{"id":6157,"date":"2019-06-25T10:41:04","date_gmt":"2019-06-25T15:41:04","guid":{"rendered":"https:\/\/www.figmarketing.com\/blog\/?p=6157"},"modified":"2023-09-06T19:03:42","modified_gmt":"2023-09-07T00:03:42","slug":"annuities-require-more-than-just-numbers","status":"publish","type":"post","link":"https:\/\/www.figmarketing.com\/blog\/annuities-require-more-than-just-numbers\/","title":{"rendered":"Annuities Require More Than Just Numbers"},"content":{"rendered":"\n

Few people in the finance world provoke more intense reactions than that of <\/strong>Nassim Nicholas Taleb<\/strong><\/a>. <\/p>\n\n\n\n

For those unfamiliar, he\u2019s a famed statistician, author, academic, former risk analyst, and trader.  If you don\u2019t believe that he\u2019s controversial, head over to his Twitter account<\/a> and take a scroll through his feed. <\/p>\n\n\n\n\n\n\n\n

You\u2019ll see he regularly goes toe-to-toe with Twitter laymen while trading heated exchanges with other intellectuals. And not just intellectuals in finance, but scholars in a seemingly endless field of subjects. It quite poetically fits then, that some of the best arguments\nfor annuities can come from the thoughts of Nassim.<\/p>\n\n\n\n

“Skin in the Game”<\/h2>\n\n\n\n

One of his most recent works has been his argument revolving around the concept of having \u201cskin in the game.\u201d  To summarize the central idea of his “Skin in the Game”<\/em><\/a> <\/em>work, Taleb puts it on his Medium page<\/a> as \u201cowning one\u2019s risk.” <\/p>\n\n\n\n

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Nassim Nicholas Taleb (Courtesy of American Program Bureau)<\/em><\/figcaption><\/figure><\/div>\n\n\n\n

In other words, you don\u2019t just encounter the consequences of your decisions, but must fully live through and experience those consequences first-hand.  The further a person is removed from the consequences of a given decision, the less the full scope and impact of those potential consequences will factor into their decision-making process.  As a result, human experiences can become just numbers on a computer screen.  One that often sits in a brightly lit office with a potentially nice view. <\/p>\n\n\n\n

How can this apply to the world of financial services and the products that clients are advised to be in? The two key words are \u201cbe in.\u201d <\/p>\n\n\n\n

Financial products and assets are like buying a house: you have to live in the thing moving forward.  Only clients don\u2019t see their assets or products as a house because financial assets are numbers and words on paper, leaving everyone to subjectively understand what precisely these assets or products are. How each person views those numbers and words depends on a myriad of factors, including the language their financial professionals use to describe them. <\/p>\n\n\n\n

To complicate it more, throw in the fact that humans are messy.  This alone is the main underlying factor that has thrown the Nobel Prize-winning wrench into the idea that entirely rational decision-makers determine markets and economics.  Financial professionals are tasked not just with getting the most significant number on a computer screen but also fully understanding their clients.  A task that even psychologists struggle to accomplish. <\/p>\n\n\n\n

Applying to Annuities<\/h2>\n\n\n\n

Now let\u2019s look at applying this to annuities, perhaps the most controversial product in finance.<\/p>\n\n\n\n

Annuities are often said to be complicated.  It’s even more true with certain types of annuities. However, a lot of this viewed complexity is more from the financial professionals\u2019 standpoint than that of the client. That’s because annuities differ from most other financial products and assets that financial professionals work with daily.  Insurance companies offer them.  They\u2019re taxed differently.  But most importantly, they can\u2019t be sold on the market after purchase because they\u2019re contracts and not ownership of an asset. <\/p>\n\n\n\n

Related: How to Gain Client Interest in Annuities [Infographic]<\/a><\/h4>\n\n\n\n
\"annuity<\/figure><\/div>\n\n\n\n

This asset versus contractual obligation distinction is where human messiness and Nassim Taleb\u2019s Skin in the Game <\/em>come into focus.  How the average person views assets compared to a contract is going to be different from your average financial professional. <\/p>\n\n\n\n

In terms of human messiness, consider that many financial professionals usually aren\u2019t strictly numbers- oriented people; but people who were attracted to the entrepreneurial style of running a financial practice.  How they view market risk and risk, in general, is different from the average person.<\/p>\n\n\n\n

“Owning One’s Risk”<\/h2>\n\n\n\n

Now let\u2019s throw in the Skin in the Game <\/em>concept of \u201cowning one\u2019s risk.\u201d Sure, it stings when a financial professional\u2019s assets under management income go down in a market downturn. However, it hurts A LOT more when that money is the life savings that you\u2019re well-being is dependent on for the rest of your life. What can be viewed as a bad year for you could be a nightmare year for your client.<\/p>\n\n\n\n

Perhaps you\u2019ll correctly point to the history of the market going up in the long-term. But let\u2019s consider this: the history of the American stock market is incredibly small in the whole of human history.  The idea that people can always count on the market the rest of their lives can be quite na\u00efve from a historical standpoint.  Do we really think the public and the politicians they elect will continue to politically favor corporations the way they have the last few decades?  Especially with the declining amount of trust in our society that\u2019s driving much of the polarization in politics?<\/p>\n\n\n\n

Think about the plethora of ways simple tax changes could impact corporate growth in the future.  Consider the rise of artificial intelligence. What will the economy look like in 30-40 years?  It certainly won\u2019t resemble the one of the past that created the beautiful upward curve of the hockey stick S&P 500 chart. <\/p>\n\n\n\n

Annuities and Guaranteed Income<\/h2>\n\n\n\n

None of this is to say that annuities are a perfect solution to it all. It’s to say that the idea of guaranteed income for the rest of one\u2019s life can make many people breathe substantially easier by removing the cloud of doubt that sits over their heads during market downturns.  So just like people, the gravity and darkness of each person\u2019s perceived cloud can change for them as their life inevitably changes.  People may think they can handle downturns during their working years when they\u2019re healthy.  How they view downturns if they\u2019re retired and potentially sick could be drastically different. <\/p>\n\n\n\n

Related: How Annuities Can Address Client Issues<\/a><\/h4>\n\n\n\n
\"return<\/figure><\/div>\n\n\n\n

Annuity advocate and Financial Independence Group\u2019s <\/strong>Retire Happy Now<\/strong><\/a> partner, <\/strong>Tom Hegna<\/strong><\/a>, often says, \u201cAssets make people miserable.\u201d That may sound like a typical annuity pitch to us in the finance world, but there\u2019s a tremendous amount of truth to it.  Because something that many annuity people know that the rest of the finance world forgets is that the vast majority of people don\u2019t want to become forced economists once they retire. That’s one of the unexpected outcomes of the decline of pensions. <\/p>\n\n\n\n

Skin in the Game <\/em>can even impact which annuity a client may want to choose.  For instance, several factors could be wise in choosing a company with a slightly lower payout if it contributes to a client\u2019s sense of well-being. <\/p>\n\n\n\n

A few good examples could include: <\/strong><\/p>\n\n\n\n