The brokerage firms, banks and insurance companies have a product for every situation. Right now the situation is fear and they feed this fear with ‘safe’ products. These firms make money when money moves. They do not make money if investors develop a prudent portfolio and remain disciplined to that strategy. Annuities help people believe their money is safe, when in fact in the long term they lose money. Best advice, stay wawy from annuities.

Any prospective customer who takes the time to understand annuities runs away screaming. A recent report by consulting firm Cerulli Associates puts the matter as delicately as it can: “Information about variable annuity purchases reveals that they do not appear to be based on educated decisions.”

Consider the experience no-load fund giant T.Rowe Price had when it sent potential customers software to help them determine whether variable annuities were right for them. The program factored in the investors age, income, tax bracket and investment horizon — and it regularly told potential buyers that they would be better off in a plain old fund. An educated consumer, as it turned out, was not a good prospect for annuities.

If folks really knew what they were buying, how could you explain the $21 billion of annuities sold in 1996 that went into IRAs? IRAs, already tax-sheltered, benefit not a whit from the annuities deferral feature.

Insurance agents and stockbrokers make a heft commission when selling variable annuities, much more than the commission on mutual funds or stocks. This hugh incentive costs consumers big in the short and long term.

Please comment or call to discuss.