Why Annuities Are Often Sold, Not Bought

— -- If you have substantial assets or suddenly come into money through inheritance or a divorce settlement, there’s a good chance that someone will try to sell you an annuity.

Annuities are highly complex investments that are marketed aggressively, often to individuals for whom they may not be appropriate. Investors usually don’t go looking for an annuity. Instead of being sought, these investments are sold.

In an annuity, the investor hands over a substantial lump sum to an insurance company in an arrangement by which the company is ultimately obligated to provide an income stream for life. There are various types of annuities, many of which aren’t right for anyone.

However, some annuities have a purpose for some individuals, particularly if they have a critical need for a life-long income stream. For this income stream, annuity buyers pay substantially. But this may be worth it for those who lack a retirement income stream.

The main reason you may be solicited for this product is that commissions for them are often 6 or 7 percent or more of the total investment. At this rate, if you invest $500,000 in an annuity, the salesperson earns $35,000 — possibly in one afternoon.

This powerful financial incentive motivates various types of financial people, especially brokers and insurance reps, to search high and low for prospects. Because annuities require the buyer to write a large check, prime sales targets typically include women who have recently inherited money, collected insurance proceeds or received a divorce settlement. Prospects also include well-heeled clients of financial professionals (including brokers), who are well aware of the money these clients could readily invest in an annuity. The less these clients know about financial matters, the more vulnerable they may be to sales pitches for annuity products that aren’t right for them.

Even if a person trying to sell you an annuity calls himself or herself an advisor, he or she is under no legal obligation to serve your interests beyond determining that an annuity is “suitable” for you — a relatively low standard. Advisors who are classified as fiduciaries are required by law to meet a much higher standard: to always put clients’ interests ahead of their own. Those who may try to sell you an annuity aren’t pure fiduciaries.

This isn’t to say that fiduciaries don’t help clients acquire an annuity if it’s an appropriate investment for them. But anyone who stands to gain a commission for selling you an annuity isn’t acting as a pure fiduciary. At that point, they have taken off their fiduciary hat and are operating under regulations that don’t require them to put your interests first.

Like most sales pitches, those for annuities convey a great sense of urgency, as though a decision to buy this product must be made quickly. And, as usual, there’s no urgency at all. Those who delay getting an annuity are at no disadvantage. And usually, disadvantage comes to those who decide to buy them.