Wishing and hoping won’t make it come true, whatever “it” may be. Compounding clichés, I’ll also stipulate that if something sounds too good to be true, it is likely not true. The investment world is rife with sales pitches for products that sound too good to be true. “Always forward, never backward,” “Up but never down,” “Never lose money,” etc. are prime examples.

For a skeptic like me (who is also a fiduciary financial advisor), these commercials and sales pitches are difficult to accept passively. Federal financial regulators monitor what fiduciary advisors are allowed to say and do with respect to securities law compliance. Insurance products are regulated by the States, so insurance salespeople are subject to far less stringent compliance standards.

My dad used to say that there were three kinds of lies: white lies, damn lies, and statistics. In recent years, a fourth category has become perhaps the most insidious of all—lies of omission. In other words, it isn’t what is said that counts, so much as what is held back. This is the preferred lie in annuity sales.

We recently encountered a sales pitch for an Equity-Indexed Annuity (EIA) product, which is a somewhat complicated contract with some features beyond the scope of this Blog. It is not the product itself I am criticizing today, but rather the way it was being sold. I’ll save product details for another day.

The following are a few highlights from the sales pitch to illustrate my point regarding lies of omission.

• (Said) annuity investment returns are market-based; (Unsaid) credited gains are a fraction of equity market growth
• (Said) owners participate in equity market gains; (Unsaid) credited annual value increases are capped for most EIAs
• (Said) purchasers earn a “reasonable” rate of return; (Unsaid) the term “reasonable” is defined by the insurance company, rather than the buyer
• (Said) purchasers never lose money, because in down years the value remains steady; (Unsaid) this is financed by a cap on annual growth
• (Said) the insurance company pays for the sales commission; (Unsaid) buyers are locked into the contract until the commission is amortized
• (Said) equity markets often crash; (Unsaid) equities rise 70% of the time, and fall back only 30%, averaging 10%+ annual returns over time

Today’s analysis is intended only to educate the audience how to listen to annuity sales pitches with a skeptical ear. These products serve a purpose for some people and for some situations.