Who Really Benefits from Annuity Buyouts?

moneyA few years back, before the US was in the midst of a major economic downturn, many carriers started offering guaranteed benefits as a part of their annuity packages. However when the recession of 2008 hit, it became too expensive for carriers to payout the generous guarantees attached to the pre-recession annuity sales – a time when carriers were gaining new accounts by writing contracts that they would never be able to honor.

It did not take long for carriers to start looking for a way to get out of their obligation and start offering clients seemingly generous buyout programs. Many of these buyout programs appeared very beneficial at first glance. While each company offered their own spin on a buyout, it generally involved a lump sum payment of some sort. A deal that seemed very generous up front, but mainly served to benefit the carrier who could not afford to pay a guarantee to a contract holder who could have many healthy years ahead of them.

So, how did the carriers handle customers who objected to the buyout? Some companies took a gentle approach telling only customers who had older variable annuities that they needed to move a percentage of their funds into other options (typically bonds), while others moved funds on a “discretionary basis.”  Still others forced the client’s hand – basically saying that they needed to take the buyout or the benefit would be terminated.

What is the lesson in all of this? As a fee-only provider, my initial instinct is that the companies that originally sold variable rate annuities were not necessarily looking out for the customer’s best interest. The bottom line of the sale was to gain as many customers as they could and let the chips fall where they may. Looking back, it was clear that they did not look at the big picture. And, I think it is safe to say, if they knew how much they stood to lose once the recession hit, they would have never suggested a guaranteed annuity product (however, when the original annuity was sold, the broker was in a position to make a lot of money).

This is the slippery slope of working with a fee-based provider. There are many things hidden from the customer, because the bottom line is typically the only thing that matters. Often the client’s well-being is an afterthought, if it is a thought at all. My hope is that the end result in all of this is that every advisor would serve their clients by the principles of the fiduciary standard.  That they would put the client and their needs first and suggest products based on what works best in their investment picture. I firmly believe that only after this becomes the rule instead of the exception, will we really see a change for the better in the practice of financial advising.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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