Business With Style

I recently spoke asked my brother, who is a financial planner in Greenwich, CT, where his high net worth clients are putting most of their money these days, given that alternative investments (mostly hedge funds) have had their worst year ever and that conventional investments like stocks, bonds, and commodities haven’t fared much better, either. He told me that more and more of his clients are asking him if they can buy annuity products from him because they are interested in preserving principle and accumulating wealth slowly, without the volatility that’s inherent in riskier assets like stocks and bonds. In response to their demand, he has started selling annuity payments and has made a pretty penny doing so – in fact more than he generally makes in fees and trading commissions from his client accounts. He explained to me that annuities are a win-win for the salesperson and the customer.

The customer is usually guaranteed to receive the full amount of their principle back over the course of the annuitized payments; or at very least to receive a minimum payment that reflects some correlation to the size of the principle. More than that, however, they are often able to borrow money against future cash flows from their business in order to allow the compounding returns of the underlying annuity investments – usually principle-protected income products like bonds – to really grow their own personal wealth without all of the volatility associated with conventional securities or investment vehicles.

For him, as the guy selling annuity products, my brother has made a fortune. Since annuities are kind of like reverse insurance policies, calculated based on actuarial tables and conservative estimates of the returns on the underlying annuity investments, a profit margin is easily calculable and the seller is given a big cut of the profit as a commission. And since so many of his clients are able to leverage their principle against future business cash flows, principle amounts easily push $1m, putting his commissions well into the 5 digits for each annuity he sells.

Initially I thought there was something wrong about how much he could get paid for the sale, especially given that it is really so little work for him to sell the product. But the longer I thought about it, the more it seems like a fair exchange, just like any other insurance transaction. In return for stability, security, and yes – in the end, real, augmented wealth by way of leverage – it seems only fair that the people who buy annuity payments should pay a bit of a premium.