Variable Annuities - the New Snake Oil

The cliche of the snake oil salesman is deeply embedded in American cultural in the form of frequent depictions in the movies of those fast talking salesmen touting their wares to a crowd of curious onlookers. Most of you probably have seen a scene from a western in which the smooth talking dandy pitches his wonderful elixir as "good for whatever ails you!" Variable annuities with a guaranteed minimum wealth benefit (GMWB) are increasingly sold in much the same manner. Insurance agents and fee-based "advisors" increasingly push variable annuities on anyone and everyone, regardless of their age, income, and wealth. Frequently these salesmen don't even understand what they are selling, only that they get BIG commissions for selling them. Are you a 78 year-old single woman with Alzheimer, but with $1.3 million in the bank? No problem! You NEED a variable annuity with a GMWB rider. A couple in your mid-60s with two defined benefit plans between you? No problem! You need TWO variable annuities and you definitely need to replace the ones you were already sold in your Roth IRAs with two brand new ones that are waaaaay better! Why are they better? Because they are NEW and generate another commission for ME! The truth is that variable annuities are one of the most oversold products out there because of their big commissions, not because of their actual performance. Now here's a dose of reality courtesy of Dr. Michael Edesess (advanced mathematics and economics), Louis Mittel of Advisor Perspectives, and Robert Huebscher. Variable annuities under perform a passively managed fixed income portfolio by almost 1.60% annually on average based on modeling 100,000 trials using random date-of-death Monte Carlo simulations. In fact, a passive fixed income strategy has a higher internal rate of return (IRR) for all life spans through 113 years of age. The variable annuity returns just can't make up for their higher fees and the cost of the longevity insurance embedded in the product over shorter periods of time. Of course, insurance industry sponsored research "shows" that variable annuities are superior to passively managed fixed income portfolios. However insurance industry studies are flawed to say the least. For instance, industry studies assume that an investor will live to be 90 years of age 100 percent of the time even though the actual probability is only 19%. As well, insurance industry studies "show" that variable annuity income will keep pace with inflation even though inflation has averaged 3% over the last century and the actual nominal median average income increase for variable annuities is only 0.5% per year (far below insurance industry claims). So the next time the snake oil salesman comes a calling, "JUST SAY NO!" Biechele Royce Advisors could sell you variable annuities and make those big commissions, but instead chooses to do the right thing by building you properly diversified stock and bond (fixed income) portfolios to help you achieve a successful retirement. Best Regards, Chris Christopher Royce Norwood, CFA Biechele Royce Advisors, Inc.