Transcript:
JEFFREY SNYDER
This morning on BRN, roughly four out of five Americans don’t know what an annuity is. And joining me now to discuss this is Dr. Stephen Lee from California State Polytechnic University at Pomona. Dr. Lee, great to see you.
Thanks for joining us on the program this morning.
STEVEN JAMES LEE Ph.D., D.C.J. California State Polytechnic University, Pomona
Glad to be here. Thanks so much.
JEFFREY SNYDER
Yeah, and I know one of your roles at university is teaching personal finance to your students. And just to level set, I mean, are you finding students prepared and understanding of just general personal finance when they come to your class?
STEVEN JAMES LEE Ph.D., D.C.J. California State Polytechnic University, Pomona
Not at all. Yeah, not at all.
It’s pretty challenging. There are other obstacles that we need to overcome. I don’t teach using a financial calculator.
I’m trying to move away from that. That’s how I learned. But Microsoft Excel and Google Sheets are so vital.
I find that so many companies, when I talk to them about networking and placing students into internships and the like, so many companies, pretty much every company expects Excel proficiency. And so many, an alarming number of students don’t have that. So I have to provide training videos and things of that nature and in-person instruction, oftentimes office hours, you name it, to walk students through very basic Excel calculations and functions and all that fun stuff.
And so because we learn things like time value of money, how to calculate marginal tax rates, and things of that nature in Excel, I have to first oftentimes train them in Excel before we can even get to those important calculations. Well, that’s it. Doctor, I learned on an abacus.
JEFFREY SNYDER
I guess today’s kids are probably a little further ahead than I am. Doctor, an interesting study came out. I want to ask you about this.
And does it surprise you that roughly four in five American adults, four out of five American adults, don’t know what an annuity is? Does that surprise you?
STEVEN JAMES LEE Ph.D., D.C.J. California State Polytechnic University, Pomona
Again, not at all. Annuities are complex creatures. And there are, I want to say, three main types.
There’s the fixed, which just pays you a fixed amount. There’s an equity indexed annuity that links to a market, such as the S&P 500, the BRIC, the FTSE, what have you. And so your accumulated cash value in there will essentially link up to a market performance indicator.
And then there are variable annuities, where you’re directly invested in the market. So those are the three main types. There are several, several, several subtypes and different flavors and features and bells and whistles when it comes to annuities.
So they are very complex, but it doesn’t surprise me at all that most people don’t know. And it’s really interesting because a lot of them, those that work for school districts or other nonprofit organizations, if they have a 403B, it’s a tax-sheltered annuity. They have it.
And it’s really funny to, well, maybe not funny, more like amusing, to read and listen to people that blast annuities when they themselves are in an annuity through their employer. And, you know, is it just, is this lack of understanding about an annuity, is it because that instrument is something that, as part of the broader financial literacy discussion, the personal finance discussion that you lead, saving for retirement, saving for some purpose, this vehicle just doesn’t come up in conversation, typically. The trick is where should it come up? Yeah.
And this is part of a larger problem. Perhaps a lot of my colleagues will disagree with me, but I tend to boil it down to the regulatory landscape, which is incredibly complex. Easily, I think the most complex aspect of personal finance is how, who a financial planner is, what financial planning is, what a financial plan is, and how all that should and is regulated.
And the problem is, is where do you bring up annuities? Do you bring it up in life insurance? Because technically it’s an insurance contract. Do you bring it up in retirement? Because that’s the main point of an annuity, is to supplement your retirement income. Where do you bring it up? Do you bring it up in the parts where you mentioned vetting financial advisors, becoming at least basically aware of the regulatory landscape? Where do annuities arise in the personal finance discussion? And I think that’s really difficult.
The way that I do it is I tend to use it as a bridge between the insurance and protection discussion portion of financial literacy and the retirement portion. So I use it sort of as a bridge, but there are probably 101 different ways to bring up annuities. And I think that’s the fact that they are inherently complex, the fact that the regulatory landscape is incredibly complex, the interaction of those two just makes it really difficult conversation to have.
And that’s even before you get to client potential pushbacks. Oh, my money is going to be locked up. Oh, isn’t insurance just a scam? I’ve heard that one before.
Aren’t insurance companies greedy and they always deny claims? It’s rough. It’s a tough discussion to have, I think. Yeah.
And look, the industry probably hasn’t helped itself. There’s a lot of stories of people coming to the cafeteria to sell certain financial products. As you said, the competitive, the complexity of these products.
JEFFREY SNYDER
But the world, Dr., seems to be changing a little bit. I think I read somewhere in a study that annuity sales have gone through the roof. So clearly something is resonating with a certain population here in the United States.
STEVEN JAMES LEE Ph.D., D.C.J. California State Polytechnic University, Pomona
Or they’re being pushed even more. Or they’re being pushed even more. I mean, they certainly are.
I mean, that’s certainly a possibility. And look, I will be the first one to admit that you turn on the TV or you go to a football event. It’s usually sponsored by some kind of financial institution or there’s an ad, right? So it’s continuously pushed.
That’s right. And the other thing, too, that I would say consumers ought to know or just be aware of is that annuities seem to be the latest battlegrounds between different types of advisors, the insurance advisors, specifically those who love annuities versus those who hate annuities. Annuities have become so politicized now because what’s happened recently and I say recently, within the last 5, 10, 20 years in the industry is the word fiduciary has cropped up.
And fiduciary just means if I’m a fiduciary for a client of mine, that just means I have to place their interest before me. I’m supposed to look out for their best interest. That’s all it means.
It’s beyond the suitability standard, which just means, hey, does this product make sense for you? Does it make sense for me to put you in this product? That suitability, which is here, fiduciary standard is here. Fiduciary standard has been around for a long, long time, hundreds of years. Attorneys are held to fiduciary standards.
Anyone that’s working in a retirement plan, at least in America, is a fiduciary, whether it’s the custodian, the fund manager, whoever. They’re all fiduciaries. But financial advisors now more and more so are being held to that fiduciary standard.
And so now what we have is, and you see this all over social media these days, is financial advisors are essentially weaponizing annuities against each other. And they’re saying, well, if you never consider an annuity ever for any of your clients, you’re failing in your fiduciary duty. You’re not really a fiduciary.
And then you have the other side where they say annuities are garbage. You’re throwing your money away. And so if you ever do consider annuities for your clients, you’re not a fiduciary because there’s no way you can be upholding their best interests.
So annuities have become the battleground between the different types of advisors, as I see it. So maybe one of the key lessons here, Doctor, is don’t get your financial advice from social media? I wouldn’t go so far as to say that. It’s just you need to avoid all of the mudslinging and all of the back and forth because there can be a lot of that over social media.
Yeah, I’m joshing with you. No, a lot of advisors produce quality content on social media. It’s just that they, not all of them, but many of them take time out to just bash the other side in the annuity debate.
And it’s not just always annuities. It can be other things too, fees, how fees are calculated, asset under management fees, fee compression. It can be a number of other things too.
Like their stances on filing taxes or preparing taxes for their clients, how liberal or conservative are they going to be in that enterprise. There’s all sorts of areas. But annuities, as of late, have become even more of a hot topic and a battleground, as I said, between different types of advisors.
JEFFREY SNYDER
And I have to think that that’s confusing for the consumer, very confusing for the consumer. I mean, how do we make it, at the end of the day, the consumer matters. They’re the ones picking the advisor.
They’re the ones potentially saying yes to a certain product or products. So how do we make them better consumers, Professor?
STEVEN JAMES LEE Ph.D., D.C.J. California State Polytechnic University, Pomona
Yeah, that’s the question. What do we need to give them? I mean, they all can sit in your course.
They could probably take a web course from you, but they need help, clearly. Correct. Right.
And I’m trying to remember. I think it was from 2021. I published a book with Jeff Camarda aimed at consumers.
Granted, it was higher net worth, higher income consumers. But in the back of that book, it’s called The Financial Storm Warning for Investors. And in the back of that book, we have, I think it’s a 50-item questionnaire, if you will, for consumers when helping them vet financial advisors.
But in addition to that, really, with just educating the consumer more, there’s certainly that piece. But with all the education in the world, if regulation isn’t smart, like on the institutional side, on the government side, on the supply side, if regulations aren’t smart, if they don’t have teeth, if they’re not efficient, then there’s a real problem. Because now, anything that you don’t – and I’m not suggesting that we regulate everything to death.
I’m suggesting that the regulations are efficient and that there’s a clear understanding of all involved, all stakeholders. What’s regulated? How much of this are we going to take out of the consumer’s hands and regulate? And then how much do we expect the consumers to self-educate? And I don’t think that conversation has taken place at all, at least not that I know of. I think there needs to be a frank dialogue of how much should the consumer be responsible for the decisions that they make financially.
But again, we don’t – the problem is that in K-12 largely, I know states have finally started coming around to this, but we pretty much have not provided any training at all in the public education sphere. Right, so then how do you expect consumers to make – Well, you can’t – no. I mean, you have to – no.
No. It’s not – no. They got rid of the home ec class from when I was a kid.
They used to teach you how to prepare your taxes, if I’m not mistaken. I mean, granted, the tax code was simpler then, but still, the basics, right? They taught you all that. All that’s my understanding.
JEFFREY SNYDER
Yeah. I mean, I agree with you. I think you have to have a baseline, and that’s where people like you and other professors, doctors, in personal finance can step in.
But you need to have it more available to people, and I think we’re starting to get there, but we’re not there yet. Dr. Lee, great conversation. Thank you so much for joining us.
JEFFREY SNYDER
Look, we’re going to have to have you back because this is something – I don’t think we’re going to solve it in 10 shows, but I think by continually talking about these issues, you elevate them to a certain level, and then it actually can help move things along. So, Dr. Lee, we’re going to leave it there. Great to see you.
Thanks for joining us, and we look forward to having you back on the program again very soon, sir. Thanks so much. Look forward to it.
And don’t forget to subscribe to our daily newsletter, The Morning Pulse, to help support BRN programming. Details, of course, at our website. And we’re back again tomorrow for another edition of BRN.
Until then, I’m Jeff Snyder. Stay safe. Keep on saving.
And don’t forget, roll with the changes.