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Prominent money manager and master of self-promotion Ken Fisher does not think highly of variable annuities. If you did not know this already, it is likely that you have neither been on Google nor read the New York Times in the past few years. If you had, you surely would have seen Fisher’s ubiquitous, provocative advertisements that shout, “I HATE Annuities. And you should too,” above a picture of Fisher and a phone number or link about Fisher Investments.
Fisher's antipathy for annuities is as passionate as his advocacy of active management, for which he charges his clients fees of 1% or more.
Criticism of variable-annuity contracts is nothing new. As Fisher is quick to point out in a promotional video “interview” in which Steve Forbes lobs him softball questions, annuities have many warts. High sales commissions that are generally neither transparent nor disclosed, high ongoing internal expenses, steep surrender penalties and product complexity are all legitimate reasons for investors to be wary of vagabond financial advisors and insurance agents who come to town extolling the benefits of annuities as retirement-planning elixirs. As Fisher rhetorically asks, “What’s not to hate?”
Indeed, misrepresentation and lack of disclosure pertaining to variable-annuity sales has been a hot-button issue for securities regulators, as is evidenced by the title of the Financial Industry Regulatory Agency’s (FINRA) Investor Alert: Variable Annuities: Beyond the Hard Sell.
However, before we all line up to commend Fisher for his public service announcement, there is one little problem with his vitriolic views on variable annuities.
Fisher’s claims are at odds with a growing body of empirical research published in peer-reviewed academic and professional journals.
At the heart of the issue is that, in his anti-annuity magniloquence, Fisher neglects to disclose that nearly 90% of all variable-annuity contracts issued over the past decade or so have a rider feature that offers the contract owner some form of a lifetime income guarantee – something no traditional money-management firm or mutual fund can provide. Since these guarantee features first came into vogue in the early 2000s, researchers have sought to determine whether they truly add value to consumers or whether they are merely marketing gimmicks for generating revenue for commission-hungry sales reps and greedy insurance companies.
To the surprise of many, including those in the often-skeptical academic community (see Moshe Milevsky’s Confessions of a VA Critic), empirical research has found that variable annuities can be useful in protecting investors from the twin retirement threats of sequence-of-returns risk (the risk of sharply negative market returns early in retirement) and longevity risk.
One of the pioneers in variable-annuity research, York University professor Moshe Milevsky, in a 2006 paper entitled Financial Valuation of Guaranteed Minimum Withdrawal Benefits, concluded that not only did such riders guarantee a risk shift from investors to insurance companies, the insurance companies issuing the riders were dangerously under-pricing their guarantees. His comments proved remarkably prescient, as the ensuing 2007-2009 stock market crash wreaked havoc on annuity insurers, forcing them to pony up hundreds of millions of dollars in reserves to shore up their guarantees.
While the financial losses from the market decline caused many carriers to exit the variable annuity business entirely, consumer demand for lifetime-income guarantees, especially in the wake of the previous decade’s market volatility, remained strong. The void created by departing insurers has been quickly filled by new entrants eager for a piece of the $1 trillion-plus variable annuity market. Since 2009, variable-annuity product structures and rider designs have evolved at a pace that would make Darwin blush. This has created a fertile ground for researchers as well. The following table offers a sampling of some of the more recent studies on the merits of these complex and controversial products:
Contrary to Fisher’s bellicose assertions, these papers find that annuities may offer real value to at least some subset of the investing population. As the co-author of two of those papers , it is only fair to disclose that our research concludes that, consistent with Fisher’s position, variable-annuity contracts are a poor choice for certain investor circumstances. At the same time, they are a perfectly rational choice for others, particularly those with little or no bequest motive, a desire to maximize guaranteed lifetime income, an aversion to market volatility and long life expectancies.
The title of this op-ed piece is, of course, facetious. While I have no idea how annuity issuers feel about Fisher, I certainly do not hate him and neither should you. At the same time, it is high time to challenge Fisher’s claim that annuities are inherently evil, especially when it appears that a preponderance of empirical research does not share his conviction. While we are at it, one might also challenge Fisher to prove that paying 1% or more to an active money manager adds value relative to a strategy of passively managed index funds when there is a small mountain of empirical research on that subject that suggests otherwise. Alas, that is a satire for another day.
John H. Robinson is the owner of Financial Planning Hawaii and Nest Egg Guru. He holds a degree in economics from Williams College and has been a financial advisor since 1989. He has published numerous papers in peer-reviewed academic and professional journals, and his financial planning insights frequently appear in the national news media. He may be contacted at [email protected].
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