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A Better Deal Than Annuities

In the universe of investment products marketed to the retail investor, few present as poor a value as the annuity. Many a salesperson's fortune has been built on these instruments, which offer a huge up-front commission, as well as an annual commission “trail” that is paid out for years, until it scales down to zero. The incentive is that if you sell enough up front, the recurring commissions pay your salary and life gets easier. That is until the time comes when the trail ends, usually after eight years, and the salesperson has to “flip” the old annuity into a fresh one to get a new commission, and the annual trail restarted. I'm always a bit amused by investors who say they're not quite sure why their salesperson just called out of the blue, wanting to switch them into a new annuity when the old one seemed to be just fine. Well, there's your answer.

With it's sister product, the variable annuity, the investor gets to choose from a range of expensive mutual funds, with the attendant risks and fee bloat they entail. These pay the salesperson even more, so they are very much incentivized to get you to buy them. I've lost count of the headlines showing abuses and enforcement actions for this product's trail of destruction in my trade papers. It's been going on for years, and the prosecutions and fines don't stop.

The placement of these investments in retirement plans is another abusive practice. An investor should not put a tax deferred investment into a tax deferred wrapper. People know it's the wrong thing to do, and technically, it's not illegal, but the incentives to oversell the thing make this common.

Perhaps a better alternative, especially now that interest rates are rising, is an investment that will provide a monthly income without fail, is guaranteed by the Full Faith and Credit of the U.S. government, and can be purchased at little cost to the end investor: GinnieMae Collateralized Mortgage Obligations. For a great many investors, these instruments have provided those seeking ultimate safety with a monthly payout that well exceeds that of Certificates of Deposit or Treasury bonds with similar durations.

They can provide income, or can be used for compounding. They can be used to anchor a portfolio of other fixed income investments that, while offering higher yields, don't offer the same government backing. In fact, these are the only other investment besides a U.S. Treasury instrument that carry the Full Faith and Credit pledge of the government. That's quite a distinction.

However they are utilized, these can be owned without a markup or a commission, don't rely on an insurance company's credit rating, and an investor can sleep the sleep of the dead owning them. All you need to get started is an investment professional with well over a decade's experience in owning and trading them. What could be more convenient?

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