At a recent meeting of Destin Realtors where I was providing a market trend presentation, an audible surprise could be heard when I mentioned that we do not favor annuities as investments for our clients. We utilize ETF’s, closed-end funds, REITS, preferred and common stocks, bond instruments of every stripe, and mutual funds, but not annuities. 

We actually spend a lot of time assisting new clients who are attempting to extricate themselves from a disappointing annuity experience. There are instances where folks who have purchased annuities are told, upon inquiring about their options with the annuity company, that the only way to get their money back is to annuitize the account.  And this may not be what the purchaser had in mind when he first bought the product. He assumed that the annuity was a “regular” investment account, but the contract prohibited any other access to the money. 

A shopworn phrase in the investment world says that “annuities are not bought, they’re sold.”

This means that the product is considered to be more of a benefit to the seller than the purchaser. Annuity salesmen are extremely well compensated, garnering somewhere between 5 percent and 8 percent of the cost of the annuity at the time of the sale.  Let’s say our annuity salesman sells you a $500,000 annuity and is rewarded with a 6 percent commission. His upfront payday is $30,000.  And, after the sale, he has no further financial incentive to service your financial needs. Unless you might need another annuity.

As we mentioned, a major annuity drawback is the lack of liquidity. If you withdraw your money early, the penalties can run as high as 15 percent of the amount withdrawn. Essentially, when you purchase an annuity, you give up the right to access and utilize your own money. In fact, we tell clients who inquire about annuities to visualize a pair of handcuffs whenever they see the word “annuity,” due to the lack of access.

Deciphering all of the fees that are associated with annuity offerings is not an easy task, and it is likely that the average purchaser is paying more in fees than he or she realizes. 

Paul Sullivan wrote a fascinating September article in the New York Times entitled, “A Guaranteed Return on an Annuity Has Limits After All.” Sullivan writes, “Annuities are sold with the word ‘guaranteed’ sprinkled through the marketing material, but it turns out that the definition of guaranteed may vary. Prudential Annuities has suspended the ability of policy holders with 14 types of benefits to make further contributions.” Many people purchase annuities with the idea that they will continue to contribute and thus grow their money, but many firms offering annuities are calling a halt. 

“You’re going to see every major insurer out there who has products that are considerably higher than what the market would see today do this,” said Brian Fernstermaker, managing principal at Envision Consulting Group. So two years after offering an annuity product, the insurance company has realized it is going to be tough to make good on promises made and is withdrawing the product from the market.

That same $500,000, invested wisely in the market and tactically managed and monitored, can bring significant income generation without the handcuffs of losing control of your own money. And of course, there are no limits on future contributions. Annuities gained popularity because they promised guaranteed income.  Now that same income generation can be accomplished through investing in blue-chip stocks that pay dividends and bonds that pay coupons while maintaining control and 100 percent ownership of your money. In all likelihood, you earned 100 percent of it.

Margaret R. McDowell, a chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (, a fee-only registered investment advisory firm located near Sandestin.