Last week one of my client’s came in to review the variable annuity she purchased back in May of 2008. She wanted an explanation of how this product worked and was concerned because she was not making much money on this investment. This annuity was purchased from a very large, well known insurance company on the advice of her financial advisor at that time.
In May of 2008, the S&P 500 was trading around the 1375 level and today trades at 2083. If you bought the S&P 500 back in May of 2008 you would have made almost 52% on your money. This particular investment did not even come close to a 52% return. In fact, the total return on her investment during this time frame was just less than 5% and the investment inside the annuity was a subaccount with the objective of growth. The question is why did this investment drastically underperform the S&P 500 during the same time period?
As I have found with many variable annuity products, the details of the product were not explained to her correctly. Most of these products are sold on fear and the word guarantee is used loosely when representing annuities. For one, the guarantee is only as good as the company backing the product and second many of these products have extremely high fees and expenses embedded in the investment. I called the insurance company with the client present and asked some very pointed questions. After about a 10 minute conversation with the representative from the insurance company in question, I had my answer to why this investment did so poorly during a very good time to be invested in the stock market. Fees and expenses are the main reason this was a poor investment decision. After calculating the total fees on this product, it came out to over 4% annually.
If you go back and look at this particular investment, the insurance company made more money during the time frame than the actual client. While the client only made about 5% on her money, the insurance company made over 32%. I cannot tell you how often I see this happen to people. It’s gotten so bad that the US government has actually stepped in and tried to put a stop to these types of products being sold to the investment community. So how do you avoid this from happening to you and what can you do if you already own an annuity similar to this?
Always read through the annuity prospectus before buying. Ask your advisor to write down all the expenses associated with the product as well as the surrender charge schedule. If you are reading this and you feel you may own a product similar to this, please call me at (772) 223-9686 to make an appointment and we will call the insurance company directly to understand not only how the product works but all the fees and expenses associated with the annuity.