‘My adviser insists this is a good, low-risk investment.’ I’m semi-retired at 63 with $2 million saved. My financial adviser wants me to sink half my money in an annuity. Should I do it?

Question: I am 63 and semi-retired. I have no debt. I have $2 million in pre-tax 401(k), and about $60k other savings, and $0.5M in real estate. I hired a fiduciary financial advisor, my first, about five months ago. Prior to that, I had managed my investments passively. I defined my desired risk level to the advisor as low. I’d like to avoid major market corrections, such as 2008 and now. 

His advice was to invest 50% in ETFs that they actively manage, and the other 50% in an indexed annuity. As of this morning, the ETF account is down 19%. I did not invest in the annuity. I’ve never been a big fan of annuities, but my advisor insists this is a good low risk investment vehicle. Is a variable annuity a good option for me? I don’t much like the thought of tying up 50% of my retirement savings for 10 years. (Looking for a financial adviser? This tool can help match you with an adviser who will meet your needs.)

Answer: Unfortunately, there are a lot of red flags coming up here, the first being that while your adviser may call himself a fiduciary, he may not truly be working in your best interest. “In most cases, indexed annuities are sold on commission. If the adviser claimed to be a fiduciary and sold an annuity, there’s something that does not compute,” says certified financial planner Chris Chen of Insight Financial Strategists. 

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Note that a true fiduciary adviser will be paid through fee-based compensation, not commissions on products, so if your adviser is claiming to be a fiduciary and is recommending an investment that pays them a commission, that should be a red flag.  Fiduciary advisers who belong to the National Association of Personal Financial Advisors (NAPFA), and other similar fiduciary-oriented professional organizations like the CFP Board, pledge to advise in the best interest of a client. “One of the ways they do that is they don’t get into a conflict of interest situation such as being paid commissions on products like annuities,” says Chen. (Looking for a financial adviser? This tool can help match you with an adviser who will meet your needs.)

Regardless of whether or not he is a true fiduciary, “it’s unlikely a variable annuity would be a beneficial approach here, especially over a low-cost passive one,” says certified financial planner Elliot Dole of Buckingham Strategic Wealth. One of the biggest downsides of a variable annuity is the high cost often associated with it, including administrative fees, fund expenses for investing in mutual finds and more. Furthermore, Dole adds: “Watch out for onerous surrender schedules with indexed annuities. Complexity in the structure exists to benefit the issuer, not the investor.” That said, there are perks to annunities, and this MarketWatch guide gives helpful tips on annunities, as does this one.

Other things to consider are that there are many forms of risk which your adviser should help you understand. “Ask what risks are being prioritized with the recommendation of this particular annuity. Does the annuity protect the value of the asset or your future income stream from the annuity? Maybe the annuity is low risk in terms of future income, but what about the risk of giving up liquidity for 50% of your retirement savings?” says Kan. 

No matter what you decide, it’s imperative that you and your adviser mutually agree on the characteristics of a low-risk portfolio. Certified financial planner Bill Kan of Candent Capital says you should have a deeper conversation with your adviser about the rationale behind the recommendation for the actively managed ETF strategy and why the annuity is a good low risk investment vehicle.

“No one strategy works across all periods and economic conditions and all sound strategies should have their moment to shine, but it can take years for those moments to come. Is your adviser’s understanding of low risk consistent with your definition of low risk? History has shown that even low risk strategies can suffer during major market corrections,” says Kan.

Because of where the market is currently (as of when you wrote to us), a result of -19% for an ETF portfolio wasn’t too bad. Still, Chen says, “In my opinion, you need a real fiduciary adviser specializing in retirement planning who will likely start with a financial plan to fully understand your situation and goals. Someone like this can be found at NAPFA or XY Planning Network.” (Looking for a financial adviser? This tool can help match you with an adviser who will meet your needs.)

It’s also key to look at other strategies for lower risk, pros say. Different planners have different strategies and certified financial planner Michael DeMassa of Forza Wealth says for his conservative clients looking for good low risk investments, “we’ve been buying US Treasuries ranging in maturities of six months to three years. The current yield to maturities is a little over 4%.”

Depending on what your portfolio looks like in terms of stocks and bonds, if a client asked for a lower level of risk tolerance — a portfolio made up of cash, CDs, or short term US Treasury bonds would seem appropriate, says certified financial planner Scott O’Brien of Worthpointe Wealth Management. Indeed, by spreading CDs out across multiple FDIC insured banks, you’ll protect the principal. “CDs are paying attractive interest rates. Currently there are 12-month CDs available paying over 4%,” says certified financial planner Greg Reeder at McClarren Financial Advisors.

Have an issue with your financial adviser or looking for a new one? Email [email protected].

Questions edited for brevity and clarity.