The financial sector has taken much criticism for their promotion of annuities in recent years because customers don’t know the full story as to why they are so heavily favored. What makes this investment the preferable choice for financial planners? Is their personal interest in direct opposition to that of their clients? Sometimes the two are in line but investors need to be more aware of their options, including differences between mutual funds and annuities. Professionals could be more up-front too, but fortune favors the consumer armed with information.
A mutual fund is a product in which many clients invest simultaneously, “mutually” hoping to profit from the fund. These are stocks, bonds, and shares which vary in risk like any sort of investment. Consumers can choose very low risk with minimal returns or take an educated risk with the hope of greater returns. Risks are graduated from virtually nothing with almost no return above the bank’s annual interest rates to low-moderate, moderate, moderate-high, and high-risk investments. Consumers can have some say as to what sorts of companies or funds they invest in such as socially responsible or environmentally friendly industries and firms. Commissions for financial consultants who sell these products are low and there are no guaranteed death benefits. Funds can be moved around and changed without extra costs while a consumer invests in the fund. This type of investment does not include any kind of insurance product.
Again, investors can choose the level of risk they want to engage in with annuities but these are individual investments with guaranteed death benefits and often associated with higher growth. Financial professionals also make more money selling these by a considerable margin: more than twice as much with variable annuities in particular. Mutual funds are frequently sold by banks and co-operatives while annuities are usually sold by insurance agencies. They can be hugely lucrative when the planner has experience and good sense but can also lose money since they are like any investment in this regard. With the guaranteed death benefit, this does put things in a different light, however, and one can even arrange for a special life benefit with some policies in which, for instance, a person with a terminal illness can benefit early to pay medical costs.
Investors have found fee structures for annuities to be unclear compared with those of mutual funds. What you need to ask is whether you pay up-front (front-end) or at the end of a policy (back-end) and how much, plus annual fees. There is always some cost to the consumer whether that is a straight or percentage-based pay-out.
Neither of these instruments are inherently bad. Either product can be a good thing when paired with the appropriate client by an ethical and intelligent financial consultant.