As for the new client I was meeting, the huge disparity was due to the way this annuity's projected returns were laid out. Using a fairly moderate portfolio as an example, this annuity illustration projected an average return of 7.68 percent — but 11.5 percent for the first four years.
Andrew Rogers, the director of financial planning here at Alliance Wealth Management, noticed it immediately. "The high initial return was simply a projection or a 'guess,' yet it made this illustration look much better than it really was, he explained.
"Worse, this client left the initial meeting with the other advisor feeling as if they were definitely getting $22,000 per year if they pulled the trigger," he said.
These annuity illustrations are used by financial advisors because they help show on paper what kind of returns a particular annuity might offer over the long haul. And for the most part, this is a good thing. As financial advisors, it's our job to make sure our clients understand the type of returns to expect, depending on the level of risk they accept when they invest.
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Annuity illustrations aren't always what they seem
But things do get tricky quickly with certain investments — and especially annuities. With a variable annuity in particular, these illustrations sometimes offer projections that don't fit well with reality.
Most of the financial advisors I've discussed this issue with agree that you have to be careful with illustrations that seem too good to be true. And it's not always a dishonest advisor that misleads their clients; at times it's more of a miscommunication.
"Annuity illustrations can be misleading because they can be very complex products," said Jamie Pomeroy, a financial advisor in Winona, Minnesota. "There are so many moving parts that often brokers have a difficult time fully understanding the product, let alone illustrating it properly."
Whether your financial advisor might lead you astray or simply doesn't understand the products he or she is selling doesn't matter. At the end of the day, it's your job to understand how your advisor is investing your money, why you chose this path and the fees you're paying.