If you invest with Zurich International or Friends Provident, the odds are good that you own a Variable Annuity product. Popular with salespeople but comparatively devastating for investors, Variable Annuity products are sold widely throughout the world.
Try to find a financial academic, however, suggesting that they’re a good deal, and you might as well be panning for gold in your bathtub. These products are defended by the folks who sell them, but they’re the ire of investors who do the math.
The high fees of these products zap investment profits, but they munificently pad the coffers of salespeople.
In the United States, they’re considered an inflexible deal because they charge up to 9% of the portfolio’s value if you want to withdraw your money early.
If only Zurich International, Friends Provident and an array of international providers would be so generous. With them, fees for withdrawing early can be five times higher than that. And the insurance benefit is too often a paltry joke wrapped in the cloak of a convincing salesperson.
Variable annuity products appear to be better in the U.S. (fees are lower) but they are still an abomination in the eyes of the financial academic community. They’re often unfairly sold by commission hungry sharpies–and usually misunderstood by the investors who walk into these chain-shackling lairs.
For the breakdown of a product sample, check out my post, Zurich International and Friends Provident, Should You Invest With Them? Note the comments of misfortune by real investors who were sold on the salesperson’s dream.
To read more about less devilish variable annuity products, you can check out the following articles. Even with these American plans, you’ll find financial academics and journalists lambasting them, but salespeople supporting them. Any wonder why?
Three Reasons To Buy An Annuity–The Motley Fool
Nine Reasons You Need To Avoid Variable Annuities–Forbes
Variable Annuities, Buyer Beware - CNN Money
Variable Annuities, Greed At Work - USA News
Variable Annuities Are A Bad Deal - Scott Burns, Dallas News
Five Reasons to Avoid Variable Annuities – Larry Swedroe, CBS MarketWatch
What’s Wrong With Variable Annuities? - SmartMoney.com (SmartMoney Magazine)
Variable Annuities Don’t Belong in Retirement Plans - Forbes Magazine
Variable Annuities—Lifelong Income, High Cost - Businessweek Magazine
Stay Away From Variable Annuities–Suze Orman (youtube)
When I google “Variable Annuities Are A Good Investment” I can find a couple of articles weighing the pros and cons. But the pros generally come from a salesperson, not a financial academic or an objective journalist. Here’s an example:
Are Variable Annuities A Good Investment? – The Wall Street Journal
If you must buy a variable annuity, please buy one through Vanguard or TIAA Cref. Their costs are significantly lower, and they tend to be more flexible. Don’t buy one from a Friends Provident or Zurich International rep.
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12 comments
sm says:
November 7, 2012 at 10:38 am (UTC 8 )
Hi Andrew,
First of all, great book. I've learned a lot through reading your book, as well as some of the books you recommend by Bogle, and now I'm about to put my knowledge of index funds/etfs into real-life use.
I will be purchasing 25% Canadian short term bonds in my particular portfolio. I've narrowed it down to two, they are:
CLF – Ishares 1-5 yr laddered gov bond mer ~ 0.17%, yield 3.77%
or
XSB – Ishares DEX short term bond index mer ~0.28%, yield 2.97%
I would like to point out that with my account at Scotia itrade, CLF can be traded commission free, which makes the decision harder. Let me know what you think.
-simon
Andrew Hallam says:
November 7, 2012 at 1:59 pm (UTC 8 )
Hi SM,
I wouldn't let the current interest yield sway your decision because indexed bond yields aren't constant–unlike individual bond yields. The yields will always change.
Either option would work. However, I prefer VSB myself because it's a short term government bond index with half the expense ratio of XSB. It doesn't make sense to choose XSB when you can get it for half the cost.
Paulo says:
January 8, 2013 at 6:36 pm (UTC 8 )
Hi Andrew,
I recently finished your book and found extremely helpful, THANK YOU and CONGRATULATIONS!
I'm from Brazil and I have to confess I fell for the Financial Advisor's trick purchasing a Friends Provident product. I already invested 30,000 USD in a 25 year product at the Isle of Mann and have over 20 years left. I see your articles and information about avoiding such products and I'm already passing the information along, however what's your recommendation in a case like mine?
For now, I already reduced my monthly payments to the minimum amount possible (150USD with 95% Allocation) and re-allocated my funds to hold three products with the lowest possible administration fees. Two stock index funds (US and UK) and one bond Index.
Thanks a lot,
Paulo
Paulo says:
January 8, 2013 at 7:16 pm (UTC 8 )
I saw this post and it was very clarifying. http://andrewhallam.com/2011/04/weve-just-been-sc…
Andrew Hallam says:
January 13, 2013 at 6:33 am (UTC 8 )
Hi Paulo,
I'm really sorry to hear that you were seduced by this scheme. Based on what I have written to others, I think you know what I would do.
Short term, it will hurt. But long term, it will be more beneficial to ditch this account entirely and start with a fresh, new, low cost portfolio instead.
Kelvin Wong says:
January 30, 2013 at 8:12 am (UTC 8 )
Hi Andrew,
This is Kelvin who is a Chinese in Hong Kong.
I read your book(in chinese version) your idea is great!
A bad new for you is that i also got a fund investment plan from Zurich 3 years ago.
So i will withdraw some of the money out now.
I am trying to start a fresh, new, low cost portfolio again…..but questions again:
1) i can't find some similar index funds in Hong Kong or China. Do you know where i can have some channels to get it?
I can't buy Vanguard 's index fund in hong kong i think. (i have checked their website but only Singapore, Australia and Japan)
2)Is Tracker Fund of Hong Kong same as the index fund you mentioned in your book?
http://www.trahk.com.hk/eng/homepage.asp
I think it is the most similar things i can find now.
Am i correct?
Thanks for your great teaching again! it is really helpful to me^^
Best Wishes,
Kelvin
esteban ulate says:
April 19, 2013 at 7:42 pm (UTC 8 )
hi…i was offered the generalli vision plan and almost accepted it…i read this post and obviously rejected it.
i am from costa rica and would like to know how to do index investing from my country.
is it possible??
a sales person approached me and wanted to sale me this product
http://www.american-premier.com/products/heritage…
seems to me its a VA….
thanks for you help
esteban
Liam OToole says:
April 24, 2013 at 4:40 pm (UTC 8 )
Hello Andrew,
I started my teaching overseas stint in Turkey and they offered us a retirement scheme with ABG, which has since been taken over by La Mondiale. When I worked there the school was matching the amount I was putting in which was great, now that I have moved schools I still have this actively managed fund with no contributions but what I put in. I am at a loss as to what to do. Have you any experience with this? Here is a run down of what I can see…
They charge between $5-15GBP a month to actively manage my portfolio according to my fees. Every year there is a 1.5% charge on the total amount of your investment. You can move it to certain countries retirement schemes, but since I now work in HK I am not sure I can move it to my new scheme. I am a kiwi but since I am now out of the country it doesn't seem like I can open a retirement scheme in NZ now, which is an option if I had it, to move these funds to. I have asked for clarification from La Mondiale but it seems like trying to get the money out, I have to wait 10 years from my initial investment to withdraw it and the fees can range from 25% to 1.5% at withdrawal depending on how long I continue to put money into it.
It seemed like a good idea at the time as the school was giving me money to help retire, the fees didn't seem to matter at that point, or they didn't send a warning sign to the amount of fees until I read your book, and now I am wondering what to do?!
Does this ring any bells to you or your readers?
Thanks for your help!
Liam
Andrew Hallam says:
April 26, 2013 at 1:56 pm (UTC 8 )
Hi Liam,
Can you withdraw any of it, without paying a fee? You may be able to redeem some. If the company is charging 1.5% to manage this money, and the fund expense ratios are another 1.5-1.75%, the total cost would be more than 3%. Can I assume that this is correct?
Liam OToole says:
April 27, 2013 at 6:51 pm (UTC 8 )
Hi Andrew, thanks for your reply.
Yes, I have 2 policies within the account, one of the policies I have has 1.5% management on top of the annual fee, the other one is up to 4% as they have an ongoing charge every 3 months added as well? So that ends up to 3% in one and 5.5% in the other! The performances since the accounts were started have equated to 5.3% and 3.8% respectively.
I have been in contact with them, they can only switch into another retirement programme that they deem appropriate or I have to leave it in there until I am 55, that's it they tell me. I asked about their non actively managed accounts as a worst case scenario…
My retirement at my HK school is a Manulife account that we put into but there doesn't seem to be any growth on the account I'm in, a higher risk one, it seems like just a place we save our money essentially. I can't see any fees associated with it either. They will accept transfers in but I have to see if La Mondiale accept it as an appropriate retirement fund. If I can move it into this one then I believe when the time comes to move we can withdraw all the funds on departure.
So that's the current situation right now. I'm hoping that the switch across to Manulife is a possibility but either way I'm not feeling like either is a great retirement option.
Thanks for your help,
Liam
Andrew Hallam says:
April 27, 2013 at 8:09 pm (UTC 8 )
Hi Liam,
I know that you could build a low cost portfolio of exchange traded funds through Hong Kong's Saxo Bank brokerage: http://hk.saxomarkets.com/en/why-saxo/
A guy named Boris has been very helpful in setting up accounts for my other Hong Kong based readers. Once you have done so, please show other teachers at your school how to do it. I also have a seminar link that shows international teachers whether they are saving enough money. Please share this too: http://andrewhallam.com/2013/04/international-tea…
If possible, sell what you can from those other firms. The costs sound prohibitive. Please keep me posted.
Andrew
Liam OToole says:
May 16, 2013 at 4:06 am (UTC 8 )
Hi Andrew,
There is no chance to get this out before 55 unless I move somewhere in the future to a school/country with an appropriate retirement scheme.
Interesting information is that every time you contribute they take 5% as a fee but luckily there is no penalty to stop contributions as of now which I have done. The fees equate to about 3% but the current growth of the account has been 8% over the last 5 years. At least that's something right?
So I have to keep it in for now and hopefully the growth continues. Any future funds I have to invest will be in the ETF's or Vanguard as you pointed out, hopefully as soon as possible!
Thanks for your help,
Liam