The following transcript is taken from the video titled Why Dave Ramsey Doesn’t Understand Fixed Index Annuities.
All right, so we wanted to make a reaction video to one of Dave Ramsey’s videos that he talks about fixed index annuities. And just jumping into this, we applaud Dave Ramsey. He has a huge influence in the financial community. He’s encouraging people to stop excessive spending, get out of bad debt and these kinds of things. So for that, Dave, we applaud you. But when it comes to fixed index annuities, Dave is just way off. He’s factually incorrect in his video, which we’ll see a clip of here. And he’s also from the standpoint of being a trusted advisor, he’s just not in line with what I believe should be the way that we approach these things.
So we want to jump into this, talk about and respond to Dave’s video. We want you guys as consumers to get the facts. Fixed index annuities are very popular right now for obvious reasons. When you see huge declines in the markets, fixed index annuities have a lot of value to folks, and I’m going to touch on that in this video. So let’s jump in.
First of all, let’s talk about the facts in Dave’s video.
I don’t know much about fixed index annuity. I did a little bit of research, but I also want to hear it from you.
Okay. Well, basically what we’re talking about is an indexed annuity that has a floor to it. It’s not going to go below a certain return, probably 5% or 6% or something like that, and it’s probably indexed. Typically, it’ll be off of something like the S&P 500.
This was a call in, all right? Somebody called and said, “Hey, I got a large amount of money in a retirement account. Somebody mentioned fixed index annuities. What do you think?”
Okay, so my first response is the tone of the response to fixed index annuities was sort of grave concern. And this is common with a lot of Dave’s responses to any insurance products, kind of lumps them all together. Be careful that kind of an approach.
The problem I have with it though is that most advisors would ask some questions to determine the situation of the caller. What’s going on? What kind of risk tolerance do you have? What do your other assets look like maybe? And maybe he didn’t have time to ask that, but then really, should we be delivering this kind of a response?
So Dave had zero questions for this caller. He simply applauded his ability to save a lot in a retirement account, which is great. He’s offering some kudos for that effort. However, here’s what he said. He jumped right in and he said, “I have no problem with the index.”
Well, as a stock market guy, we know that Dave doesn’t have a problem with indexes. He likes the S&P. This is his bread and butter. His bigger problems seem to be costs. So let’s jump into costs right away.
The problem is that the annuity fees are double what you get with a mutual fund.
He says that the cost of fixed index annuity are astronomical. And this is simply not true. I’ve consulted with our experts here to make sure I’m right about it. We have people new on annuities on a regular basis, and the costs are nominal, almost zero, unless you add a lifetime income rider. And that’s where somebody is basically locking in the ability to get an income for life off the annuity. So right there, Dave says, “Well, the costs are astronomical.” They’re simply not. It’s just simply an incorrect statement in the video.
The second thing that Dave says in this video is he says, “It’s not a fixed product.”
And index means it’s not fixed. Index means it follows an index.
And I guess his logic for that is because it is variable based on in the index, but actually by all industry standards, it’s a fixed product. In other words, a fixed product is one where the money stays within the insurance company rather than being invested in the markets outside of the insurance company. You don’t need a securities license to sell a fixed index annuity. This is simply from a financial and regulatory standpoint, not a correct statement.
So you guys need to know. It is a fixed product. You have a floor. You get gains on an index basis, depending on the index you choose. And there’s a lot of other factors that were not mentioned by Dave, participation rates, caps. He just simply doesn’t understand these products at all, and yet has this sort of visceral reaction to the annuity.
The next point that’s really important is he talks about commission.
And his commissions are 4x, what he would get if he sold you the same mutual fund, same index.
This is a very sort of common criticism of Dave, which is interesting. He talks about advisors. If you’re a financial advisor, I guess you can charge a 1.5% fee for life on the account. That’s not a commission apparently. But if you sell an annuity and you charge maybe 6% upfront that that’s somehow a terrible, aggressive commission and really misleading. Over time, that 1.5% can easily eclipse any 6% commission on an annuity.
The other thing that is sort of woven into this idea from Dave is that insurance advisors and financial advisors are somehow two separate groups, which is not the case. I’ve worked with as an attorney in my background as a planner, literally hundreds of financial people. A lot of them have insurance and financial qualifications and licenses, and they will actually offer both products depending on the circumstances.
So for me, the way that this sort of adamant approach hits me is just there’s a one-size-fits-all here. Insurance people are evil unless they’re selling term life and making all these grandiose claims about annuities that simply aren’t accurate when you look at current products and the current state of affairs with regard to fixed index annuities right now.
The other thing about commissions is that the client’s not paying the commission. So the caller in this case, he’s not paying it. The commission comes from the carrier. I guess Dave’s assuming that because the carrier pays it, that somehow the client’s paying it. It is what it is. When you’re dealing with a traditional mutual fund or a financial product, that 1.5% fee is actually getting tacked on an annual basis. It’s actually coming out of the account. So just something to think about when we’re really negative on fees.
All right, another quick point about cost expenses. It just seems to be a major focus in a lot of Dave’s videos. He treats any kind of cost or expense as almost evil. I’m not sure why. There are different kinds of expenses. I actually heard a colleague, Garrett Gunderson make a great point about this recently. There’s frivolous expenses, lifestyle expenses.
Sure, it’s a good idea to encourage folks to keep those expenses down. However, you also have protective expenses, which I’ve been well-versed in as estate planner over the years. And protective expenses are buying insurance ironically, but also anything that has to do with sort of protecting or safeguarding your assets. In this case, any cost, albeit however nominal, as I mentioned for an annuity, could be identified as a protective cost. Something to think about for a retiree that doesn’t have a tolerance to lose money.
An even more important point in kind of wrapping up concerns about Dave’s video is that it failed to take into account the caller’s situation.
… having that much money, it still makes me a little nervous. I don’t know, I just don’t really feel too good about it.
When he called in, he’s happy about the fact that he’s got maybe a million-five in an account, right? I’m approximating there. Retirement account. And he is also nervous about this, right? He’s got a very low risk tolerance.
So those are factors where you might say, “Well, we want to have a floor. We want to have a contract.” This is another thing that we never hear in these sort of videos that criticize insurance products. We never talk about the value of having a contractual protection around your account to avoid losses, to safeguard in retirement these kinds of things. You can get other kinds of annuities that have, like I mentioned, a lifetime income rider. A lot of peace of mind there. There’s financial peace around this. I find it interesting. We’re talking about financial peace when it comes to getting out of debt, but not so much when we’re talking about locking in your cash and avoiding losses. And again, there are virtually no costs on a lot of these fixed index products. So cost is not really an issue in terms of the account.
So my heart here is not really to criticize Dave, but just say to encourage trusted advisor, thoughtful, mindful advice. A lot of times the feedback in these videos is if you want to be wrong and disagree, then just go ahead and be wrong. You’re entitled to your opinion. You can be wrong. Well, that doesn’t really resonate. We want to be thoughtful, we want to look at each of these products, we want to look at the situations in terms of fixed index annuities. I encourage you. Get the facts. Don’t just accept face value advice that seems really adamant and really certain that could be very wrong for the situation.
So with that, thanks for joining us and we’ll see you guys in the next video.