The Mutual Fund Puzzle

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I hate mutual funds. They can have incredibly high fees, with expense ratios that exceed 4% per year, and that doesn’t include sales commissions. Most mutual funds tend to underperform their benchmarks and many financial advisors who recommend or sell them aren’t fiduciaries.

Because of those simple yet powerful facts, you should never consider mutual funds as part of a client portfolio regardless of their situation, goals, or preferences.

Sound ridiculous? Sure does.

If you substitute “annuities” for “mutual funds,” though, these are the exact statements many financial advisors use for never considering annuities for their clients. While it’s true there are lots of bad annuities, to dismiss them (a product that has been around for thousands of years) outright because some aren’t very good is bad advice at best and a clear breach of fiduciary duty at worst.

While the “annuity puzzle” is well-documented in the academic literature, there is no “mutual fund puzzle.” Annuities and mutual funds are clearly different products, and there are notable differences in how they potentially help clients accomplish their financial goals; however, outliving retirement is one of the greatest fears cited among retirees1 and annuities are one of the few products that can fully eliminate this risk. Therefore, how can a financial advisor ignore annuities carte blanche for all retiree clients and consider that to be good advice (or a good financial plan)?

It’s not.

In this article, I summarize some of the key findings of a paper I have that’s about to be published in the Journal of Retirement titled, “The Value of Allocating to Annuities,” that explores these topics.