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An ATM in Today’s Slot-Machine World

Annuities are a path for investors who want to achieve security, not play games.

Editor's note: This article first appeared in the Q4 2021 issue of Morningstar magazine. Click here to subscribe.

Should investing be like playing a slot machine or like using an ATM? Ralph Wanger, the famed manager of the Acorn Fund, articulated these two very different paths the asset-management industry could take in the pages of this magazine a few years ago ("A Hurricane of Disintermediation," Page 16, April/May 2017). His take—unsurprising for a charismatic and highly successful active fund manager—was that the industry had become too sterile and predictable, taking much of the fun and potential excitement out of investing. Rather than engaging investors in the opportunity to win big with an individual stock or with a star fund manager, financial advisors increasingly turned to index funds, eliminating the opportunity for outsize gains, but also insuring against—at least on a relative basis—a hugely disappointing outcome, such as a bankruptcy or a bottom-decile fund return. Wanger argued that in pivoting this way, the industry forfeited some of its appeal and became more commoditized. It had traded the lure of the slots for the dependability of an ATM.

Pendulums swing two ways, however. The folks at Robinhood HOOD have become the talk of the financial world by doing very much what Wanger suggested, by bringing gaming aspects to investing and, thus, engaging a new generation of investors. The online trading platform has done what the industry eternally desires: It has reached out to a new and underserved audience. It has done so by making investing seem like play rather than preaching eat your broccoli and systematically begin a sensible but dull savings and investment plan. Robinhood tries to make investing fun, transforming a simple stock purchase into an online mission, a giant multiplayer action game where traders take on the establishment from the convenience of their cellphones.

Not surprisingly, Robinhood’s approach has met with much criticism. Financial advisors worry that the cavalier attitude of many of these traders will lead to disastrous results in the inevitable bear market. Financial regulators have expressed concerns over the “gamification” of investing and have launched investigations into the practices of many new financial-tech apps. Even Charlie Munger, the ultimate old-school curmudgeon, has gotten into the act, labeling as “bullshit” the notion that the gamelike trading of meme stocks is actual investing. Substantial parental authority is rising in opposition to this hugely popular new trend.

Clearly, the investment landscape is splitting. On the one hand, there are the slot machine traders, making quick, free bets on meme stocks they have done little or no research on. They have their own set of heroes, ranging from anonymous online tipsters to professional fund managers like ARK Investment Management’s Cathie Wood, who bets big on new, potentially game-changing companies and themes. On the other hand, there are the ATM adherents, which include the bulk of the financial planning community and academia, preaching a slow and steady approach based on diversification, asset allocation, buy and hold, and indexing. It’s ice cream versus vegetables. One wildly popular, the other eminently sensible.

It’s interesting to consider annuities within this context. Annuities are the anti-slot-machine; rather than feed the slots for hours in hope of a big jackpot, with annuities one antes up a large sum of money in order to subsequently receive a steady and continuing series of payments. Instead, annuities are very ATM-like in that once purchased, they provide dependable regular withdrawals. Not surprisingly, annuities have little appeal to investors seeking excitement, but they do attract some interest from academics. Scholarly papers on the potential benefits of annuities appear regularly but are read by a very small circle, even among the planning crowd. Given their lack of sex appeal, annuities have long been a product that is sold rather than bought. Ironically, the high fees and mind-numbing complexity inherent in a product that’s dressed up to facilitate sales undermine much of the potential benefits of annuities and have made them a product that many sensible financial advisors shun. But cost and complexity are solvable problems, as the mutual fund industry’s long-term pivot from high-cost active to low-cost passive funds has shown. In time, annuities could similarly pivot from expensive and complex to simple and affordable solutions to lifetime income.

As explored throughout this issue of the magazine, the theoretical benefits of annuities retain much appeal, especially for those who view investing as a means to an end rather than a game whose sole goal is to accumulate the biggest pile of cash. If you pine for the days of secure pensions, as many investors and commentators do, annuities are a viable way to re-create that scenario. As investors age, the ability to transition from accumulation to a secure retirement where they won’t outlive their savings becomes the chief investment challenge. Annuities would seem to be a necessary part of the solution. Today, many investors shy away from annuitization because they have been conditioned to see their savings as proof of their success, the tangible evidence of their skill in the game of life. Without their savings, they don’t feel like winners. Perhaps eventually, financial advisors will succeed in positioning annuitization as a game-winning move, allowing investors to put aside financial games and get on with their lives.

Don Phillips is a managing director at Morningstar. He is a member of the editorial board of Morningstar magazine.

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