A Real Look at Fixed Indexed Annuities (FIAs)

“I heard I could get an investment where I couldn’t lose money, could keep up with the stock market, and it was FREE!” Seems made-up, right? Unfortunately, this is an all too common comment in the world we live in. Investors who are looking for lower costs, higher returns, and also safety – all wrapped up into one hear these words and jump to put large portions of their portfolios into what are known as Fixed Index Annuities (or FIAs). We know there’s no such thing as a free lunch and if it sounds too good to be true, it probably is. I’m not saying FIAs are bad or good for everyone, but instead trying to bring some balance to the discussion by simply laying out some potential pros and cons of FIAs.

Potential Pros

• Downside Protection- FIA’s come with protection from downside market loss. Since you’re not directly invested in the index, you do not participate in any losses of the index. Pair this with the fact that most FIAs (Without optional riders) don’t come with any explicit fees and it can be a good fit for those who don’t want to see their account value go down in the future. 
• Potential Returns – Past performance is no indicator of future success within investments, however FIAs do have the ability to outperform other conservative investments such as Fixed Annuities, CDs, and Cash.  
• Optional Riders – FIAs may include optional Income or Death Benefit Riders which, for a fee, can provide an additional layer of safety for a client or their beneficiaries. It’s important to note optional benefits in themselves have potential pros and cons that should be discussed with your financial professional.

Potential Cons

• Potential Returns –  Although some people will point to back-tested returns or proprietary formulas being used, past performance is not an indicator of future success. FIAs, explicit or implicit, have a limited upside. This doesn’t have to be a bad thing, but investors should temper expectations when investing within these vehicles. 
• No Dividends- Since you’re not directly invested in the index, you do not participate in any dividends accumulated by the securities represented by the index. 
• Surrender Periods- One item often overlooked when investing FIAs is the surrender period. This is the amount of time your money will need to stay at the insurance company before you can access it in its entirety. Some products can have surrender terms as long as 20 years (most don’t go nearly this long)! However, many FIAs allow for a certain amount to be taken out annually without a penalty. 

While everyone’s situation is unique, it’s important to be educated on the things we invest in and know everything has potential pros and cons. 

In addition to providing full service Financial Planning, The Mahoney & Raftary Wealth Management Team at Raymond James offers free reviews of existing annuities and can help clients to better understand what they own or are looking to invest in.

**If you decide to take your money out early, you may face fees called surrender charges, as mentioned above. Plus, if you’re not yet 59.5, you may have to pay an additional 10% penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them.**

Chris Raftary, CFP® is a Financial Advisor with Raymond James in Boulder, CO (1881 9th St, Suite 250). Contact me at 313-655-7067 (cell) / 303-448-7120 (branch) or chris.raftary@raymondjames.com. Raymond James & Associates, Inc. member NYSE/SIPC.