-return basis. The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing and an independent registered investment adviser. Loth can be reached at 827-5591 or, Colorado

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