Dear Mr. Berko:

My wife and I are both 57 and want to invest $43,000 in a growth mutual fund. Our bank suggested a variable annuity growth fund, but we have read so much bad stuff about variable annuities that we decided to ask you first.

The man told us that there was no commission, so all of our money would go into the mutual fund, which is in the variable annuity that will grow tax-free until we take out the money on retirement. He said we can sell the annuity anytime we wish, that we can get yearly checks for 10 percent, that it’s guaranteed against all losses in the stock market and that we get life insurance in the amount of our purchase. What do you think?

P.R., Durham, N.C.

Dear P.R.:

That banker is a disingenuous, shifty, unprincipled salesman. You did not tell me the name of the annuity, but if the bank hires people like that, it’s reasonable to assume that the products fit the salesman. Run, don’t walk, away from that bank and change checking accounts, too. Your cat will sooner learn to bark than would that annuity fulfill the promises made to you by that mountebank.

There certainly has been a mountain of negative comments written about variable annuities in the press, and most of that flak hits the target right in the bull’s-eye.

These are the annuities that pay 8 percent to 16 percent commissions to the salesperson and have annual expenses between 4 percent and 6 percent. These are annuities with double-digit penalties if you withdraw early, require you to maintain ownership for 10 or 15 years, have subaccounts (mutual funds) with abysmal performance records, have home offices that won’t talk to annuity owners, and nickel-and-dime you to death by charging you for checks, quarterly statements and so forth.

During a typical month, I receive at least a half-dozen letters from readers who got sandbagged by an insidious broker-dealer or a guileful bank.

However, most Wall Street firms — like Raymond James Financial Inc., Merrill Lynch & Co. Inc., Oppenheimer Holdings Inc., UBS PaineWebber, Smith Barney — are not allowed to stoop that low. So most New York Stock Exchange brokerages are stuck with the several dozen low-commission, low-cost and better-performing VAs like MetLife, Equitable, Ohio National, Hartford, etc.

Frankly, their 5 percent commissions are in line with most load mutual funds. At 2 percent to 3 percent, their annual carrying costs are not much higher than many load funds and closed-end funds, and it’s worth the expense.

Mutual funds don’t provide you with a guarantee against loss. Mutual funds will not guarantee you a 6 percent (or more) lifetime income. Mutual funds won’t provide you with market insurance that protects the beneficiary with the “step-up” value of the policy when it increases in value. Mutual funds don’t allow their owners to accumulate capital gains and dividends on a tax-deferred basis. Mutual funds won’t allow you to take a profit from your investment in a growth fund and invest the proceeds in another fund without paying taxes on the gain. Mutual funds cannot guarantee your beneficiary or spouse a guaranteed 6 percent or 7 percent or 8 percent or 10 percent income for life. Mutual funds are not impervious to suits from or attachments by creditors.

A mutual fund portfolio must be either large-cap, small-cap, balanced, fixed-income, etc., but a variable annuity’s portfolio can be a combination of all objectives and the owner can change those objectives and their percentages at any time to meet his or her goals. Mutual funds do not have guaranteed minimum income benefits regardless of stock market conditions. Mutual funds do not have guaranteed minimum withdrawal benefits regardless of stock market conditions. Mutual funds do not have guaranteed annual compounding (most are 5 percent) if the market performs poorly. Mutual funds can’t provide these and other advantages, which is why VAs’ annual fees are 0.5 percent to 1 percent higher. Since the commission costs are virtually the same, it seems to make more sense to own a VA than a mutual fund.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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