NAFA Response to Sean Williams, Motley Fool’s, The Five Worst Things you can do with your Money
November 12, 2014 by NAFA Response
NAFA Response to Sean Williams, Motley Fool’s, The Five Worst Things you can do with your Money
November 3, 2014
Sean – thank you for your enthusiasm for investing and helping consumers. It will come as no surprise that NAFA, the National Association for Fixed Annuities, is extremely supportive when financial journalists relate accurate and helpful information about fixed annuities. This helps to ensure consumers are properly educated so that they may consider the facts and make a decision based on reliable and accurate information.
What may surprise you, however, is that while we are enthusiastically pro-annuity, we also believe there is a role for all financial products in financial and retirement plans, and we don’t believe one size – or product – fits all. NAFA believes that choice and abundance of product offerings is best for the multi-cultural, multi-generational and multi-risk tolerable American community looking to save for the future. But, this diverse group of individuals is not helped when information about very distinct and unique products is blurred and over-generalized, resulting in inaccurate and false information.
In your November 2, 2014 blog article, The Five Worst Things You Can Do with Your Money, you inaccurately combine features of variable annuities and fixed annuities and treat these two distinct products as one and the same.
Also, when you discuss fees, please make it clear that fixed annuities do not have fees while you own the annuity—and do not have “annually accruing fees.” Fixed annuities have surrender charges that are taken ONLY when you end the contract early or take more money than the penalty-free amount (usually 10%). Fixed annuities may also offer riders that provide additional benefits and features, and you may be charged for those riders. All insurance companies are required by law to prominently disclose all charges and under what circumstances they may be incurred. This information must be disclosed both before you buy the annuity and when you receive the insurance policy. The second disclosure is important because, unlike investment products, all annuity policies issued come with a money-back guarantee, called a “free-look period,” during which time you can return and cancel the policy and receive ALL of your premium back. This is an insurance guarantee and consumer protection that investment products do not provide.
Related to your comment on commissions, insurance companies do pay the annuity salesperson for the sale of an annuity. They are paid when the policy is issued and accepted. However, the commission payment isn’t taken out of the amount paid into the annuity. Furthermore, this one-time commission is usually less than almost all security products’ ongoing management fees which are charged to the consumer and taken directly from their investment account. The SEC advises that “before you hire any financial professional always find out and make sure you understand how that person gets paid when they sell securities.” The SEC goes on to state that “investment advisers who sell securities or security products generally are paid in any of the following ways:
- A percentage of the value of the assets they manage for you;
- An hourly fee for the time they spend working for you;
- A fixed fee;
- A commission on the securities they sell (if the adviser is also a broker-dealer); or
- Any combination of the above.”
Depending on your needs and preferences, insurance commissions and investment fees have potential positive and negative benefits, all of which should be considered when choosing financial products and the professionals who sell them.
Broadly castigating the purchase of annuities as one of the “worst” things a person can do with his or her money is not responsible financial advice. Nor is it responsible journalism to confuse the reader by suggesting that features inherent in variable annuities are also included in fixed annuities. Both products have a role, but let’s be sure to explain their unique benefits and limitations accurately. We have produced “9 Answers Investors Need to Know about Annuities” and we’d be happy to share it upon your request.
Sincerely,
Kim O’Brien
President & CEO
1 Securities and Exchange Commission, http://www.sec.gov/investor/pubs/invadvisers.htm
