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Monday, September 29, 2014

Why I Hate Annuities . . . and Ken Fisher Too!

To forestall the libel lawsuits I remind you that the titles of these posts are Myths.  In general, I don't practice "hate".  And, as you probably already know, I don't "hate" most annuities (and Ken Fisher really doesn't either, by the way).  There are excellent ones, and bad ones as well.
I certainly don't hate multi-billionaire Ken Fisher.  I've never met him.  I admire his research on, and support of, California redwood forests.  But really?  Are you going to sign over all your retirement funds to a high pressure firm that performs worse than unmanaged money?  Here are my issues with his firm's borderline practices. 

First and foremost are the ubiquitous (not to mention, factually remiss and ethically questionable) full-page "I Hate Annuities  . . . And So Should You" advertisements.  I have a copy of the "free" report offered in the ad and it is, overall, a fairly evenhanded summary of annuities . . . with a few serious errors.  But serious, glaring errors they are, and I wonder if they are accidental, for example conflating fixed annuities with their risky cousins, variable annuities.  I'm not going to get into those details in this post.  Later.

Second, is his gargantuan push to lure investors into a very bubbly market with claims of consistent 11+% annual returns.  Didn't work out so well back in 2008 either.  I think this is unconscionable, this appeal to the irrational fear and greed of investors who cannot afford to lose any money, especially in this overvalued market.

Third, is the neglect of his fiduciary obligations to his clients.  Fisher Investments has its own propriety products which it almost exclusively recommends.  They have a history of inadequate evaluation of client needs.  And for this they charge fees of 1% or more.  They have been sued and fined.

Fourth, as a result, Fisher Investments appears to be glossing over a major retirement risk for small investors:  sequence of returns risk.  The table below shows how average returns work.  It doesn't matter in what order the years are calculated, the end result is the same, as long as no contributions or withdrawals are made.

But suppose you're retired and making withdrawals to meet your fixed budget.  All of a sudden, losing years make a huge difference.  Nobody seems to be able to consistently predict sequence of returns.  So avoiding losses is essential in retirement.  Here are the facts in the table:
  • Initial principal balance is $500,000.
  • $25k annual withdrawals are taken, increased with inflation.
  • The average return for both portfolios is identical:  6%

Finally, Fisher is already a billionaire.  I encourage you to do business- instead -with local independent, fiduciary advisers who sell no proprietary investments & employ a holistic approach in evaluating and planning for your retirement.  And who don't resort to inflammatory mass marketing to add to an already gigantic empire.  If you're going to spend 1.25+% of your assets every year for planning and management you might as well at least get some guarantees in return.  Or at least outperform unmanaged index funds.

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