Morningstar - Q4 2021 - 10

Dispatches
The Annuity ATM
Too dependable for
today's slot-machine
world?
PHILLIPS CURVE
Don Phillips
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 assetmanagement
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
10
Morningstar Q4 2021
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. K
Don Phillips is a managing director at Morningstar. He is a
member of the editorial board of Morningstar magazine.
https://www.morningstar.com/authors/286/don-phillips https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405/index.php#/p/16 https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405/index.php#/p/16 https://www.morningstar.com/authors/286/don-phillips https://www.morningstar.com/stocks/xnas/hood/quote
Morningstar - Q4 2021

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