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Does Your Financial Advisor Have a Conflict When It Comes to Annuities?

Category: Financial and taxes in retirement

February 18, 2014 — Now that all of us have assumed responsibility for our own retirements, conducting due diligence has become part of our job description. That responsibility extends to vetting the financial advisers and providers of financial services that we might hire to help with our retirement finances. If you decide to buy an annuity, which many experts believe most retirees should have a portion of their retirement in, you need to be especially careful.

The Wall Street Journal published an interesting article last week entitled “Who’s Training Your Financial Advisor“. The piece brings up how financial advisers salivate at the sheer size of the 401k and IRA market as the world has moved to them from defined benefit (pension) plans. Roll overs, which typically occur when workers change jobs or retire, are big – last year workers rolled over an estimated $258 billion from 401ks to Individual Retirement Accounts (IRAs). There is money to be made on these new accounts, so consumers have to be careful.

In the worst example of how much an adviser could make from steering you to certain financial products, the Journal reported that one company had sent emails to some advisers promising a new Maserati if they sold at least $7.5 million of annuities in 2014. Since a Maserati starts at around $126,000, it is easy to see the profit that must be in these annuities (for the record, $126,000 is 1.68% of $7.5 million). When companies are willing to pay bonuses of that size, due diligence seems like a good idea.

When you buy an annuity you are basically trading some of your savings for the promise of a regular payment for a certain number of years or the rest of your life. There are certain wrinkles available, such as annuities that are paid for the life of husband and wife.

Some things to think about
Here are some of the thoughts we have to help make a smart decision about annuities (by no means is this an exhaustive list, we hope others will add to it):

– Ask your advisor how and how much they are being compensated if you buy something they recommend. They might not tell you how much, but they should say if and how they might benefit

– Ask if they have any conflict of interest with advising you

– Compare the payouts, fees, terms, and fine print of several companies before you buy

– What are the tax implications of what they want to sell you

– Definitely include comparisons with some of the known low-cost providers like Vanguard, Schwab, Fidelity, and USAA

– If you don’t like the smell of the deal, walk away and get more comparisons.

Comments? What are your thoughts about due diligence and annuities? Any successes, or horror stories? Please share your thoughts with your fellow Topretirements members.

For further reading:
Newly Retired Owner’s Manual for Your 401k and IRA

Posted by Admin on February 18th, 2014


  1. I honestly don’t know who to trust or what I should do with my money. I have lost so much over the years, as we all have, trusting in financial advisors expert advice that I’m about to cash it all in and put it under my mattress!!!!! Annuities, roll-overs, IRAs……trust this company with my money and my future ….no trust this one…..!!!! Sometimes I think I should just figure it out for myself and then I have only myself to blame. Say nothing about good ole Uncle Sam wanting his piece of the pie!!! Who really has good advice for this problem? I’m by myself so the decision is all mine because no one, family or friends , want to be responsible for anything bad happening and I don’t blame them……..because what is best and who does know????? I thought annuities sounded great……until more was explained to me……same with IRAs. Anyone else feel this way or am I just being paranoid?

    by Sandra — February 19, 2014

  2. Sandra, You might want to start watching the Suze Orman show on CNBC. She’s a Certified Financial Planner, and her program has been helping people for over 10 years now. She’s also written several books. My own CFP, and others I know of, have taught community service type investment classes thru local community colleges. Depending on your age, the best thing you can do, if you have wage income, is open a Roth IRA, because all contributions grow tax free, since the contributions made are in after-tax dollars. I’ve been rolling over money from my IRA to my Roth IRA for the past 14 years, paying taxes as I go, while tax rates are the lowest in history. Though my IRA continues to grow, that has converted nearly half of my IRA balance already, prior to when I will be required to take the Required Minimum Distributions each year (at age 70 1/2) which will increase my income, and therefore the taxes I have to pay.

    The main caveat is beware of the hundreds of those who now call themselves financial advisors, but who have not done the work and passed the exams to obtain the CFP designation, and are merely sales people for insurance or investment companies. When it comes to growing your finances, fear is your enemy, not your friend. Concentrate on what you have, not what you lost. Take the bull by the horns and be your own advocate.

    by Sandy — February 19, 2014

  3. Sandy…..I should have mentioned that I am retiring in 2 months…….so some things I just can’t do. However, thanks very much for the advice about Suze Orman. I will try to catch her show and check out her books……and I am going to try to be less paranoid and grab onto those horns!!!!!! Thanks again!

    by Sandra — February 19, 2014

  4. The simplest answer is learn to do your own finances. In short, if your financial planner is compensated by commissions on what he sells, walk away. If he charges a flat fee for services his interests are more aligned with yours. But, the only sure route is learn to do your own financial planning. Read all you can, subscribe to various publications, learn all you can about anything your are looking into purchasing before you listen to any adviser, expert, pundit, etc.

    by Leonard — February 19, 2014

  5. Is it ok to just walk away from your finanicial advisor? I’ve been contemplating this lately but all the programs are with her company and I’m not sure how to transition over to another company. Just wondering about other views on this topic.

    by Dale — February 19, 2014

  6. Dale: it is OK to just walk away….in fact it more than OK, it is in your best interest if you begin to have the slightest doubt on advice and direction you are being given.
    Now for your other question, transitioning to an other company. I deal with the big boys, Vanguard and Fidelity. Transition is simple with these guys…..they do 90% of the work for you. You mentioned “all the programs are with her company”. I am not sure what you mean by “programs” but it is not uncommon for some advisors to make investing seem way, way more complicated than it really is. Unless you are in the top 5% of wealth, “programs” may be so much “smoke & mirrors” to keep you guessing and your advisor to keep reaping their commissions.
    Don’t get me wrong, there are many fee only advisors offering valuable investing insight and advice. But as the above article made very clear…..if there is money on the table, there are LOTS of people trying to get their hands on it.
    I am about to retire and move a large portfolio of assorted components from my company’s contracted advisor to Vanguard. Vanguard is giving me some advice on some minor changes, AND they are arranging the asset transfer for me.
    If your advisor’s plan for your assets is not clear and easily understood in laymem’s terms…..walk away right now. Listen to that “little bell of caution” ringing in your head. You earned it…do your best to keep most of it. 🙄

    by Dave C. — February 19, 2014

  7. Dale – Dave C is correct about the ease of transition. I too deal with Fidelity and they will handle the transfer for you. The only problem you might encounter is your current adviser may have you invested in some proprietary funds. Eg., funds only available to their clients and not sold to anyone else. You may have to sell those funds and transfer the cash. This happened to my father when he changed brokers and while they transferred all other assets they would not transfer one fund. He had to sell it and then transfer the cash. If you’re in a taxable account this of course would create a tax gain or loss. They’ll also hit you with an exit fee for leaving them. It cost me $250 to leave my broker (won’t name them here) and transfer to Fidelity, but in the long run it’s worth it.

    by Leonard — February 20, 2014

  8. Sandra,
    I am a little concerned that you’re lumping annuities and IRA’s together, as they really have no similarities. I would do as Sandy suggests and learn more about investing. If you have a friend who invests her/his own money, simply ask for an hour or two of their time and sit down over a cup of coffee or tea. You can easily get the BASICS in that amount of time. If i had a friend in your situation, i would gladly meet with them several times to inpart what i know.

    Additionally, although i’ve been a Fidelity customer since the mid-1980’s; recently TIAA-Cref (another financial services company) offered to have one of their CFP’s come to my house and help me with the maze of what to do next (being that my husband and i will be retired soon). The assistance is free (we have accounts with them), ongoing, and has been incredibly helpful. If you have any accounts with TIAA-Cref, i would suggest this route. If not, contact them; the first meeting is free. And take your time, it will come together. Wishing you the best.

    by ella — February 21, 2014

  9. Oops, sorry, Sandra. 😳 Concerning my comment above, of course IRA’s and annuities have similarities. The concept behind both is that they are meant to provide money during the retirement years. Glad you’re looking into this, and i hope you find the assistance you need.

    by ella — February 21, 2014

  10. Thanks to everybody for their comments on finances. I’ve been looking into a few other things and checking out some companies that hopefully will be able to help. Edward Jones has been highly recommended…..any comments, if u can and/or want to. Anyway, I am checking into it more and more. I have found that, just like everything else, if people have a good experience with any company (or anything) it will come highly recommended…..if not, forget it…..that is just the way it is………but everything helps. So thanks again. I really appreciate all the feedback.

    by Sandra — February 22, 2014

  11. Sandra, also check out a credit union…some of them have wealth management services on a %asset basis with much lower %s than other organizations. They offer investment advisory services to members through “Credit Union Investment Services”. I do not have one near in my current state, but if I relocate I may be able to use one that I like and has very reasonable fees.

    by Elaine — February 22, 2014

  12. For what it’s worth in my opinion annuities are a terrible investment for everyone except the person who sells them – particularly in this environment. With government spending out of control and the Federal Reserve printing enormous quantities of paper money, we are overdue for a raging inflation that will make the late 1970’s inflation look tame. The value of fixed annuities will be destroyed by high inflation.

    by Tony — February 23, 2014

  13. Regarding the comment on the Edward Jones company, it may be different now, but about 10-15 years ago I spoke with them and everything they recommended were full load mutual funds.

    by Jim — February 23, 2014

  14. I do my own research and investing, and learned a lot about annuities. A summary: Many researchers recommend covering much of your required, minimum expenses with annuities, in order to get guaranteed income for life (or joint lives) and protect against cognitive decline and financial fraud as you age. Social security is the best kind of annuity; it is indexed for inflation. If possible, most people should wait until they reach 70 or at least full retirement age to start payments. You will get the equivalent of a 5-8% extra return each year you wait, and the increases are also indexed to inflation. This is most important for women, who live longer. If you are already in retirement, most researchers recommend immediate, fixed annuities which provide the most income under poor or moderate investment conditions. These also charge the lowest sales commissions, and are easy to compare. Shop independent agents at or (you may have to go through Fidelity to access the latter; they provide institutional discounts on fees). These companies provide free, impartial advice and a lot of information on their sites. A variable annuity with guaranteed withdrawal benefit option or systematic withdrawal of savings can provide more income in good investment conditions, depending on your investment options. You will pay much higher fees and give up a share of your market gains in order to get protected income that is not subject to market losses. Your state guarantee association protects your annuities against insurance company failure; check its limits of coverage and individuals for insurance products. Do not put -most- of your money in annuities unless you absolutely have to; save enough money in other savings for emergency expenses and to use while you delay Social Security payments. If you are married, evaluate the many alternate withdrawal strategies that the Social Security Office will not tell you about unless you ask. T Rowe Price has an online tool you can use to optimize your combined benefits. I recommend the book “Annuities for Dummies,” which helped me get started. Now that I have annuities, I feel more comfortable investing my remaining savings for long-term growth over the next 30-35 years.

    by Rex — February 27, 2014

  15. Three more points: Fixed index annuities that track the S&P 500 or other indexes, and let you earn a percentage of index gains or cap increases in exchange for protection against market losses are very complicated and almost impossible to compare. I don’t like the fact that companies can change the share percentages and/or caps AFTER you buy the contract. I don’t understand these well enough to make an informed choice – too many moving pieces – so I won’t buy one. Second, inflation protection options on fixed annuities are overpriced by insurance companies right now. Inflation would have to average >4.5% annually for you to break even, according to one recent independent study. Third, mutual fund fees eat a significant amount of your investment gains, even if you pick relatively low cost funds. If you do not feel comfortable picking Exchange Traded Funds to reduce your fees, you can get help and just pay by the hour for unbiased advice. will recommend them for you at no cost, based on your investment risk tolerance. If you want them to help you rollover, actively monitor, rebalance and update your investment portfolio over time, they charge half of what RIAs normally charge for investment advice and management. FutureAdvisor says they use the latest university and investment community research and modern portfolio theory to recommend portfolios. They are the best free service I have found to analyze exactly what you have now and give you specific recommendations for low cost, diversified investment alternatives that match your risk tolerance.

    by Rex — February 27, 2014

  16. Thanks Rex…nice analysis of annunities

    by Elaine — February 28, 2014

  17. Here is a one-page summary of the book’s advice for people considering annuities:

    by Rex — February 28, 2014

  18. Correction: Vanguard uses the IncomeSolutions annuity platform, not Fidelity.

    by Rex — March 3, 2014

  19. Rex…….thanks for all the great information on the annuities. I will definitely check out the different companies, websites and books.

    by Sandra — March 4, 2014

  20. Learning More: The academic and industry studies on the best way to obtain retirement income can be difficult to read, and present different conclusions. This is confusing if you are just starting your research. If you only have the stamina to read one scholarly study and want it be be fairly easy to understand, I recommend one from the Society of Actuaries (SOA). It was addressed to companies who are developing new retirement plans, but I found it very useful to compare the likely performance and other reasons for making investment choices over a long retirement period. Search the web for: “THE NEXT EVOLUTION IN DEFINED CONTRIBUTION RETIREMENT PLAN DESIGN A Guide For DC Plan Sponsors To Implementing Retirement Income Programs.” It was published in Sept 2013 by the SOA, in collaboration with Stanford Center on Longevity, an American College professor of retirement income, and a couple of advisors from Drinker Biddle & Reath LLP. Start with Table 8.1, page 37 and tradeoffs pages 38-40. (RIGs = Retirement Income Generators, your choices for obtaining retirement income from your savings). Review the observations on pages 50-51, which are based on the summary graphs. Then take a look at those graphs in Section Ten and explore the rest of the study.

    by Rex — March 6, 2014

  21. Thanks to all! Now for the Big????? What if you have never ever invested. Your husband has a small 6 figures Security fund. We have just inherited a nice amount of $$$ higher 6 figures. Savings a little. He has 6 more years before retiring at 66. We would love to wait until he is 70 to collect the SS, but not sure that will work. We are also thinking of relocating in the next year…NC or Delaware. Where & how do we get started. Do we check out Banks or just go to a Vanguard,Fidelity. Please help!

    by Roseann — June 4, 2014

  22. Roseann-you need a financial advisor if you’re not familiar enough with managing your funds. Some people think that one should only use a fee-based planner, not one that sells products and offers financial planning too. To find a fee-based planner in your area go to the national organization for financial planners at

    by Carole — June 5, 2014

  23. Carol. Thanks very much. I will visit the site ASAP.

    by Roseann — June 5, 2014

  24. I may be wrong, But My take on “Financial Advisors” is..if they are so good in Investment and Direction..Why are they working for a living??
    Folks, you must take an interest in the self-handling of your money and if not stick it in something like I-Bonds where at least you wont lose the principle…

    by CJ — June 5, 2014

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