June 19, 2008

As Baby Boomers approach retirement some of them will consider annuitizing their money, making a lump sum payment in return for a constant income stream for the rest of their lives. That’s a good idea for many of them. Classic research suggests that almost everyone should annuitize some (or even all) of their money as they enter retirement and more recent research finds evidence that people are often happier when they have an annuity in retirement.

That’s all well and good but many annuities are purchased with the help of a financial advisor and herein lies a serious problem in this marketplace.  Financial Advisors/Planners are often compensated as a proportion of the assets they are managing. For example, they might charge you 1% of assets annually. Once they sell you an annuity that money essentially vanishes for them. The money is now being held by the insurance company who is obligated to make payments to you. Even if they receive a commission for the sale, they have now given up 1% of those assets for potentially many years going forward.

So, what do you think happens in this situation? You guessed it, despite their fiduciary responsibility to do what is in their client’s best interest many are reluctant to advise people to purchase annuities. The industry buzzword for this behavior is “annuicide.”

Annuities are yet another example of an issue I have brought up before on this blog. Federal oversight in many of these financial services marketplaces is woefully inadequate. We need some individual legislators to make disclosure and regulatory oversight in these growing marketplaces a priority.


One comment

  1. For some reason, people don’t seem to like annuities.

    Slightly off topic, but I sometimes work with individuals who receive large settlements because of traffic accidents, etc. The court always requires the settlements to be set up as annuities to provide for their long term care. Lo and behold, these individuals turn around and sell their rights to payments for pennies on the dollar. They quickly blow through that cash and end up on the government dole. This happens more often with men than women.

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