The Contrarian Sales Approach to Describing Annuity Drawbacks
January 6, 2011 by Chris Conklin
The assertion that many annuity agents make sales without adequately disclosing the product’s drawbacks has dogged the industry for years, causing a regrettable amount of damage to our industry’s public image.
Let me share with you two examples of this assertion in the popular media, and then offer compelling reasons to rethink the way that you present annuity drawbacks to clients.
Humberto Cruz is a nationally syndicated financial columnist who frequently writes about annuities. Many of his articles seem to have a negative slant against the product, so in December 2010, he published an article that attempted to clear the air regarding his attitude toward annuities.
The article, “No Annuity is Intrinsically ‘Good’ or ‘Bad’,” disclosed that Cruz actually owns several annuities. He mentioned that any type of annuity can be inappropriate if you are not aware of potential drawbacks, such as expense charges on variable annuities, surrender charges on deferred annuities, loss of access to principal on immediate annuities, and complex interest crediting formulas on indexed annuities.
So why does he consistently emphasize these drawbacks in his articles? He wrote, “I find it essential to mention these drawbacks after sitting through more than a dozen annuity sales presentations where they were glossed over if not totally ignored, and because readers ask me to give the pros and cons.”
Humberto Cruz is not alone in claiming that annuity sales agents ignore or gloss over the drawbacks of annuities. In April 2008, Dateline NBC ran an hour-long episode called “Tricks of the Trade,” which featured a hidden camera investigation of indexed annuity sales techniques. This quote sums up the overall emphasis of the reporter’s assertion:
But there are two important things [senior consumer and annuity buyer] Leo Stulen says he wasn’t told, things that some experts say make this a horrible investment for many seniors. First, the annuity would lock up most of his money for more than a decade, which is longer than he might live. And, what’s worse, if he needed to withdraw his cash early, he would pay stiff surrender penalties.
The show profiled several agents. Regarding agent Jim Rieger, the reporter set up the segment by saying, “There’s plenty of talk about what you can gain, but the key question is: Will he tell us about those big surrender penalties if you try to get your money out early?” and concluded it with, “There’s no mention of big penalties.” Regarding agent Rickey Gibbs, the reporter opened with, “But will he be honest about those big surrender penalties?” and concluded, “But the salesman doesn’t say how big the penalty is if you need the rest of your money.”
The Dateline NBC show was particularly damaging since then-SEC Chairman Christopher Cox cited the episode when he proposed Rule 151A, a rule that would have brought indexed annuities under the jurisdiction of the SEC, and against which the annuity industry had to fight vigorously to defeat.
The contrarian sales approach
The contrarian sales approach is to not only fully disclose the drawbacks of annuities, but to emphasize them along with all the positives. Your clients know that there are drawbacks to every financial product. They know that there is no such thing as a perfect financial product. For example, if you want safety and liquidity, you typically have to accept a low rate of return. If you want the potential for high gains, you typically have to sacrifice safety – and so forth.
Since your clients know that annuities must have drawbacks, why not be up front about the drawbacks? Think about how this changes the dynamic of your sales presentation: Now, you’re no longer trying to hide or minimize your product’s drawbacks. Instead, you’re someone your client can trust.
The good news is that the drawbacks will not prevent people from buying annuities. Take Humberto Cruz, for example. In his article, he writes, “To be sure, many annuity sellers do provide full disclosure. All financial products, not just annuities, have drawbacks. For the record, and since readers often ask, I own three immediate annuities, and my wife owns a deferred variable annuity with a minimum lifetime income rider. I’ve owned half a dozen deferred fixed annuities, all cashed in (not annuitized) at the end of the surrender-charge period. I’ve never bought an indexed annuity, but don’t rule out doing so in the future.”
Why the drawbacks don’t prevent sales
Let me ask you a question about your personal retirement savings: When you decide where to put your retirement money, you’re looking for a lot of things. You want to make sure your money is safe, you want to have the potential to earn a high interest rate, you may want to be free to move all your money at any time, and you may even be concerned about what happens to the money if you die. Of all these things, when you decide to put your money somewhere, what is the single most important factor for you?
I’ve asked thousands of annuity agents this question when it comes to their own money, and their answers are often representative of the typical consumer’s. The overwhelming, No. 1 priority is “making sure my money is safe,” followed by a distant second “having the potential to earn a high interest rate.” “Being able to move all my money all the time” falls well behind these two top priorities.
These priorities reveal why properly disclosed surrender charges, for example, don’t stop people from buying annuities. Why would anyone compromise either of their top two objectives – safety and attractive earnings potential, which annuities deliver – to achieve an objective that’s far down on their list – liquidity?
The value of the contrarian approach
By being very proactive in disclosing annuity drawbacks to your clients, you change the way your clients think of you. It becomes clear to them that you are on their side, making sure that they make fully informed decisions. Since the annuity subsequently performs exactly the way you described in both its advantages and its drawbacks, both their opinion of the annuity’s value and your credibility as an advisor will grow over time.
And since annuities are very attractive financial products that fit the needs of many consumers even with their drawbacks, people will buy them – and be happy that they did.
Chris Conklin is a licensed agent and principal and actuary of Insurance Insight Group and MyAnnuityTraining.com. He can be reached at 801-290-3320 or firstname.lastname@example.org.