Will you get the desired results if you buy a Lamborghini, but park it in the driveway and never drive it? That is probably not what you had in mind. However, is that an error on the part of the car? Or is it an error on the part of the manufacturer, the car salesman, or yourself?
When I was first asked this question, I thought obviously it is an error on the owner of the car. You don’t buy that expensive an automobile that everyone know is designed to be driven like they do in the commercials and then sit it in the driveway like a broken down Saturn. (Sorry Saturn owners) It is inherently known what kind of car it is and it is designed, marketed, and sold that same way. Why would he buy such an expensive car and not use it for its intended purpose?
Well, what if it was not something as common and natural as driving a car. Most people own and drive cars. And while you may never have driven a car that powerful, you can visualize what it must be like. And Lamborghini is counting on that in the way they market and sell the product. But what about an Annuity? Annuities are not something you purchase and “drive” every day. So if an annuity is marketed and sold like a Lambourghini, but runs like a mule, how would you know? That’s why I like this article from Kevin Startt, of Startt Planning!
Unfortunately some annuities are marketed as safe money products with all the upside of the market. No limitations on what you can make, but without any risk or fees. Unfortunately some manufactures in the insurance industry know that you do not know all the ins and outs of how annuities work. So some companies occasionally create products that sound great on the surface but fall apart once you look under the hood.
How do the sustain sales for more than a year or two with this kind of business model? Many will put a “multiyear reset” on their products. This is a technical way of saying your gains are not locked in or “safe” until the end of a number of years. So you do not really know what you have made until the end of a number of years, sometimes five years. Kevin makes a good point that many times these products get introduced when the respective market is at the highest point in years. They know any bad press or reputation they may receive are years down the road. And by that point they will be working under a different name or hope that the sales force and the consumer have forgotten.
If you are an advisor, do not fall into these traps and certainly do not reward manufacturers and distributors that should and do know better than to build their business models around these techniques. “I didn’t know” is not going to be good enough excuse for you when your client realizes what they have bought. Do not let your marketing organization give you the same excuse, because they should have known…and chances are they were counting on it. If you are a consumer, rely on an industry professional that has been around long enough to watch for these “too good to be true” ploys and “turn and burn” businesses.