The Two Issues I Have With Roger Ibbotson’s Research Paper on Indexed Annuities

If you’ve been around the financial industry for any length of time, you likely know the name Roger Ibbotson. He is founder, advisor, and former chairman of Ibbotson Associates, now a Morningstar Company. He is a professor at Yale and is currently the chairman and CIO of Zebra Capital Management, LLC, an equity investment and hedge fund manager. To say he’s accomplished a lot in the finance industry would be an understatement. Perhaps his most well known work was his published research titled “Stocks Bonds Bills and Inflation” (SBBI) which serves as a standard reference for information and capital market returns. You can read more biographical information on the Yale website.


In January 2018, Professor Ibbotson published a new whitepaper report titled Fixed Indexed Annuities: Consider the Alternative. I’m sure Ken Fisher (of Fisher Investments and “I Hate Annuities” advertising fame) about had a heart attack when he heard the news. Regardless of how you feel about annuities, this research is worth the read.

I’ll summarize the “fairly” technical whitepaper by saying this:
Given the current interest rate environment, many advisors and their clients will be seeking alternatives to the bond market. A fixed indexed annuity is one of those alternatives you may wish to consider.

You’ll have to read the whitepaper for the technical stuff. However, I have two issues with it (heck, why not be a little critical).

Issue # 1: The research is problematic.

If you’ve read the whitepaper, you know that the research uses simulated growth of a generic uncapped large cap equity FIA. I’m certain that I’m not the only one to point out this concern. In fact, I’ll bet that opponents of indexed annuities will cite the following:

  • This is unrealistic. These products weren’t around then. The options that are purchased to facilitate the existence of these products weren’t available, so how could you possibly know the pricing?
  • There are too many factors and unknowns involved in “backtesting” an FIA this far.

The funny thing is that those points aren’t the reason for my concern. Are they valid points? Sure. But here is what we know to be true – past performance is no guarantee of future results. It does NOT matter whether that past performance is real or hypothetical. That statement still holds true. In fact, Ibbotson’s SBBI chart was the first research of its kind to actually track real historical data on those various asset classes (kind of crazy when you think about it.) So even with REAL historical data, we don’t know what the future will hold. THIS is the point and this is why I say that the research is problematic.

My fear is that advisors will use this research (and more concerning, the person who did the research) to set the wrong expectation for prospective clients. It is my hope that the research is not misused. Bonds and FIAs are two VERY different financial instruments. Features like taxes, liquidity, guarantees, issuing companies, etc. add to the complexity of comparing them with one another.

My interpretation of the indented message of the whitepaper is as follows:

FIAs could be a tool to consider when evaluating alternatives to traditional fixed income options inside of a portfolio. In fact, they should be treated as a different asset class entirely.”

Advisors should be certain to help clients consider all of the factors when evaluating what is best for them.

Issue # 2: It Emphasizes a Solution to the Wrong Problem

Words matter. As a marketing professional, I’m keenly aware of this. As a married man, I’m reminded of it regularly.

There is a statement made within the research that states “As we age and approach retirement, risk is a major consideration. Risk of losses becomes a critical issue and worry.”

The research puts a heavy focus on returns, specifically exploring returns relative to risk. This is not surprising considering the world in which Professor Ibbotson comes from. He’s an academic, an economist, and is now the chairman and CIO of an asset/hedge fund manager. The statement made about risk of losses becoming a critical issue and worry for those in or nearing retirement is certainly true. No one will argue that. This is certainly how someone from the investment world sees the problem. However, there’s a new paradigm shift that has taken place over the past decade.

The “ROI” of greater importance to retirees is “Reliability of Income,” not “Return on Investment.” The statement made about risk of losses comes from a balance sheet perspective. The truth of the matter is that today’s retiree has much more of an income statement perspective. This is especially true for would be clients of annuities. Their chief concern is making sure current and future income isn’t lost. Their secondary concern is making sure they don’t experience significant investment loss. Let’s face it – if you can solve the income problem for clients, the asset management side of the equation becomes much easier.

Many will make the argument that the “balance sheet perspective” and the “income statement perspective” are one in the same or that they are tied so closely together that you can’t really distinguish between the two. As someone who helps advisors market to this demographic, I can assure you that there is a significant difference.

We see major differences in response rates just by reviewing how words and concepts are positioned within your marketing. This is true of every direct mail piece we’ve created for advisors, as well as seminar presentations, and even messages shared on the radio, in person, and on videos.

As you can see, my “issues” with Professor Ibbotson’s research are relatively minor. Here’s to hoping the entire industry is in a better place after this research.


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