Annuities: The Trojan Horse of Retirement

HUNT VALLEY, Md. (TheStreet) -- I am a fee-only financial adviser, which means I can lead my clients to any investment on the planet if it is best for them. In addition, I am a fiduciary and must lead my clients to the best possible investment -- again, for them. Yet, despite opportunities to invest in some of the cheapest, commission-free annuities, I rarely recommend a client ever invest in them. In fact, I think it's a safe bet none of my colleagues who are also fee-only, fiduciary advisers would consider an annuity a wise investment.

Annuities are little ticking time bombs of taxable income that will either blow up in the hands of the owner or definitely in the hands of the heirs. In only slightly less violent imagery, annuities are like the Trojan horse, rolled inside your camp without understanding what's inside.

Annuities are like the Trojan horse, rolled inside your camp without understanding what's inside.

Annuities are typically sold with high fees to compensate for commissions to sell the investment. These commissions normally come with 4- to 15-year deferred sales charges, in essence handcuffing the client into the contract. It's a safe assumption that at least 90% of all annuity sales come with a commission -- the reason people buy them is because they are sold by a seller who is compensated for the sale.

Annuities are an easy sell because insurance companies are marketing wizards. They conduct enough focus groups and do enough market research to know what causes investor fear, grief and anxiety. They then attach a product feature dealing with each investor concern to lure the person to the product. For example:

"Tax deferral for everyone wanting to minimize taxes": Annuities are, for the most part, the only tax-deferred savings vehicle that is a benefit given only to the insurance annuity industry. There are far better overall planning ways to minimize taxes during your life and at death. (Municipal bonds are tax free and capital gains and dividends are also taxed at a flat 15% rate, unlike the ordinary income tax rates of the annuity.)