Salesforce Fuels AI Engine

Summary

Podcast Title: Motley Fool Money
Host/Authors: Dylan Lewis, Ricky Mulvey, and Mary Long
Episode: Salesforce Fuels AI Engine
Release Date: May 27, 2025
Description: In this episode, Motley Fool Money delves into Salesforce's strategic acquisition of Informatica for approximately $8 billion. Hosts Ricky Mulvey and Tim Byers explore the motivations behind the deal, its implications for Salesforce's AI ambitions, and the broader impact on the data management landscape.

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Introduction to the Episode

The episode begins with a brief discussion about the resurgence of movie theaters during Memorial Day weekend, setting the stage for a broader conversation on business trends and strategic moves within major corporations.

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Salesforce’s Strategic Acquisition of Informatica

Timestamp: [04:48 - 12:19]

Overview of the Acquisition

Ricky Mulvey introduces the main topic by announcing Salesforce's agreement to acquire Informatica for about $8 billion. He highlights that this acquisition has been on Salesforce's radar for some time and seeks to understand the underlying business rationale.

Ricky Mulvey:
"Salesforce agreeing to buy Informatica for about $8 billion. This is an acquisition that Salesforce has wanted for a while, Informatica. And you'll be able to explain this better than I understand they help companies with data management, particularly in the cloud."
[04:48]

Purpose Behind the Acquisition

Tim Byers elaborates on Salesforce's core business—Customer Relationship Management (CRM)—and emphasizes the importance of data in enhancing Salesforce's offerings. He explains that Informatica specializes in data management, making it a valuable addition to Salesforce's ecosystem.

Tim Byers:
"Because Salesforce is better when you have data to do things with. That's the whole point of Salesforce. Salesforce as a customer relationship management business is you collect a bunch of data about your customers, about deals that are in the pipeline, and then you do stuff with that data that helps you do more business."
[05:18]

Historical Context of Salesforce Acquisitions

Byers draws parallels with Salesforce's previous acquisitions, notably Mulesoft, acquired for $6.5 billion in 2018. He explains how Mulesoft enhanced Salesforce's ability to manage APIs and integrate various data sources, setting the stage for the Informatica deal.

Tim Byers:
"Mulesoft helps you manage that. Informatica is different than that, but related. What Informatica used to do is tooling for what was called ETL integration. E extract T transform, L load."
[06:15]

Strategic Implications for AI Development

The conversation shifts to the strategic significance of the acquisition in fueling Salesforce's AI initiatives. Byers suggests that acquiring Informatica provides Salesforce with more data connectivity, which is essential for developing and training AI agents.

Ricky Mulvey:
"One way to think about this acquisition is that Salesforce is getting more raw material to feed its AI agent with this multi billion dollar acquisition of Informatica."
[07:56]

Tim Byers:
"Technically, there's more under the hood, but for the purpose of this discussion, that's a perfectly good way to think about it."
[08:08]

Financial Perspective and Shareholder Sentiment

Ricky Mulvey raises the point that Salesforce shareholders may feel indifferent or skeptical about the acquisition. He inquires about Tim Byers' stance on the deal.

Ricky Mulvey:
"Right now, shareholders of Salesforce are feeling pretty meh about this acquisition. How about you? Are you bullish? Bearish? Maybe somewhere in between."
[08:19]

Tim Byers:
"I like it. I like it. And there's two things I really love about the deal. It's all cash... I love that it's all cash. I cannot stress enough how much I like that."
[08:28]

Byers appreciates that the deal is structured entirely in cash, aligning with Salesforce's historical preference for cash acquisitions over equity-based deals. He highlights that this approach is beneficial for shareholders and maintains employee equity incentives in acquired companies.

Comparison with Previous Acquisitions

Mulvey provides context by comparing the Informatica acquisition with Salesforce’s other major deals, such as Slack ($28 billion in 2020) and Tableau ($16 billion in 2019). He discusses concerns like de-privatization and whether Salesforce might be straying from its core mission.

Ricky Mulvey:
"When investors look at an acquisition, sometimes they worry about de-privatization, a company getting away from its core mission or spending too much on another company's growth to bring it into the fold."
[09:55]

Tim Byers:
"I would give him a B, because I think Slack was... It's getting back to the roots because... It's an all cash deal. Thank God it's an all cash deal. We're not using Salesforce Equity."
[10:57]

Byers rates Marc Benioff, Salesforce’s CEO, a 'B' for his acquisition strategy, citing the Slack acquisition as a shift from their traditional all-cash deal approach. He expresses optimism about the Informatica deal, noting its strategic fit and financial prudence.

Conclusion on the Acquisition’s Potential

Byers concludes that the Informatica acquisition is a positive step for Salesforce, returning to their roots with all-cash deals and strategically enhancing their data management capabilities to bolster AI development.

Tim Byers:
"It's better than what it was. So I like seeing Salesforce get back to the way they used to do it, which actually paid off reasonably well."
[12:19]

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Listener Engagement and Broader Investing Insights

Timestamp: [12:19 - 16:23]

While the primary focus of the episode is Salesforce's acquisition of Informatica, the conversation briefly shifts to broader investing topics, including annuities, later in the transcript. However, as per the episode's main theme, these segments are secondary and intended for a different context.

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Key Takeaways

1. Strategic Fit: Salesforce's acquisition of Informatica is aimed at enhancing its data management capabilities, which are crucial for advancing its AI initiatives. This aligns with Salesforce’s core CRM business, which relies heavily on data.

2. All-Cash Deal: The decision to structure the acquisition entirely in cash is seen as favorable, maintaining shareholder value and employee equity incentives without diluting existing shares.

3. Historical Consistency: Compared to previous acquisitions like Slack and Tableau, the Informatica deal marks a return to Salesforce's traditional acquisition strategy, which is generally well-received by investors.

4. AI and Data Connectivity: By integrating Informatica, Salesforce is positioning itself to better harness and manage vast amounts of data, thereby fueling its AI engine to offer more sophisticated and integrated solutions to its clients.

5. Shareholder Sentiment: While some shareholders may be indifferent, the acquisition is strategically sound and aligns with Salesforce’s long-term vision, potentially driving future growth and innovation.

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Notable Quotes

• Ricky Mulvey:
  "One way to think about this acquisition is that Salesforce is getting more raw material to feed its AI agent with this multi billion dollar acquisition of Informatica."
  [07:56]

• Tim Byers:
  "Because Salesforce is better when you have data to do things with. That's the whole point of Salesforce."
  [05:18]

• Tim Byers:
  "I cannot stress enough how much I like that [the all-cash deal]."
  [08:28]

• Tim Byers:
  "It's getting back to the roots because... It's an all cash deal. Thank God it's an all cash deal."
  [10:57]

---

Conclusion

In this episode of Motley Fool Money, Ricky Mulvey and Tim Byers provide an insightful analysis of Salesforce’s $8 billion acquisition of Informatica. They explore the strategic motivations behind the deal, emphasizing its role in strengthening Salesforce’s data management and AI capabilities. The discussion highlights the significance of the all-cash transaction in preserving shareholder value and maintaining the integrity of employee incentives within acquired companies. Overall, the acquisition is portrayed as a positive and strategic move that aligns with Salesforce’s long-term vision of leveraging data to enhance its CRM offerings and drive AI innovation.

For listeners who are stock investors or interested in the strategic maneuvers of major tech companies, this episode offers valuable perspectives on how acquisitions like Salesforce’s move to integrate Informatica can influence market position and technological advancement.

Transcript

[Bro Brockamp]

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[Ricky Mulvey]

What'S the world Ignoring that, maybe it shouldn't. You're listening. It's Motley fool money. I'm Ricky Mulvey, joined today by Tim Byers. Tim, are we getting you on a caffeine day or a no caffeine day?

[Tim Byers]

Today's a caffeine day. Fully caffeinated, ready to go.

[Ricky Mulvey]

How was your. How was your Memorial Day weekend?

[Tim Byers]

It was pretty, pretty good. Pretty good. You know, parades, end of season European football, FA cup winners, Crystal Palace. Life is good.

[Ricky Mulvey]

Appreciate you separating American from European football. You know who else had a good movie or a good weekend is movie theaters. I almost said who had a good movie and that was weekends. We're coming back from Memorial Day movies gearing up for a big summer in this past week. Weekend was the biggest Memorial Day weekend for box offices ever, breaking the record held in 2013. So in 2013, 306 million in domestic box office. This year, 325 million. You can thank the releases of Lilo and Stitch, the non animated version and Mission Impossible. The final reckoning. Are we buying the narrative that movie theaters are coming back?

[Tim Byers]

Are they coming back? I mean, I guess in a way they are. But I also think there's a qualifier here. I mean this might be more proof that known franchises, Ricky. Still the formula studios used to get patrons into the theater. So Lilo and Stitch. Known franchise, Mission Impossible. Known franchise, Final Destination, Bloodlines. Another one that did really well. Not this weekend, but leading into the big year we're having so far known franchise like so. Yeah, but it's a good thing to have theaters filling up. I do think that I should give theater some credit. That the more elevated theater experience I think is like it's better going to the theater than it used to be. Some food to deliver to your seat, maybe some premium drinks. You know, that's a good thing. And I have to say I did some research on this. Ricky, do you know how many Alamo Drafthouse theaters were opened in 2024?

[Ricky Mulvey]

I have an outline. So I'm going to say I don't know. I would not have been able to guess. I'm a big fan of Alamo Drafthouse. I got the movie Pass.

[Tim Byers]

Okay. Seven. Seven theaters. Thank you for not cheating because it is right here in our notes. But that's pretty good. That's. I mean, 41 overall. And for those who don't know, this is a private company founded in Texas. It has spread slowly throughout the the country, and they deliver this, you know, in seat premium experience. They make it kind of an event, which is pretty cool. So, yeah, now if. If things keep going the way they're going, we will end up with 7.8 billion in gross domestic receipts for the full year. That's still going to be lower than 2024. But, yeah, I mean, for an industry that I thought along with the rest of a lot of everybody else, that theaters were starting to die, I think the narrative is that they are most definitely not. Maybe they aren't what they. They were, but they ain't going away.

[Ricky Mulvey]

And we are seeing some originals come back. Tim Robinson and Paul Rudd had a movie I saw called Friendship, and it was a packed theater for an original comedy, and it was absolutely phenomenal. I think what's happening, Tim, is that we're kind of coming into balance in the. The streaming theater era. Streaming didn't totally kill theaters, and probably the theater business will never return to what it was pre Covid. But there is. There are green shoots showing that this is a real business.

[Tim Byers]

Well, I mean, to be. To be fair, and I should admit my bias here, I am totally sucked in by Cobra Kai.

[Ricky Mulvey]

So.

[Tim Byers]

So I'm not even thinking about movies right now. So let. Let's be fair about this.

[Ricky Mulvey]

Let's move on to this Salesforce acquisition. Salesforce agreeing to buy informatica for about $8 billion. And this is an acquisition that Salesforce has wanted for a while, Informatica. And you'll be able to explain this better than I understand they help companies with data management, particularly in the cloud. So as we look at this acquisition, the real business of what we're discussing on today's show. Why does Salesforce slash Marc Benioff, want to spend billions on a data management company?

[Tim Byers]

Because Salesforce is better when you have data to. To do things with. Like, that's the whole point of Salesforce. Salesforce as a customer relationship management business is you collect a bunch of data about your customers, about deals that are in the pipeline, and then you do stuff with that data that helps you do more business. So, like, data is at the part of what Salesforce does. So you would like to have as much data as possible residing into or connected to Salesforce as humanly possible. And the connected to is the point that matters here for why Informatica, you know, is important. So you may remember a few years ago, Salesforce acquired a company called Mulesoft, which is another rule breakers pick. We had it like on the scorecard for like I think a grand. I'm not even sure if it was three months, Ricky. Like we, we had it on the rule breaker scorecard and Salesforce came in and said, we'll take that please, and gave us a double in the space of about two months. Which is, it's great and terrible when that happens because we love, we love the business, but Salesforce took it out from right underneath us. So what Mulesoft did is also a little bit of data management. It's really more like managing APIs. You have a bunch of different connections into other applications, other data sources. Mulesoft helps you manage that. Informatica is different than that, but related. What Informatica used to do is tooling for what was called ETL integration. E extract T transform, L load. In other words, meaning that if you're going to take data from one place and put it in another place, you need to extract it, you need to transform it into the destination format and then you need to load it to the destination. Informatica can still do that, but they do more things. They do more things that are related to like discovering data in your environment, what that data is, what format it is in which it exists and then finding ways to connect to it. So Mulesoft and Informatica both are in the business of getting data, connecting it into a system and making it available so that you could do more things with it. And that's very good for Salesforce. They want that. In fact, if you have more data sources and more ability to do things with data, guess what you can make more of, Ricky. You could have more AI agents.

[Ricky Mulvey]

Okay, so one way to think about this acquisition is that Salesforce is getting more raw material to feed its AI agent with this multi billion dollar acquisition of Informatica.

[Tim Byers]

That's a way to think about it. Technically, there's more under the hood, but for the purpose of this discussion, that's a perfectly good way to think about it.

[Ricky Mulvey]

Right now, shareholders of Salesforce are feeling pretty meh about this acquisition. How about you? Are you bullish? Bearish? Maybe somewhere in between.

[Tim Byers]

I like it. I like it. And there's two things I really love about the deal. It's all cash. God, I love that it's all cash. I cannot stress enough how much I like that, and I wrote about this in an analyst insight for the site, because that's what Salesforce used to do. It was almost always all cash. And then they would give away equity to the employees of the acquired company. And that was always something that, you know, they'd get kind of slammed for from some institutional investors, but at least you saw the purpose. Like, they would buy the company, they'd buy it out outright. A smaller deal in cash, good for shareholders, and then they preserved the equity to buy out, like the founders to buy out the employees were coming over because what they wanted them to feel was like, if you're coming here, you are going to be treated like royalty. And so they would create better than average loyal amongst the companies that they were acquiring. Like they'd stay for a much longer period of time, because why wouldn't you? You're getting a sweet deal. So I love that we're going back to those roots. I also love that we're talking about a deal at 8 billion, Ricky, that is much cheaper than when it was originally rumored, which was north of 10 billion. So, like the story of Salesforce getting more efficient, not like overspending, like a drunken sailor. I think that's still intact. So that. That makes me happy.

[Ricky Mulvey]

So Salesforce is a $266 billion company. So an $8 to $10 billion acquisition, this is large, but it's. It's not, you know, it's not more than half the company, if you will. And, you know, I think you look back on some of the Salesforce acquisitions, the one most listeners would know is Slack, which Salesforce acquired in 2020 for about $28 billion. Tableau in 2019 for about 16 billion. The previously mentioned Mulesoft back in 2018 for six and a half billion. When investors look at an acquisition, sometimes they worry about deworsification, a company getting away from its core mission or spending too much on another company's growth to bring it into the fold. And, you know, as I mentioned, Salesforce shareholders are sort of brushing off this acquisition. But Benioff has done this before. And I guess looking back at his history in Salesforce's history of acquiring companies, what grade would you give him as an acquirer?

[Tim Byers]

I would give him a B, because I think Slack was. I would have given him an A prior to Slack because most of the acquisitions were all cash. And they were. They tend to be accretive. In other words, they were adding. They were adding value over time. And the longer employees from the acquired company stayed, the more value they created. Slack really changed that. Slack was a big equity acquisition. There was some cash, but they also laid out a bunch of Salesforce equity. It broke the model a bit and I think we still don't know the complete fallout from that acquisition. So A B but this one, like I said, where I really want to give them credit, it makes some amount of strategic sense. We're going to have to wait to find out how much. But it's getting back to the roots because it's. I cannot stress this enough, Ricky. It's an all cash deal. Thank God it's an all cash deal. We're not using Salesforce Equity. They have 14 billion on their balance sheet right now. They can't afford this. They generate plenty of organic cash flow as it is. It's better than what it was. So I like seeing Salesforce get back to the way they used to do it, which actually paid off reasonably well.

[Ricky Mulvey]

And as we wrap up, I have a question that I'm going to ask listeners. If you have an answer for this question, like you to email [e-mail] that is podcasts with an [e-mail] so here's the setup. I was listening to a comedy podcast. Comedy and news. I'll say podcast this past weekend with, with Tim Dillon and he was telling a story that I think is relevant to an investing audience, which is that he was talking about how Comedy Central and media executives were really brushing off Both podcasting and YouTube a few years ago. And this is at a time when Comedy Central was. Was pretty dominant. They were feeling themselves. People were going to cable television to watch comedy. They owned it through. Through the aughts and they sort of thought that this audience for comedy would on cable television would always be there. And to the detriment, they sort of ignored YouTube and podcasting. And yes, the Daily show is on YouTube but Comedy Central was. Was pretty late to the party and they didn't own the comedy section of YouTube like one may imagine for such a dominant player. And it's, it's a transition the ground.

[Tim Byers]

To Funny or Die. Didn't they.

[Ricky Mulvey]

I think that was a little longer ago than, than YouTube. I haven't heard about Funny or Die in a minute, but I'd have to look that up. But basically a few years later some executives come back and they're like we're at Comedy Central and we're really focused on podcasting starting now. And they're late to that party. They're late to the YouTube party when audiences have already been built there. So the Broader investing question from this is what's being ignored today that you won't be able to ignore in five years, that maybe executives will start leaning into this a little bit too late. So if you've got an idea. Podcastool.com but we'll go with Tim Byers first.

[Tim Byers]

I think the world has largely forgotten and I'm talking about the business world that we have put fiber and wireless broadband in a growing number of places across the country and, and the globe. I mean that's, it's, it's been idle or at least more idle than it should be for a while. Ricky. It's not going to stay that way because we've also put sensors into just about everything and we're going to have more robotics coming online everywhere. So the hype around the Internet of things, it was too early, it was too extreme and consequently it was easy to ignore. But the actual build out of the industrial Internet of things is starting to move at a fairly brisk pace. I will point you to companies like John Deere, for example. Today they're in the minority. That is not going to be the case in the future here. Smart executives are already thinking about how to leverage this for cost savings and things like logistics, distribution across industries, tested safety. There's a lot that can be done here and there are companies that are getting into this that are worthy investments. One I'll point out for, for members of Motley Fool Rule Breakers. It's been a winner on our scorecard. Not a huge winner yet, but I still am very much bullish on it is Samsara. And credit to Jason Moser who was earlier on that and their ticker is not surprisingly IoT. So Internet of things. Ricky. Don't sleep on it.

[Ricky Mulvey]

I like it and I, I may add, I might put self driving in there. I think as we get closer and I know you're a little.

[Tim Byers]

I think it's related.

[Ricky Mulvey]

Yeah. And I think is, is I keep seeing these examples of self driving getting closer and closer to this place where it's going to be everywhere. And I think, think that that switching point may happen within the next five years and there's going to be a lot of big questions that come from that, especially with professional drivers. Do I need to own a car? Which I like owning a car, but if you're in a city, I think that that's going to be even more of a question mark. Yeah, definitely something that I've got my, I've got my eye on anyway. Tim Byers, appreciate you being here. Thank you. For your time and your insight.

[Tim Byers]

Thanks, Ricky.

[Ricky Mulvey]

This Memorial Day, turn up the heat with the Home Depot. Find the perfect grill and patio set to cookouts coming all season long. Grill up a feast with the next grill four burner gas grill only $229. And complete your space with the stylish Glen Ridge Falls seven piece dining set now on special buy for just $499 with free delivery. Take your Memorial Day cookout to the next level all summer long with the Home Depot. See homedepot.com delivery for more details. Up next, Ro Brockamp joins me to discuss the ins and outs of a financial product that brought in more revenue than Apple last year. We talk about how annuities actually work. This is a family show, so we try to avoid words that are potentially offensive. But bro, let's bend the rules a little bit. Today we're talking about annuities. It's a word that conjures very strong opinions, both pro and Congress, especially from financial advisors. But there's no question they play a role in many Americans retirement plans. According to industry group Limra, total annuity sales in 2024 were $432 billion. That's an all time high and up 12% over the previous year. And for some context, Apple's 12 month trailing revenue is $400 billion more annuity sales than Apple revenue over the past 12 months. There's an old saying that annuities are sold, not bought. In other words, most investors don't go looking for annuities, but they end up finding them and that's because they're promoted by insurance agents and financial advisors, thanks in part to the commissions that they can earn. So we're going to talk about this a lot. First of a two part series, the pros, the cons, and one type that bro thinks that most retirees should at least consider. How about that soft language, bro?

[Bro Brockamp]

Yeah. So this will be just an overview, you know, a primer. Annuities are a really complex topic. We could do several shows on this. But this is just an overview, say maybe planting the seeds of knowledge and then you could do your own research. But I'll just start by saying here's the basic idea of annuities, right? You're paying an insurance company to bear some of the risk of investing and, or creating income in retirement and just as you do with any other insurance, right? You're just deciding, okay, which risk am I going to hold on to and which am I going to transfer to the insurance company? And depending on the Annuity. There also might be some tax advantages which we'll dig into a bit of. So again, it's just a question of, all right, which risk am I willing to bear? What am I willing to pay someone else to take? And is that price I'm paying worth the amount of risk that is getting transferred to the insurance company?

[Ricky Mulvey]

There are many types of annuities, but we're going to break them into two broad categories the next episode. That's when the retirees, that's when you can really tune in. But for this episode, this is for folks who are still saving for retirement. So bro, for those working, what's so interesting about annuities?

[Bro Brockamp]

Well, first of all, I'll point out the tax advantages depending on the type you buy, right? For some of them, you can almost think of them like a non deductible traditional ira, right? You don't get a deduction when you put the money in, but the growth is tax deferred. So you don't pay taxes on any capital gains, dividends or interest along the way, which leaves more money for it to grow. And then the withdrawals are taxed as ordinary income. And in many cases withdrawals from before age 59 and a half are also penalized 10%, just like an Iraqi. Also, there are some additional creditor protections with IRAs. It depends on the annuity and the state. But that's why you'll see higher risk professions like doctors. They often have a little bit more interest in annuities and then from there the benefits of an annuity really depend on what the annuity is invested in.

[Ricky Mulvey]

Which type of annuity would I be looking for if I'm interested in something for the safer side of my portfolio?

[Bro Brockamp]

Well there you might be interested and it just saying might in something like a fixed annuity or a multi year guaranteed annuity. And these basically play an interest rate and they're often higher than what you'd get from CDs. From what I could see online, you can find multi year guaranteed annuities paying between 5.5% and 6% for five to seven years. Plus you get the tax deferral if you're buying the right type of annuity. So that's great, right? You're getting a little bit higher interest plus you don't have to pay taxes on that interest until the annuity, the contract comes due. So that sounds great. On the other hand, these are not FDIC insured, just like a normal, like a CD would be. And they're not liquid, right? You generally have to agree to keep the money invested for a certain amount of time. You'll pay surrender charges if you cash it in before that time. Many, if not most, offer some penalty free withdrawals of a certain percentage of the contract value each year. But you should know the details before committing to the contract.

[Ricky Mulvey]

Let's move to the other side. What types of annuities offer exposure to the stock market? And why should someone consider that rather than just logging into their brokerage account and buying some shares of individual companies or low cost exchange traded funds?

[Bro Brockamp]

And here I think probably the most appealing thing is the tax benefits, right? So let's talk about just a plain old would be called a variable annuity and it's sort of like a 401k. Again, you don't get a deduction when you invest the money, but the money grows tax deferred. And you get to choose from among a collection of mutual funds, though usually called sub accounts when they're within an annuity. And you know, I actually sold some of these back in my financial advisor days. You know, in situations where you had people who had already maxed out their 401ks and their IRAs, they had many years ahead of them to accumulate money. They were worried about taxes, so it could make sense. Plus often they will come with other benefits, such as a death benefit that guarantees that your heirs will get a certain amount. Also you can add riders that guarantee that you'll have a certain amount by retirement. These are called a guaranteed minimum accuracy accumulation benefits and they will often cost an extra 0.5 to 1% a year. And just know that the more you layer on these guarantees, the more restrictions that may be on what you can invest in. Another type that might be interesting to people who are accumulating money and maybe even in retirement already as well are equity index or registered index linked annuities. So these provide some of the potential upside of the stock market, but with a guaranteed level of return or limited downside. So you might have an equity index annuity that says you're going to get a guaranteed 2% or 3% a year, but if the stock market goes up, you could earn as much as 7% a year. Or you might have these registered index linked annuities where they say if the market goes up, you can earn as much as 8 to 10% a year, but if the market goes down you won't lose any money. The thing about these is you just have to understand how the return is calculated, right? There's usually a cap, so it could be Capped at, say again, 8, 10%, maybe as high as 15%. In years where the stock market returned over 20%, like 2023 and 2024, you missed out on some of that. Plus the dividends are usually not factored into the return. On the other hand, though, you have the downside, right? 2022, when the stock market was down almost 20%, depending on the annuity, you either didn't lose any money, you accepted a higher cap, you probably had to say, well, I'll lose as much as 5 or 10%, but no more than that. And you may wonder, how do annuities do this? Well, they do it because they're using options. The money that you give to the insurance company, it's mostly going to be invested in bonds, but then they will buy options to give you some upside versus by using call options. Or if they're protecting on the downside, they might sell some put options. And because you're not really invested in the stock market, the dividends are not factors in the return either. So it's really important to understand how the return on these are going to be calculated.

[Ricky Mulvey]

So most of what you said about annuities make them sound pretty good, pretty appealing. So as we wrap up on this portion of the conversation, what are the downsides that listeners need to know?

[Bro Brockamp]

I would start with just the complexity, right? If, if this were a show about the benefits of investing in an s and P500 index fund, you could easily then take what we go to any broker and buy any index fund from iShares or Vanguard and be done with it. Annuities are totally different. Each one is different. Who sells them is going to be different. It's not easy to just go and buy one on your own. You usually have to go through an insurer's agent and the disclosures and all that stuff can run to 100, 200 pages long. They're very complex. The other big downside is just the costs. And I think most financial advisors, not all, but most financial advisors would say, yes, I love the benefits, but when you factor in the costs, they're probably not worth it. And you absolutely need to understand if any returns, projections on the annuity that you're shown are those before or after costs, you want to get that very, very clear. That said, I do think it's important to realize that some of these costs are going to pay for insurance, and that is backing any of the guarantees that come with the annu. And this is the way insurance works, right? So let's talk about homeowners insurance. Right? You pay for it every year, but you hope you don't need it. But you know it's there in case something catastrophic happens so that you don't have to bear all those costs. It's the same with a lot of what is offered by annuities. So, for example, I mentioned the guaranteed minimum accumulation benefit. Historically, the stock market always recovers. Always goes up. Yes, it drops. Sometimes it takes five years to recover, sometimes 10 years, but it always goes up. But what if it doesn't? Right? Or what if it takes longer than the amount of time you have to wait it out? By paying for a guaranteed minimum accumulation benefit, you're transferring some of that risk to the insurance company. So you need to think about those fees like you would any other type of insurance. Is it worth the cost or can I manage the risk in some other way? If you're at all curious by this, I would say start by seeing what's available through financial services firms you already work with. Many discount brokers and mutual fund companies offer some annuities. And then if you work with a financial planner, I'm sure she or he has opinions about whether an annuity might be right for you.

[Ricky Mulvey]

I know the guaranteed minimum accumulation benefit has Rick Engdahl's ears perked up. He's ready to hear more. So, Rick, hold on. That's annuities for people who are still working. Next week we'll talk about annuities for those who are in retirement. Thanks, bro. As always, people on the program may have interests in the stocks they talk about in the Motley fool may have formal recommendations for against don't bear sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our Show Notes. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

[Bro Brockamp]

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