By John L. Olsen, CLU, ChFC, AEP
In the July 8, 2007, issue of the New York Times, there appears an article by Charles Duhigg titled "For Elderly Investors, Instant Experts Abound." It is a remarkable article. In four pages, its author demonstrates that he is a very angry fellow, but that he has almost no understanding of the things about which he is very angry.
He begins by criticizing a financial advisor, one Michael DelMonico.
"Elderly clients," he writes, "thought they had every reason to trust Michael DelMonico as a financial counselor. After all, the Massachusetts insurance agent had become a certified senior adviser in 2002, a credential he made sure to advertise on fliers sent to retirees."
"He did not mention how easy it had been to get that title."
"He had paid $1,095 for a correspondence course, then took a multiple-choice exam with questions like, "Marketing can best be described as:" (The answer: "The process or technique of promoting the sale or distribution of a product or service.") Like more than 18,700 other applicants since 1997, he passed."
Clearly, Mr. Duhigg feels that Mr. DelMonico's Certified Senior Adviser designation is bogus. Well, that's arguably true. Many professional financial advisors feel that the CSA designation is not worth much. But Mr. Duhigg's description of the process for obtaining that designation is worth even less. He states that payment of a $1,095 fee and passing a single multiple-choice exam is all it takes.
That's not correct. In fact, the CSA designation requires the applicant to complete successfully (1) four online courses, (2) an interview with "a professional in a field outside of yours who works directly with seniors" and submission of a written report of that interview, and (3) a closed-book exam. In addition, the candidate must agree to comply with the CSA Code of Professional Responsibility. And the fee is $1,195, not $1,095.
Now, many of us in the financial advisory community believe that these requirements are not sufficient to make the resulting designation truly meaningful. But "lightweight" as they are (to many of us), they're more than Mr. Duhigg claims. In short, he misrepresents them.
And he doesn't stop there. Mr. Duhigg then proceeds to condemn Mr. DelMonico for selling annuities (largely to senior citizens) as if that is, in and of itself, something shameful, and as though that has anything to do with the worth of Mr. DelMonico's CSA designation.
Neither is the case. The CSA may, indeed, be a designation of questionable merit, but that has absolutely nothing to do with the appropriateness of whatever investment products its certificants might or might not recommend. Moreover, the sale of annuities to senior citizens is not necessarily a bad thing.
Certainly, there are bad annuity sales—far too many of them. But they're bad when the annuity in question is not appropriate for the person to whom it's being sold, in the light of all relevant facts and circumstances. To make a proper judgment of whether a proposed annuity sale is or is not suitable, one must (1) take the prospective buyer's goals and financial situation into account and (2) know something about how annuity contracts actually work.
Mr. Duhigg fails on both counts, but he doesn't let that get in the way of his condemnations. He doesn't like annuities, especially deferred annuities. "Deferred annuities," he says, "offer sales agents the richest commissions, which is one reason so many of them are sold every year, regulators say. Selling a $100,000 deferred annuity, for example, typically earns a sales representative $9,000, though buyers are prohibited from touching much of their money for 10 years."
That's just plain wrong. If he's referring to first-year commissions, he should have known, before making pronouncements on the subject, that both non-indexed fixed deferred annuities and variable annuities pay a maximum of 4–7 percent in first-year commissions. Many pay less. While some "equity indexed" deferred annuities do, in fact, pay 9 percent or even more, to state that 9 percent is a "typical" commission for "deferred annuities" is nothing less than misrepresentation (the very thing that seems to outrage Mr. Duhigg).
And that's not all he gets wrong. For example, he reports, "Financial experts say deferred annuities are a good option for wealthy elderly investors looking for ways to transfer savings to their heirs while avoiding large tax payments. But for retirees living off their savings, most deferred annuities are a bad choice, experts say, because elderly buyers are likely to die before the contract begins paying out."
Those two statements demonstrate not only that Mr. Duhigg doesn't know much about annuity taxation, but also that his sources whom he considers "financial experts" don't, either. Genuine financial experts know that a deferred annuity is a lousy way for one to transfer one's wealth to heirs for two reasons: First, they don't get a step-up in basis at the owner's death. Second, the "gain" in the annuity not only does not escape tax at owner's death, but also will be taxed to the beneficiary as ordinary income (technically, income in respect of a decedent).
As for the notion that deferred annuities are a "bad choice" for elderly buyers (in the opinions of Mr. Duhigg's "experts") because those buyers are likely to die before the contract begins paying out, the same thing must be said of certificates of deposit, bonds, and stocks. Does that make those instruments "bad choices," too? Are all accumulation instruments bad choices because the buyer might die while they're increasing in value?
After revealing his misunderstandings of how annuities actually work, Mr. Duhigg returns to denouncing the abusive sales of annuities. With that, we can agree. No responsible advisor approves of such sales. Mr. Duhigg relates how Mary Ann St. Clair was allegedly the victim of such a transaction. According to the article, Ms. St. Clair, a 73-year-old widow, caring for a son with down syndrome, was persuaded by Mr. DelMonico to invest much of her savings into deferred annuities that "prevented Mrs. St. Clair from receiving the annuity's payouts for five years, unless she paid significant fees." If so, if she needed access to those funds during the five years when surrender charges were applicable (because she did not have other funds on which to rely), and if she had relayed that fact to Mr. DelMonico, then Mr. DelMonico should almost certainly not have recommended that she buy deferred annuities with that money. If the facts are as presented, these were bad annuity sales.
But does this mean that the annuities were bad, or that the very same contracts could not have been appropriate for some other 73-year-old widow? Mr. Duhigg clearly thinks so. But that's because Mr. Duhigg knows very little about annuities.
That he didn't let that stop him from writing a diatribe on the subject suggests that he's right about one thing—that "For Elderly Investors, Instant Experts Abound."
John L. Olsen, CLU, ChFC, AEP, is principal of the Olsen Financial Group in Kirkwood, Missouri.