My first “big break”, or so I thought, in the finance industry came when I was 24. I spent two years working with at-risk children in a wilderness camp, a whole different story, and I was ready to begin my career in the finance world. I imagined this meant completing financial plans and helping clients as they transitioned into retirement. Receiving postcards from clients as they travelled the world, thanking me for helping them accomplish their financial dreams. Except, what I was doing couldn’t have been further from helping people achieve their retirement goal. Instead, I was selling annuities, with the goal of helping my retirement, not my clients.
I had no idea what an annuity was when I was 24 years-old. I’ve been a financial advisor for the past 10 years, and honestly still get confused by them. Still, not knowing what an annuity was didn’t stop my company from trying to get me to sell them. They armed me with just enough bullet points to discuss annuities with potential clients:
- Can never lose money
- Aren’t tied to the casino, a.k.a stock market
- Better than your CDs
- Do you remember when a coke cost a nickel? Annuities protect against inflation
- Lose money in the 2000s IPO bubble? Never again with an annuity
- You’ll never see a commission with an annuity
I didn’t realize until well after I quit my job that all of these were false or just plain lies. See, I was promised big commissions, and fancy cars, and at 24 that sounded pretty good. I didn’t realize it was at the expense of someone’s retirement.
This is how the annuity business, or at least my company worked. I’m told how much I would make when I sold an annuity, which is an incredible amount. Next, the annuity companies come in pitching the latest and greatest annuity, with all of the bells and whistles (i.e. extra fees). Guaranteed income riders, 20% bonuses on initial deposits, and of course, guaranteed 6% rate of return with no downside risk?! Sound too good to be true? It is. Next, armed with barely any information, go door to door to pitch a coupon book, only to change the pitch mid-way through the meeting. Rattle off the above talking point. Last, the manager was then brought in to seal the deal. Tens of thousands of dollars in commissions were split, and the boss buys another car. Rinse and repeat.
So why did this company hire someone with no financial experience to sell annuities? There is no product you can sell and earn as high of a commission as an annuity. And even more important, there is almost no licensing requirement to sell annuities. Want to go make a bunch of money, and want to spend the minimal amount of time getting licensed. Go get your state insurance license and start slinging equity indexed annuities. It’ll take you a few days to get your Michigan insurance license. It’ll take a few more to learn the annuity lingo. Within a couple of weeks, you can start raking in the dough. It’s incredible to me that someone with almost no financial experience or licensing can sell you a product which:
- Earns a giant commission
- Locks up your money for up to 10 years
- Could costs you thousands of dollars in surrender fees if you need the funds early
- Costs an incredible amount of money each year to own
Now annuities aren’t awful for everyone and there are decent annuities out there. For example, you may go through a financial plan and decide that you would like to convert some of your assets into a stream of income when you retire. With pensions going away, and retirement accounts going up, it may make sense in your situation to convert some of your assets into an annuity and turn that money into a guaranteed income source. You purchase an annuity with a guaranteed income rider and turn on the income when you retire. A combination of annuities and a stock and bond portfolio may be perfect for your situation. The problem is that annuities aren’t for everyone, but when all you have is a hammer…
The biggest issue with annuities is how difficult they are to understand. Variable annuities have a prospectus that is over 200 pages long. If you actually have the time to read 200 pages of incredible boring financial lingo, there is a really good chance that you won’t understand it. Equity indexed annuities are even worse, as they don’t even require a prospectus. You are relying on annuity sales pamphlets to decipher which is the best one. When you are purchasing an annuity, you are relying on the annuity salesperson to steer you in the right direction as it will be mainly foreign for yourself. Working with an experienced financial planner should be imperative when purchasing an annuity.
If you are purchasing an annuity, the most important thing is trusting who you are buying it from. When looking for a financial advisor, I strongly suggest working with a Certified Financial Planner. This is even more important when you are considering an annuity. Not every CFP is perfect, but you know that your financial advisor has spent at least a year studying for the difficult CFP exam as well as 3-years of experience in the financial industry. The minimum requirement for selling an equity index annuity is an insurance license. You can go get one of those over a long weekend.
I was awful at selling annuities. So bad that I sold a grand total of zero at that first job. It didn’t take long to realize that annuity sales was not for me. Since, I spent two years getting my Certified Financial Planner designation and another three to become a Chartered Financial Analyst. I know the ins and outs of annuities as well as anyone, and they still scare the living crap out of me. If you are looking for a quick way to make a few bucks without having to go through all the trouble of licensing or becoming a CFP, annuity sales may be for you. However, if you are a retiree and considering your options, these are absolutely the people you need to avoid.