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Thinking of Buying an Annuity? Consider This.....

In last week's Barron’s article “Read This Before You Buy an Annuity” the author describes how one insurance company is marketing its annuities as suitable for savers with “low tolerance for risks; people who typically invest in CD’s, savings bonds, treasury bills, etc.” However, according to Barron’s own investigation, they found many of the underlying investments of these annuities are in businesses that fall under the parent company’s control, raising potential conflicts of interest. Furthermore, and perhaps more interestingly, it was also determined that roughly 50% of this insurance company’s investments are in private placements, which are typically used to help a company raise capital (similar to an Initial Public Offering).  As CFP's, we cannot think of an investment recommendation that is more UNSUITABLE for a low-risk investor than a private placement!

Nonetheless, annuities continue to represent high-margin products for the sellers (e.g., insurance companies), and guess who is now looking to capitalize on this trend? Private Equity (PE)! Never to miss an opportunity to make money, many PE firms have recently begun acquiring stakes in insurance companies.  Of course, these new "owners/shareholders" are interested in one thing:  profits. And this may be a change from previous insurance company norms; as highlighted in the Barron's article, "The people driving the investment decisions are not the traditional life-long executives who care about policy holders for the long term.” 

So, again, these annuity products are a significant revenue source for these companies and continue to be aggressively sold and marketed. In fact, according to the Barron's article, brokers (of this specific insurance company) who sold the most annuities business last year were rewarded with week-long trips to Australia; this year, according to the article, the brokers are competing for a trip to Morocco!  Now, to be sure, nobody at NCM is winning a trip to Australia or Morocco for selling product.  Hmmm, for some reason, the incentives just aren’t the same for recommending low-cost Exchange Traded Funds (ETFs)….Why? The reason is simple: FEES. The charges for annuities can be excessive and for the most part, very hard to completely understand.  In addition, once in an annuity, your money is often tied up for long periods of time (....which makes them even more profitable for the sellers!); this ILLIQUIDITY can be another red flag for older and/or retired investors.  

But why then are annuities so popular? Nearly $400 billion of annuities were sold in 2023, a 23% jump from the prior year.  Yes, given the imbedded profit motive for the selling companies, these products are (very) aggressively promoted.  We would guess 7 or 8 out of every 10 readers of this blog have been solicited to buy these products at some point. But there is another reason for the popularity of annuities....

Given the stock market volatility, increased lifespans, as well as the state of the world today--with inflation, geopolitical risks and political uncertainty here in the US, more and more individuals are looking for "guaranteed" sources of income. Pensions are being phased out and social security is meant to only be a supplement to retirement income.  So, it may not be surprising that sometimes investors feel they have no other option but to buy an annuity, and in some situations, that may be the only choice.  

However, there are ways to avoid this challenging position..... 

And this is the real message we want to convey in this blog.

How does one put themselves in a position where they can lower the odds of ever needing to pay for "guaranteed income" by buying an annuity? The answer is to start taking your finances seriously earlier in life and focus on what the great writer Morgan Housel refers to as “Quiet Compounding.” Compounding investment returns is a powerful force and a great way to build wealth over time, but it takes making wise (and sometimes hard!) decisions today!

Housel cites a few key points about what quiet compounding means.  Clients and regular readers should recognize these as concepts we continuously stress.

  1. An emphasis on internal vs external benchmarks. Housel says ask yourself “Would I be happy with this result if no one other than me and my family could see it, and I didn’t compare the result to the appearance of other people’s success?” It’s impossible to win the social comparison game because there is always someone making more money or proclaiming more investment successes (PS: While in some cases this may be true, remember, there is a reason $400 billion of annuities were sold, we have $1.3 trillion of credit card debt, and people are working into their 70’s; what you hear in conversation and what is reality may differ!) We tend to live in a society where people like to talk about their successes, but not their failures, especially when it comes to finances. But once you ignore this "noise," it becomes much easier to focus on what kind of return you need to accomplish your unique goals to achieve financial independence.  
  1. A focus on this independence over "social dunking." A lot of financial mistakes come from trying to follow strategies of those investors who are different from you. Quiet compounding allows individuals to use money to improve their own life, achieving what they feel is their own end goal.  Again, financial independence—i.e., the ability to wake up and do anything you want, with whom you want and for as long as you want---is quite appealing! 
  1. A focus on long-term endurance over short-term comparison. Housel says it perfectly: “Growth is almost never visible right now but staggering over long periods of time.” SO TRUE.  But yet so many investors do not recognize this for two big reasons.  One--which we touched on already--is that you have to start taking your finances seriously today, not tomorrow. Quiet compounding takes time! The second reason may just be the way we are wired as humans. We get needlessly caught up in comparison....comparison to peers, benchmarks, others' opinions of us.  With summer BBQ’s starting, we will all hear about how rich people are getting in AI stocks and other "noise."  Unfortunately, many will get distracted and think they are doing something wrong in their own investing, questioning their strategy....even making short-term changes that seem positive at the time. The fact is that while people want to be long-term investors, they struggle to actually do it.  Being a long-term investor takes patience and discipline. 

In summary, annuities are insurance; insurance should be bought if and when you need it. Start taking your finances seriously early in life and allow the benefits of quiet compounding to work for you. If you do these two things, it is very likely you will not need to buy an annuity, you will have more wealth for yourself to improve your life and you will be able to leave a legacy to your loved ones .....instead of to the insurance company!

Please feel free to reach out to us if you have any questions.

Have a great week!


NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.