A Conversation with John

I had an encounter recently with an annuity salesperson - we'll call him John. John introduced himself as a financial advisor. I said I was a fee-only financial planner, and I don't charge commissions. He said he didn't either. The following is a paraphrase of our conversation. I share it with you because it is a good example of questions you should be asking investment professionals before you consider working with them. In particular, question those who sell products. This is not the first time it has been clear to me that people selling products do not know the details of what they are selling or the other options available to their clients. Me: You don't charge commissions? How do you get paid?

John: I sell annuity products and the annuity companies pay us a certain amount, depending on the product.

Me: If you receive a fee for a particular product, it sounds like a commission to me.

John: Yes, but the clients don't pay anything. It is a great option for them and the money is very good. My goal is to achieve passive income.

Me: The clients don't pay any fees? John: They pay .08%, but that is very low.

Me: What about the underlying investments? What are the expense ratios on those?

John: It is an equity-indexed annuity. It is just invested in the market. It is not like those variable annuities that burned a lot of people.

Me: Yes, but the underlying investments have fees. Do you know those?

John: (The question was not answered.) We only get paid if the market goes up. We don't charge the .08% fee if the client doesn't make any money.

Me: So if the market goes up, they get the full gain in the market?

John: No, 50% of the gain.

Me: Do you ever recommend indexed mutual funds to your clients? They also track the market, but they are much lower cost when you add up all the additional fees that get tacked on with annuities. There is also much more transparency and liquidity.

John: There are no other investments out there that just track the market. This is the only way to do it.

Me: Of course there are. You haven't heard of index mutual funds? They've been around for decades. That's what they do by definition - track a given index.

John: (Blank stare, awkward moment) You should meet my associate, Bill. (another made up name)

Me: Well, if you wouldn't mind I would love to see a contract for one of your products that spells out all the details and fees.

John: Of course, nice talking to you.

Annuities are incredibly complicated and most people don't know what to ask or look for. I didn't get to the harder questions, like how the gain of the index is calculated (it is not as straightforward as seeing how the index performs) or the surrender period & fees. I have seen a 14 year surrender period with a 15% surrender charge in the first year. There are dozens of fees for optional benefits like inflation adjustments, death benefits and early withdrawal benefits that would tack onto the .08% fee John quoted. I am assuming this .08% is the administrative fee, but I cannot verify that because I never received the contract.

We all respond to incentives. The incentive for an annuity salesperson is huge. They make a lot of money upfront when they sell the product in addition to a trailing fee. Hence, there is a passive income for the seller. For that reason alone, it makes sense to seek out the opinion of someone who does not stand to gain financially. Examples include this Investor Alert from FINRA or a second opinion from a fee-only advisor.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.