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Fixed-Rate Annuities Don’t Belong in a Fee-Based Managed Portfolio


These simple products don’t need costly “management,” but some advisors are pushing the idea.

In a managed portfolio, your assets are chosen and monitored by a financial professional. An investment advisor typically charges around 1.00% to 1.50% annually on assets under management. The portfolio may include mutual funds, ETFs, stocks and bonds.

Annuity sales have boomed recently, and some advisors are trying to cash in by adding annuities to their managed-account plans. But fixed-rate annuities don’t belong in a fee-based managed portfolio because they’re so straightforward.

Also known as multi-year guaranteed annuities (MYGAs), they provide a set interest rate for a certain term—for instance, 5.25% annually for four years. They’re sold without an upfront sales charge; all of the deposit goes to work. Once you’ve bought this type of annuity, you don’t need to do anything other than decide whether to reinvest the interest or receive it.

In contrast, with a stock-and-bond portfolio, an advisor should regularly monitor each investment in the portfolio and periodically readjust the asset allocation when needed. That’s how a skilled advisor earns his or her ongoing management fee.

Unfortunately, more "advisory" fixed-rate annuities are being developed and promoted by insurance companies. They’re exclusively available through investment advisors that manage clients' money for an annual asset-management fee. They’re meant to go into a client's managed portfolio, where the advisor earns no upfront commission, but can charge their recurring management fee on those annuity assets indefinitely.

Higher rate dwarfed by advisor’s fees

Why would anyone put a fixed-rate annuity into a managed account? There is a reason. Advisors are luring savers with the siren song of a slightly higher interest rate. Because the insurance company does not pay an annuity agent’s commission to the advisor, the savings can be reflected in a higher yield to the client.

But you’ll still come out behind after paying the advisor’s asset management fees. The guaranteed interest rates offered on these annuities are typically about 0.25% to 0.50% higherthan onthe insurance companies' nearly identical sister products that are marketed through the normal independent agent channel.

The result is that over the course of the guarantee period, the client is going to pay significant and unnecessary money management fees to the advisor that typically far outweigh the little bit of extra interest.

Don't let that higher interest rate lure you into a bad decision. You're usually much better off taking the slightly lower interest rate and holding the annuity yourself outside any managed account.

Anyhow, by shopping around, you may find an annuity that beats the rate offered by an investment advisor, who may not have access to many annuity companies. Here’s a table of top current annuity rates.

How fixed-rate annuities work

A fixed-rate annuity is sometimes called a CD-type annuity because it behaves much like a bank certificate of deposit. However, an annuity also offers tax deferral until you withdraw interest from it, and you can defer those withdrawals indefinitely. Your money can grow faster free of federal and state income taxes until you need it. Annuity interest withdrawn before age 59½ is normally subject to a 10% IRS penalty.

Issued by life insurers, annuities aren’t federally insured like bank CDs, but insurance companies are regulated by the states and have a solid track record of meeting their obligations. Check the A.M. Best rating of the issuing insurer before you buy.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

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