Ep 13: Deconstructing Variable Annuities & Why Commissions Drive Their Sale

Ep 13: Deconstructing Variable Annuities & Why Commissions Drive Their Sale

The Smart Take:

So what exactly is a variable annuity and does it belong in your retirement plan? Kevin will give you the details on what these annuities do, costs and benefits, and if there ever truly is a reason you would want to invest in one. Spoiler alert … it’s not the benefits that drive sales.

Listen below or through your favorite podcast service. Prefer to read? No problem, show transcription is below too.

Subscribe To The “Retire Smarter” Podcast:

Click the below links to subscribe to the podcast with your favorite service. If you don’t see your podcast listed with your favorite service then let us know and we’ll add it!

The Host:

Kevin Kroskey – AboutContact

Intro:                           Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.

Walter Storholt:                Thanks for joining us for another edition of Retire Smarter. I’m Walter Storholt, alongside Kevin Kroskey, the President and Wealth Advisor of True Wealth Design, serving you in northeast Ohio with offices in Akron and Canfield as well. You can find the team online as always@truewealthdesign.com, listen to past episodes of the podcast and subscribe to future episodes as well. It’s all at truewealthdesign.com. Kevin, thanks for taking some time out to join us for another show. How you doing, sir?

Kevin Kroskey:                  I am doing good, Walter. Off to a good 2019, and I can’t complain.

Walter Storholt:                Fantastic. And looking forward to our conversation today, as I think, you know, we say this all the time, maybe it’s really old, but it’s kinda like the weather, right? I mean it’s a go-to conversation piece, but the year is just flying by. I know everyone says that and they say it probably all 12 months of the year, but it just really does, doesn’t it?

Kevin Kroskey:                  Time keeps giving the illusion that it moves faster. Yes. I think we actually touched on this before, but our memories, our brains go back to our past memory patterns and they tend to repeat over time so it gives the illusion of time moving quicker.

Walter Storholt:                I think Yogi Berra was-

Kevin Kroskey:                  It’s another way of saying that we have more experience, I suppose, Walter.

Walter Storholt:                Yogi Berra said something along the lines of it’s deja vu all over again, and I get that feeling quite a bit for sure.

Kevin Kroskey:                  He also had one of my favorites. It said it’s difficult to make predictions, especially about the future.

Walter Storholt:                That’s right. That’s right. And a nickel ain’t worth a dime anymore was a pretty good one as well. We’ll do a podcast one day where it’s nothing but Yogi Berra quotes and breaking the philosophy down of each one, I think that would be a lot of fun to do. But we’ve got a fun one scheduled for today. We’re kind of piggy backing off of our previous episode. If you didn’t hear it, episode number 12 of the Retire Smarter podcast. We talked about kind of going behind the curtain of annuities and the annuity world and maybe the free steak dinners that you hear about, and we’re kind of gonna continue that conversation about the different types of annuities and there’s one that we thought deserved its own podcast, Kevin, and it’s variable annuities. Which I have heard described as a borderline four letter word in many circles of the retirement community. So I’m looking forward to your thoughts on variable annuities, what there is to know, how to understand them, why they exist, all the good stuff. So peel back that curtain a little bit more for us today.

Kevin Kroskey:                  Sure. So if you hadn’t listened to the last episode, it may be helpful to go ahead and take a listen. But briefly, we touched on a few different types of annuities. So in broad perspective, there’s kind of two umbrellas. There are immediate annuities which are very pension-like, give money to an insurance company and then they start paying you money, say every month or every year, typically it will last for your lifetime. Then on the other hand, there are deferred annuities and there’s a few different types of annuities that fall under that differed umbrella. They could be a fixed annuity which is basically a CD like investment. They could be something called a fixed indexed annuity, which is basically like a CD with a little bit of juice and that’s when we went into last time in more detail, and then you can also have variable annuities and that’s what we’ll talk about today.

Kevin Kroskey:                  So variable annuities are very similar to say a mutual fund investment. They just fall under that variable annuity wrapper, and they’re a little bit different in the sense that they are called sub accounts within variable annuities, but basically it’s a mutual fund-like investment within a variable annuity wrapper. And the reason why, in opinion anyway, a lot of people sell these, they tend to be higher commission products. And there’s been a lot written about that in the financial press over time, but you still end up seeing these, we still end up seeing these for new clients that come in, are looking to make sense of what they have, and they come in with these things that they were sold and they’re not really sure what they have. They’re not really sure if they should keep it or what should they do with it, how to go ahead and take income if it is something that they’re in.

Kevin Kroskey:                  So I thought it’d be beneficial just to go ahead and kind of dive into it and explain really what are the costs that are involved as well as what are some of the potential benefits and where might it fit into the plan. So costs are very … Some of them are transparent, some of them are a little bit less, so you kind of have to do a little bit of digging. But I’ll just go through a list of about five of them that are pretty typical in every single annuity contract that are out there these days. So there’s something called a mortality and expense charge and basically it’s just a fee that the annuity company charges to go ahead and one, make some money for themselves, but also provides you with a death benefit. Now the death benefit on these things is a little bit dissimilar to life insurance, which we typically think about if we hear death benefits, but usually the guarantee is nothing more in the payout, at least what was put in.

Kevin Kroskey:                  So even though there’s a death benefit, it’s not like it’s tax free like life insurance is. Frankly, it’s really not much of a benefit, but it’s just a way for the insurance company to go ahead and charge some money for the product that they’re putting out there. So that’s the mortality and expense charge or M&E for short. Separately, there is administrative expenses and there’s enough money that’s put into these policies, the administrative expenses could be set aside, but typically you’ll see them at maybe like 0.1 to 0.3 percent of the policy value per year. And I should back up for a moment and mention that the mortality and expense charge is typically, generally it’s over one percent. I’ll commonly see them around 1.25 or 1.4 when I’m looking at one of these for our clients that had one of these coming into our relationship together.

Kevin Kroskey:                  On the other hand, you could see one with maybe some cost stripped out of it at about a half of a percent. So we got two expenses in the M&E, typically we’re closer to that 1.5 level for the ones that are actually sold from financial salespeople. Then you have this administrative expense as well. So now here’s 0.1 to 0.3, and so we start adding these up. Next, all the investment accounts that are in there, again, they’re mutual fund-like, but it’s just the way that these things are regulated, they’re actually called sub accounts. Now, you could go out and say buy a Pemco total return bond fund in a mutual fund format, and you can also own that Pemco total return investment strategy within an annuity. And you often see that, hey, you can buy the exact same strategies inside or outside of the annuity.

Kevin Kroskey:                  It’s also not uncommon sometimes that you’ll see the sub account version marked up higher than what you could buy in the mutual fund format. So that’s another little gotcha that the insurance company can do there. So typical investment expenses, again, I mean you can buy some funds that may be more passive or index length. It could be on the lower end of the range, say maybe like around 0.2 or 0.3 percent, or you could see some that are very esoteric and active, you know, maybe all the way up to two or three percent. But we got three expenses, mortality and expense charge, the admin, now the investment expense, and you also have surrender charges.

Kevin Kroskey:                  So typically, again, when you look at the annuity marketplace, the vast, vast majority are commission-based products. So there are some fee-only products that are out there, where everything is transparent, you would get either maybe a fixed fee or the commission stripped out and a much lower fee that are in there, but the vast majority of the products that are sold in variable annuities are commission-based and they have surrender charges. Now why do they have surrender charges? Walter, you want to take a guess on that one?

Walter Storholt:                Well, they don’t want you to undo everything after they’ve paid out these big commissions, right?

Kevin Kroskey:                  Yeah. So if the annuity is paying out, say a four or seven percent commission or something like that, and that’s going to the representative that sold that, then the insurance company has to apply this surrender charge and get their money back if you wanted to hit the eject button. So-

Walter Storholt:                It’s like insurance for their own sale.

Kevin Kroskey:                  It’s insurance for the insurance company, right? I’ve never thought of it that way, but you’re right. So, the higher the commision, the longer the surrender charge. If it’s going to be a seven percent commission, then you’re probably gonna see a seven year surrender period. And so basically the way you can think of it is about, it’s going to amortize out about one percent to that representative per year. But that person that sold you that is getting all that money upfront, that whole seven percent day one. So the surrender charges may not come in to apply in your case if you hold onto it, but if you get sold this and then you have some buyer’s remorse and say, hey, this really wasn’t in my best interest and you want to get out, there may be a pretty severe penalty to go ahead and get out in the form of the surrender charge.

Kevin Kroskey:                  So that’s four. Three are basically happening every year. Surrender charge may apply. And then there’s something called a rider and this is something additional to the kind of the chassis of the policy, if you will. And most commonly what you’ll find is it’s some sort of income rider that will guarantee some sort of minimum income benefit or minimum withdrawal benefit over your lifetime or over maybe both spouses lifetime, there’s several different ways to do it. And these things get pretty expensive, typically you’ll find them on the order of about 1.25 to maybe 1.5 or 1.6 percent. So if we start adding these up, let’s say we’re at one and a half percent for the mortality expense charge, say we’re at one and a half percent for the rider costs, so now we’re at three. Say we’re at another percent for the investment expenses, now we’re at four, maybe there is an admin expense added to it because it’s a smaller dollar amount in there, so now we’re north of four percent.

Kevin Kroskey:                  So it gets pretty expensive when you start adding all these up to go ahead and invest in one of these. And the other thing is if you combine the same, say, again, in my example of Pemco total return fund in the mutual fund format as you can in the sub account, why would you go ahead and subject yourself to all these additional fees? Well the sales pitch is usually because of these riders. And so there’s going to be, again, some sort of benefit, something that you can get from this insurance company policy, this variable annuity contract, that you can’t go out and just get in a regular mutual fund or a basket of mutual funds or something like that. So if that’s the case, then we should probably really kind of take the next step and look at these income riders and dissect them a little bit and figure out, hey, does it really make sense to go ahead and buy these things?

Kevin Kroskey:                  So one of the things that I’ve seen time and time again, and frankly it perturbs me, is that these things, these riders particularly, are marketed with a growth rate. And that growth rate may be say like five or seven percent, and the big difference is you put cash into one of these and you have basically your cash value or your account value. And then there’s something when you attach a rider to it, it’s almost like this hypothetical account and they call it your income account value. Those two are not the same thing. And if you want to go ahead and say surrender the policy and get out, you’re just going to get whatever your cash surrender value is. You’re not going to get this hypothetical income account value. But what will often happen, and frankly I’ve seen even professional people that sell these things get this screwed up when they explained them.

Kevin Kroskey:                  But the insurance company will often dangle this carrot and say, hey, if you don’t take income right away, so maybe you’re 60 years old, you put $100,000 into one of these things and you’ll let it grow until you’re 65, we’re going to guarantee, and they’ll throw out that g word, we’re going to guarantee that you’re going to get five or seven percent or whatever it may be, increase on your income account value. And what happens is, when they say income account value, the person that’s being sold that product and getting ready to put money into there, they think that they’re getting a guaranteed five or seven percent return on your cash.

Walter Storholt:                That’s what it sounds like.

Kevin Kroskey:                  Completely. And sometimes it’s … It’s legal what they’re doing. Certainly I think it’s misrepresented sometimes. And frankly I’ve seen examples where literally it was blatantly misrepresented to people. Now, whether that was the ignorance of the person selling it, or that was … You know, I don’t want to say fraud, but either way, neither of those is good. And I can’t tell you how many times I’ve heard that. So, how can the insurance company guarantee a five or seven percent return? You can’t, you simply can’t. Actually if you think about it, maybe you can. There was a guy a lot of people are familiar with called Bernie Madoff, and he guaranteed pretty much a 10 percent return and we all know how that ended up. So if you go and put money in the bank today, you’re going to get somewhere around a two or three percent rate of return. If you’re going to invest in stocks, certainly it’s going to be volatile, but insurance companies are going to put money into bonds.

Kevin Kroskey:                  So that’s how … You look at any insurance company, you look at their balance sheet, the vast majority, more than 90 percent, is going to be in high quality bonds. So they cannot go ahead and just say, okay, we’re going to give you a guaranteed five or seven percent. So that is incredibly important to remember. It’s on this income account value, it’s not on the cash that’s actually in the policy. So if it’s not on the cash and it’s on this income account value, well, does it make sense to go ahead and take the rider, be subjected to all these costs? And is that income rider really gonna be beneficial to you?

Kevin Kroskey:                  Well, here’s how these income riders work when you actually get into the payoff phase. And so I actually just picked an example from Vanguard who I’m sure everybody’s familiar with, very consumer friendly company, they don’t have commission based products. They did team up, I think it was with an insurance company, Transamerica to offer some of, not some, but a variable annuity product with an income rider. And so I’m just going to use Vanguard because frankly it probably skews much more positively than most of the stuff that’s out there that’s sold.

Kevin Kroskey:                  So if you just go to Vanguard’s website and you look at this thing, which I just did about a week or two ago, basically if you are a married couple under the age of 65, it’s gonna pay out three and a half percent of the income account value for life. Three and a half percent. So let’s just say that you’re 64 in that example. If it’s gonna pay out three and a half percent per year, then you’re going to have to live quite a long time just to recoup what you put in, because if you are only allowed to pull three and a half percent per year, then you’re going to go ahead and have to pull this out, live for about 29 years or so.

Kevin Kroskey:                  Again, that assumes no growth in the policy, but let’s just think about that for a minute. Again, it’s like if you put $100,000 in and you’re getting out $3,500 a month and literally you have to live 29 years just to recoup what you put in. And you’d have to spend all of your money first, every single dollar of your own money in that cash account, the account value, cash surrender value, what have you, before you get any of the insurance company’s money through that rider. So if you’re starting this rider benefit at age 64 and you have to live 29 years, assuming that there’s no growth in there, now you’re well into your nineties at that point before you can get any of the insurance company’s money.

Walter Storholt:                Wow. I mean, that’s just … Your head spins with all of those different costs, but that’s kind of the drop the mic moment right there. Just with such a little actual increase on those dollars and almost the same amount going out the door, it sounds like, is coming in the door. It just almost seems like a worthless investment at that point.

Kevin Kroskey:                  Yeah. Let’s put it this way, you have to live really long for these things to really pay out, and frankly if you do a comparison in terms of, well, if I didn’t do this annuity and I just put it in a mutual fund portfolio, generally speaking, what you’re going to find is you’re not going to need all that high of a rate of return to provide that exact same income stream. Now it may not be guaranteed, however, guarantees are expensive as this example that I’m going through shows. If I go back to the Vanguard product here for a moment, once you get up to age 65, the payout is increased to four and a half percent. So at that point, four and a half percent, you only have to live 22 years in that example or say age 87.

Kevin Kroskey:                  But basically, you really do have to have well above average longevity for these things to make sense to go ahead and do. Now, if I just back up for a minute, I said that’s assuming that there’s no growth in these. Well, when you’re adding up all these different expenses, and again, going through that quick example, mortality and expense charge about one and a half percent, investment expense about a percent or so. So there you’re at two and a half. You add on the rider, maybe another one and a half percent, now your four percent. Maybe it has an administrative expense or not, but you’re at four percent. Now, one of the other things that happens when you look at these, the charge on the rider is actually on this income account value. So on that hypothetical, hey, it’s not cash money in the bank, you can’t walk away with it, but on this hypothetical portion.

Kevin Kroskey:                  So what actually happens is you start taking money out of this policy through that rider, let’s go back to our example, and let’s say you put $100,000 in here. Let’s say that’s, basically say you put it right in and you just started taking the rider right away. So over time, your cash value is going to keep getting drawn down, but that income account value, it may stay higher. We have some clients where they have these variable annuities, and they bought them and the income account value is substantially higher than the cash value in the policy. And really when you look at it, because that charge is on that income account value, when I say that charge, the rider charges on that income account value, their costs were maybe around four percent when they started, but literally their costs were probably closer to about six percent now.

Kevin Kroskey:                  So it’s something that over the years I kind of lovingly dubbed the variable annuity death spiral where it just keeps succumbing to greater and greater increasing costs, and it’s just a death spiral, the cash value goes to zero. So it’s not really a good place to be. So again, those guarantees are expensive and oh, by the way, they actually become even more expensive over time because of that functionality of that income rider. So it’s tricky. It sounds good, hey, five or seven percent guaranteed growth rate. Well, it’s not guaranteed growth rate on cash, it’s really on this other thing. And this other thing actually is going to be dependent upon when you go ahead and turn it on, what your age is. And then we may also go ahead and charge higher fees on that amount over time. So it just eats up more and more of your cash.

Kevin Kroskey:                  So when you look at this, and I’ve looked at these several times over the years for clients in general, it’s not something that we use in our practice if we are say starting fresh with a client, but people accumulate things over time. Maybe they worked with a different you’ll financial salesperson before they came to us as their advisor and trying to make things work, but we’ll analyze these and in some cases we’ve decided to keep them. But inevitably these things are really a pain in the butt to work with and really the purported benefits aren’t there. If we could go back and undo some of the things that our clients did before they started working with us, I would completely undo these things and the clients would have been better off if they would just have invested in a low cost, diversified fashion in mutual funds. Granted, they may not have a guarantee, but that guarantee is very, very expensive and generally not worth it in most cases, in my opinion.

Walter Storholt:                Two things I definitely want to touch on. One is, it’s a broader thing than just looking at variable annuities. I just thought it was really cool the way you put that a few moments ago when you said guarantees are expensive. And that can be a foundational way of looking at your investment life and even beyond investments in the financial world. Anything in life, that’s very applicable. Guarantees are expensive. I don’t know, that just really rings true to me as something, kind of a valuable takeaway from today’s podcast from a life standpoint.

Walter Storholt:                The second thing is, I’ve got to try and be a devil’s advocate. I’ve got to try and be, you know, let my internal optimist come out in some way, shape or form here, Kevin. I mean these things have to exist for a reason. Is there a case where these products do make sense for someone? I mean, someone’s got to actually need these things, otherwise, again, my internal optimist says they wouldn’t exist. Is there a case where that’s been the case? And it’s not just from a, well, it’s too expensive to get out of it now, so you might as well keep it. Is there ever a time in anyone’s financial life where this becomes a vehicle that makes sense?

Kevin Kroskey:                  That’s kind of a loaded question the way that you posed it. Honestly, Walter, I’ve never seen a case where it’s made sense. Let’s back up for a moment. Let’s say that you really want a guarantee. Well, there’s immediate annuities that I talked about when we started off the podcast today, where you literally just give a amount of money to an insurance company and they’re going to pay you an income stream for as long as you live. If you want to guarantee those are much more favorable from a consumer perspective to go ahead and use those than these higher cost variable annuities. There’s also something, and I didn’t mention this, it’s kind of falls under the deferred annuity category, but they’re really differed. So they have these deferred income annuities that maybe you give the insurance company money at 60 or 65, but it’s only going to pay out if you live to, say, age 85, and so because you’re taking that mortality risk that hey, it’s possible that you could die prematurely, then they’re going to give you a higher payout and the cost to provide that guarantee for basically the, call it tail coverage.

Kevin Kroskey:                  You know, hey, maybe I do live to be 100 or older and I don’t want to outlive my money, so I’m just going to go ahead and give $100,000 or something like that to the insurance company, but I don’t want any payments until I reach age 85. Well, from a planning perspective, that can be really good because if I have a client who would do that strategically at 65 and then this income annuity, this really deferred income annuity, is going to pay in at age 85, what I like about that is I have a very defined time period that I’m planning for. So when I do their retirement planning, do their investment planning, then I can look and say, here’s a fixed period of 20 years that we have to make your portfolio last, your liquid portfolio.

Kevin Kroskey:                  Because if you live longer than that then this deferred income annuity is going to come in, it’s going to provide that tail coverage for you. That is a much easier retirement puzzle to solve than one that is completely open ended. So if a client really wants guarantees, some of these other types of annuities are much more client friendly, are much better, and there’s a lot of good academic evidence supporting it. The problem is it’s a behavioral problem. If you give $100,000 to an insurance company and you don’t have any strings on this annuity and say you get hit by the beer truck a week later and now you haven’t gotten anything from the annuity that you went ahead and provided, you went ahead and gave money to, and so you kind of lose that mortality that, you know, you got the short end of the stick, you didn’t live long enough not only to recoup what you put in, but to get any of the insurance company’s money.

Kevin Kroskey:                  Well, that’s the whole basic principle of annuities. You’re pulling this mortality risk, but people just have a tough time saying, well, what happens if I don’t live that long and I don’t get my money back? And then they start wanting to put all these different strings on the annuity, where maybe if they do get the short end of the stick, well their beneficiaries are going to get a least what they put into the policy. Or there’s gonna be some other string that’s put onto it. The more strings you put on these annuities, the lower the payout’s going to be because the less risk you have for mortality risk. So I’ve honestly never seen a case where a variable annuity has made … I take that back. Okay, I just thought of one.

Walter Storholt:                The one example. Okay. I knew there’d have to be one.

Kevin Kroskey:                  So, if a client has life insurance and they don’t need the life insurance any longer and it’s not performing properly any longer, maybe they have to put money into it or something like that, and they want to go ahead and get out of it. Rather than surrendering it sometimes, which would cause a taxable event, sorry, I might sound a little egg-heady here for a moment. You can actually do a tax free transfer into an annuity and then you could invest in the annuity. Now we did that very same thing, I think one client … We’ve been practicing for awhile.

Kevin Kroskey:                  We serve about 200 families and take care of all their financial investment and tax planning needs and literally with all the experience I’ve had over the years, I have one use case where the annuity made sense because we wanted to get out of that life insurance policy and get into an annuity. And oh, by the way, the annuity that we got into was not commissionable. The client pays a flat fee of $20 a month to the insurance company and we were able to get the same investment choices that we would have invested anyway inside the annuity. And I think it ended up costing like 0.01 or 0.02 percent more because the insurance company marked up the mutual fund investment, aka sub account, in the annuity.

Kevin Kroskey:                  So Walter, I got a smirk on my face right now, but I just don’t see it. You know, if you really want a guarantee, there’s better ways to go ahead and provide that guarantee, but you have to get over that behavioral hurdle of, well, what if I don’t live that long? If you want a guarantee, you’re going to be making the trade off of having some sort of bequest or estate planning value that you could leave to your charity or to your beneficiaries, kids and grandkids, and what have you. What we prefer to do for the vast majority of people though, is really just come back to that plan. We want to put a good financial plan together. We really want to measure the rate of return that a client’s going to need to go ahead and make their plan work.

Kevin Kroskey:                  We want to make sure that we factor in how they’re spending is likely to change over time. We prioritize their spending between those things that they really are in the needs bucket and the things that, you know, hey, if I had to cut back, here’s where I would cut back from. And then when we go in and we start matching the investments to that plan, that we put a lot of diligence and care into constructing and really reflects that client’s lifestyle. Now we can go ahead and show them, say, okay, Mr, Mrs Client, you’re going to have about a half a percent of your money in stocks and about half a percent in bonds. If things really got bad like it did in ’08, ’07, if we just went in and spent down the bonds and allowed stocks time to recover, how much of a bond ladder, if you will, how much time do we have for that safe part of the portfolio to go ahead and get us through any uncertainty?

Kevin Kroskey:                  And we’ll measure that for clients. And frankly, that’s probably been one of the things that has best connected a portfolio value, whether it’s $500,000 or $5 million dollars to income, and we can show them, we’ll just go ahead and dissect your portfolio. Here’s the safe stuff, and if we really just had to spend down the safe stuff, how many years do you have to go ahead and ride through any uncertainty to allow stocks and the riskier parts of the portfolio time to recover?

Kevin Kroskey:                  And so if we can walk them through that planning process like that, have something that is really … Reflects their lifestyle, helping them make smart decisions on all their income sources, pension, social security, but then matching up their investment portion of their portfolio and their plan to go ahead and meet whatever those income sources aren’t providing, then we go ahead and decompose the portfolio into, hey, this is really how much time you have before you have to use these risky things called stocks. That’s been the best thing that I’ve come up with in my years of practice, rather than going into some expensive product like this variable annuity that is undesirable. And if we can do that, then clients typically are able to go ahead and have that clarity, have that confidence and make a smarter decision that’s going to be more beneficial to both them as well as their beneficiaries over time.

Walter Storholt:                This has been a beautiful half hour of skull-dragging of these variable annuities and just sort of eviscerating the usefulness of these financial products. And, you know, I think it’s interesting because I know that you fall into the camp, Kevin, of viewing all of these different financial products that are out there, not variable annuities, but everything that’s available out there, as tools, and there aren’t really such things as bad tools for the most part. Just, you know, they serve different purposes and have different things that they try to fulfill. It sounds like the problem with the variable annuity, now certainly it’s just maybe being overemphasized from a marketing standpoint. Maybe there’s nefarious actions for why these are sold because of their high commissions. I know that that’s an element as well, but maybe it sounds like to me one of the fundamental flaws is that it tries to be all things to all people.

Walter Storholt:                It’s trying to promise guaranteed income while also trying to promise that you’re going to be able to get your big returns and even trying to say, well, and we’re going to charge you for it, but you can even get your money back. You can even have it be liquid and get the money back if you want it, you’re just going to pay out the you-know-what for it. And it tries to be all things to all people and maybe that’s why it also tends to fall short is an investment in your eyes, as someone who’s just trying to view products as tools, you kind of view this one as, I don’t know … I’ve been doing a lot of home renovations lately and doing a lot of painting, and you know that edger, you know, trying to paint the corners, or up against the trim, all little tough part?

Walter Storholt:                So they sell these little edgers and the idea is you just put this little block up against the wall and you just drag it down. It’s like a beautiful idea. They don’t even work that well. They’re kind of a worthless tool even though the idea behind them kind of sounded like a good idea. It just doesn’t work all that well in the end.

Kevin Kroskey:                  Yeah. If you look at the sales of these things, even though there are non-commissionable variable annuities that are out there, it’s something like 97 percent of the market is going into the commissionable type of annuity. And so when you see something like that, I mean, I don’t think it’s conspiracy. I mean, I think it’s pretty evident frankly, when you look at the evidence that it’s really the commissions that are driving it, and then driving the product sales, and you’ll have all kinds of ways to explain these things about how they’re wonderful and no, that person, no that article doesn’t make sense. Yeah, there’s high costs, but look at all these benefits.

Kevin Kroskey:                  Well, you know, if you don’t have a plan, if you can’t really kind of connect your money to your life and make those smart decisions that you need to make how I described just a couple minutes ago, then I think your mind goes to this place of fear and certainly none of us want to outlive our money. You know, after we turn off our paycheck spigot and go into retirement, any sensible person, one of their first goals is I want my money to last at least a little bit longer than I do. And so it’s kind of a fear based sale and there are these guarantees, but when you actually dissect it, there’s much, much smarter ways to do it. And certainly there’s a lot of financial incentives, again 97 percent of the industry of the variable annuity sales are going to the commission based type, it’s pretty evident what’s driving those sales.

Walter Storholt:                The curtain has been peeled, no doubt about it. So I guess the call to action for you here is if you have a variable annuity and you’ve never had that look, that deep look at how it’s working inside of your entire financial plan and you’ve heard today’s 30 minute podcast and it’s got you going, “Man, I’m guessing that this thing is dragging down my portfolio. It’s a weight around my neck. Maybe this wasn’t the wisest thing to get into. I’d like to learn more about it,” Kevin and his team can kind of take a look at that for you as they’ve done with many of the clients that they work with, and walk you through there. Or if it’s something that maybe you’re being sold right now and you’ve heard lots of good things about it, and now you’re hearing some of these bad things about it and you want to get more information, Kevin would be happy to talk to you about that as well.

Walter Storholt:                A couple different things you can do. You can call the team at 855-TWD-PLAN. 855-TWD-PLAN. The full number version there is 855-893-7526, or you can go online to truewealthdesign.com, that’s truewealthdesign.com. Click on the “Are we right for you?” button and you can schedule a 15-minute call with an experienced financial advisor on the True Wealth team and talk about this exact topic, as well as other things that might be going on in your financial life and get some help that way. Kevin, this was fun and like I said, kind of an evisceration of these variable annuities. You did that with surgical precision, sir. And that was kind of fun to watch.

Kevin Kroskey:                  Thanks, Walter. I’ll something down here. So the example said you may not expect any growth in these products. In the next podcast we’ll talk about expect returns and I’ll loop in why that’s the case.

Walter Storholt:                Turn things in a more positive direction it sounds like.

Kevin Kroskey:                  Well, positive in general, but we’ll probably be up on the variable annuity just a little bit more as well.

Walter Storholt:                That’s all right. It can be our punching bag for a little longer. So there’s a little tease of what’s coming up on the next podcast. Thanks so much for joining us on this one. This has been Retire Smarter with Kevin Kroskey. I’m Walter Storholt. Hope you enjoyed it. Don’t forget to subscribe to the podcast. You can do that on the website, truewealthdesign.com. Thanks for listening. We’ll talk to you next time.

Outro:                           Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.