Years ago I'm sitting in a San Francisco coffee shop with my wife enjoying breakfast. Without trying to or really wanting to we can easily hear the conversation from a close-by table. It was two young couples. Both were well dressed, but one was decidedly more outgoing and charismatic. One might even describe them as smooth.
They were clearly on travelling together. Somehow their conversation turned to topics that drew my attention. It began innocently enough.
"Well, what are your plans?" or so went the inquiry. "Nobody wants to think about this stuff, but it is important." They were clearly talking about someone who wasn't there.
"It is hard to know what to do."
"Look, we obviously can't know the future. But with this approach at least you have something to show for it..." Turning to her partner a little too on cue, "Remember Grandma’s experience..."
I don't remember too vividly the exact conversation--I honestly wasn't trying to listen.* It was not a simple case of a couple-friend giving friendly advice. This was a sales pitch. And they were selling the other couple on the idea of long-term care insurance, a type of annuity that has very strict terms regarding when it will be paid along with sharp limits on how much and long payment will occur.
LTC insurance plans are not bad per se. They can work in practice; though they more frequently work in theory. While I didn't know all the relevant facts in this situation, and it was none of my business regardless, the conversation frustrated me. In fact I was offended. Why?
I was offended because they were using emotion to solve a math problem. Well, more precisely they were disguising an emotional pitch as if it were a math problem, pretending it was a math problem, and not doing or even hinting at any math!
Presumably there would be some assumption-laden work-up presented at some point before signing on the dotted line. Let's charitably assume there was--that all we were witness to was the initial hook. Regardless, I resented both the approach and the fact that it appeared to be working.
It was a learning moment for me. As analytical as I want things to be, the truth is humans are emotion-driven beings. Many of our decisions are based on feelings. We seek social desirability and find comfort in confirmation.
This is why confident people are charming. Especially it is so when they are selling us something.
How you say it versus what you say--delivery versus content. They will remember how confident they were in you long after they have forgotten what you actually said.
I remembered this story as I read this recent piece from Vanguard, Guaranteed Income: A Tricky Trade-Off. From the summary bullet points:
The math is clear. A certain income can leave retirees better prepared for an uncertain lifetime. But retirees’ reluctance to annuitize suggests that the irrevocable decision to exchange liquid wealth for guaranteed income is about more than math.**
It is not too much of an exaggeration to say that there are two types of people in the financial products industry: those who sell annuities and those who detest them. A derogatory but perhaps not unfair way of describing annuities is to say that they are never bought always sold. Another is that the primary beneficiary on a variable annuity is the sales person.
Annuities work extremely well in theory. They are straightforward instruments that spread risk and smooth income.
In practice they are extremely complicated, notoriously misleading, and very expensive. There are exceptions. The regulations around them have improved the situation some, but I would argue strongly that this is a second-best solution behind simply allowing more competition in the industry in the first place. World-class fine dining in Napa Valley isn't because of world-class restaurant regulation.
If you're paying attention, you'll have noticed a paradox. I started by showing that people often use emotion to sell a financial solution but then argued that emotion is keeping people from adopting those same financial solutions. But that really isn't a mystery. If people are reluctant to listen to the clear math supporting annuitizing future income, it stands to reason that emotion will be perhaps necessary to get them over the hump.
*In fact they were so bad at attempting to be discrete that I can only assume we too were part of the sales audience.
**The Vanguard piece points to fear of regret and a strong bequest motive as the major obstacles to annuity adoption. I liked their analysis, but I don't think they sufficiently considered just how few good, honest annuity options there are. Hard to buy what isn't being sold--especially with fair options that do leave bequests. And it is harder and harder to sell them. Whether deserved or not (it is definitely deserved!), annuities have been given a bad name by all the many investment advisors who rail against them.
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