Client actually asked for it

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Sep 29, 2005 4:25 pm

In my year or so in this biz I can count on one hand the amount of times a client came in and asked for a VA.

It happened today.

Client must have spoken to a competitor and pitched him on all the wonderful benefits of a VA.    My personal opinion is that VA's are only suitable in a very very and again, very small percentage of situations.

He mentioned the "principal guarantee" features.     What came out of my mouth to help him understand was the analogy that this so called "benefit" is akin to buying an extended warranty for your appliances.  It should hardly ever come into play and it's not worth the 50 bps fee/year.  He kind of understood my point when I made this analogy.  

Was this a valid analogy?

I'd rather this 40ish client invest in a taxable account with a 60/40 allocation.    Unless the favorable tax treatment of capital gains changes I think this is a better deal than a VA.

Sep 29, 2005 4:54 pm


 I understand your point. However, you have not been around long enough to see the market declines trash your clients. The reason these annuities can actually be good choices is, there is a plan "B". My passion is for mutual funds, and would rather use funds any day, than put a client in an annuity. But, what if a client is drawing income from there account at @ 6%, and in year 3 or 4 the markets do decline significantly, does'nt knowing that a client can spend down there entire balance, and then turn around and annuitize there original investment, and create an income for life, give piece of mind to you and the client.

Sep 29, 2005 5:27 pm

great point.

If a client is very risk adverse I would just change the allocation to a 40/60 or 20/80.

In a 20/80 allocation downside risk is very small that almost any customer can handle in my opinion.     I would say worst case scenario in a calendar year in a 20/80 would be 5% at worst.   Of course the flipside is that the upside potential is very limited too...perhaps it around 15% or so.      But the goal with this allocation is principal protection and just staying ahead of inflation by a couple of percentage points.

In a 40/60 it would be closer to 10% on the downside and 25% on the upside.

The insurance companies are making a fortune are some advisors as well because they are playing off peoples irrational fears and not explaning the whole picture.

Just my .02  YMMV

Sep 29, 2005 5:40 pm

As long as the client clearly understands the additional costs for the benefits and the benefit is actually beneficial to the client, I have no problem with variable annuities.  And as moneyadvisor indicated the downside protection is sometimes well worth the additional cost. I have been around long enough to see the markets go up, down, up and sideways. Believe me you will have a happier client when he can have some security even at the cost of some return.

Consider this scenario:  Client has a large rollover from a company profit sharing plan (450K).  He is a conservative/moderate investor, but wants to have some growth (don't they all) and will not need to draw on these funds for at least 10 yrs. (This is a small part of his net worth).  "I" think he can handle more risk than he does.   What we do is put half into a VA that has a guaranteed 7% annual compounded gain so that in 10 years, no matter what, he has doubled his initial investment.  I certainly hope we can do better than 7% over 10 years, but who knows.  With this we know for sure.  The rest we put into a diversified portfolio of mutual funds as you indicated 60/40 and some short term fixed investments, just in case he does want to take some out.  He is building a new house. 

The advantages of the VA are

1. We can be more agressive with positions since we are already guaranteed a nice 7% return.  In 10 yrs, when he begins distributions we are guaranteed to annuitize either the 7% gain (450K) or the actual amount if it is higher. Obiously we don't want to be so aggressive that we lose more than we gain. Psychologically, people are more likely to take risks when they have a safety net.  Downside is you must annuitize to get the guaranteed value.  Moot point if we beat 7%  .

2. The market can go down or even stay stagnant, as it has done in the past. The client is guaranteed a known gain on at least half of his portfolio.

3. Because the VA is a mutli fund family product I don't have to worry about breakpoints if I want to divide up between Oppenheimer, Fidelity, VKM, etc etc.  Some funds and fund managers are better at different types of investing styles than others and they aren't all in the same fund family. And no sales charges for moving between sub accounts. 

4. The other money in the mutual funds, in one fund family, to keep compliance happy, has good opportunity to grow as well. If we do things right, in 10 years this portion could also grow to 450K. But the peace of mind factor with the VA is well worth it to the client.

5. If he wants to, he can spend half of his funds 225K and know that when he annuitizes he will still have all of his money.

I agree that annuities in general can be oversold or missused, but you really need to take a look at them.  They do have a place and the benefits can be substantial.  As with everything we do there is a trade off between risk and reward.

Sep 29, 2005 5:47 pm

In a 20/80 allocation downside risk is very small that almost any customer can handle in my opinion

You don't think that bond funds can lose just as much as a stock fund?  We coming out of an historical 50 year low point in interest rates. Rising rates are going to hammer bond funds, especially if rates rise at a fairly rapid clip.  Right now the bond curve is inverted. When that corrects itself, watch out bond holders.

Sep 29, 2005 6:00 pm

Sorry I meant to say the "yield" curve is inverted

Sep 29, 2005 6:40 pm

thanks for the feedback.

"the downside that you must annuitize to get the guarantee"

isn't that a pretty big downside?

can you put into words how big that downside really is?

thanks in advance


Sep 29, 2005 6:42 pm

Babbling Looney,

So you love ING huh?  LOL. 

Sep 29, 2005 7:59 pm

Babbling Looney, I am a huge fan of variable annuities.  However, the problem is that they often get sold incorrectly.

To call a 7% GMIB a 7% guaranteed return is wrong at best and dishonest at worst.  I hope that you understand the product and never tell your client that it has a 7% guaranteed return. 

The 7% will give you the starting minimum dollar figure for annuitization.  The catch is that these annuitization rates are much lower than the company's SPIA rates.  The higher the guarantee, the lower the annuitization rates.  This is why a 5% GMIB is often better than a 7%. 

The reality of the situation is that GMIB guarantees really work out to be closer to 2 or 3%.  In other words, if your investment returns 2.5% and you turn it into a SPIA, it would be just as good as using the 7% and using the artificially low annuity rates.

I like the GMIB and some other annuity riders, but the client must understand them.  Unfortunately, the broker usually doesn't understand them.

Scrim67, I like these guarantees because I don't ever expect to use them.  What it allows me to do is to take a risk adverse client and instead of putting him in a 20-80 portfolio, we can put him in a portfolio that is all equities.  I find these products to be appropriate when the client needs higher rates of return, but can't afford to lose money.

Sep 29, 2005 8:24 pm

thanks for all the feedback.

reading this thread only further emphasizes why I prefer to present an alternative in most scenarios.

Even the most seasoned advisors sometimes unintentionally don't understand the product 100%.   In the best case scenario I would guess the client doesn't understand the product either.     My gut feeling tells me that annuities are more smoke and mirrors even if used correctly as a "risk management tool".

We haven't even touched on the tax treatment of VA's when you begin making withdrawals.   This can't be a good thing the way the tax laws currently read.


Sep 29, 2005 8:42 pm

In the best case scenario, the client does understand the product because it has been properly explained.  I'm not sure how, in general, risk management qualifies as "smoke and mirrors" although I do agree that calling the GMIB 7% does qualify as "smoke and mirrors".

VA's inside of an IRA get taxed in the identical manner as any other IRA. 

Partial withdrawals of a non qualified annuity come out as income first.  Annuitization is treated as both return of principle and gain.  It's good that non-qualified VA's grow tax deferred and it's bad that the gain is treated as income. 

The bottom line is to do what's best for the clients.  VA's make sense sometimes and don't at other times.  Like most other products they are neither good nor bad.  They are simply appropriate or inappropriate based upon the situation. (And please never confuse them with EIA's!) 

Sep 29, 2005 8:59 pm

VA's are absolutely appropriate for clients who need market exposure for an inflation hedge, but have no risk tolerance for market losses.  Sure, there are better and cheaper choices for clients to invest in, but if they are risk-adverse, the VA is an excellent option

Tax deferral at least partially offsets the lack of capital gains treatment for VA withdrawals, particularly if the customer is able to defer for long periods of time.

I like the ING VA (just did one), but I also use Hartford Leaders as well.

Just my $0.02...

Sep 29, 2005 9:57 pm

Actuarily annuities make no sense.  If you crunch the number and run the statistics your almost always better off with investments outside of an annuity.  HOWEVER, as we all know, clients do not make decsions based on an actuary's assumptions and statistics.  They often make decisions based on emotions and personal experiences.  An annuity is a great vehicle to get clients in the market and more importantly, get them to stay in the market.  Additionally, I think annuity companies are doing a great job of meeting the demands of our retiring babyboomers.  These people are going to need income! They have a 401k and they want a pension like the one that dear old dad had after working for GM for 30 yrs.  Offering a worse-case-scenario lets clients sleep at night and live thru the bad months, years, etc.  Just my opinion on a very sensitive topic.

Sep 29, 2005 11:53 pm

I agree that VAs are not for everyone.  They make a lot of sense for the people that need the equity exposure, but are too scared to get into the market. 

I like the AXA & the ING products with the 6 & 7% guarantees.  You are essentially selling a Worst Case Scenario.  Odds are, the client isn't going to use the living benefit because a diverse portfolio should perform better than that over 10 years.  You are providing piece of mind to the client.

I hate Hartford and Allstate that guarantee your principal back to you over time.  Wow... you're gonna give me my money back in 10 years, big deal.  If the client doesnt think the market is going to be higher in 10 years, sell them a CD.  If you dont think the market is going to be higher in 10 years, go sell real estate.

Sep 30, 2005 6:46 am

iconsult100, as I said earlier in this thread, it is wrong at best and dishonest at worst to call a 6 or 7% GMIB a 6 or 7% guarantee.  They are not the same thing!  Both of those guarantees work out to be a 2-3% guarantee with forced annuitization.  In other words, if the account grows by an average of 3%, the client would be better off turning their account into a SPIA using AXA's or ING's SPIA rates then accepting the 7% and having to use the rates that are inside of the VA contract as they relate to the GMIB.

The companies are being dishonest by having these products and not taking the time to make sure that all of their brokers understand that they only offer these guarantees by lowering the annuity payout rates.

IMO, clients need to sign something saying that they understand that the GMIB rates are lower than SPIA rates.

Sep 30, 2005 8:07 am


can you follow up your point about the GMIB by using real world examples to illustrate your point.

I know it's a good point but I'm sure many (including myself) would be more clear with an example.

Thanks in advance

Sep 30, 2005 9:56 am

scrim67, I will make up annuitization numbers, but hopefully this will illustrate my point. 

Client buys 100,000 annuity from XYZ insurance company with GMIB of 7%.  Let's look at what happens after 10 years.

Let's say that they get an average return of 4% giving them a balance of $148,023.  However, if they use their GMIB, they will have a balance of $196,715.  $196,000 is better than $148,000!   With GMIB's this is actually incorrect.  We need to see what happens when the money is annuitized.

For a client of this age, XYZ insurance company will make a monthly payment of $1,200 for a SPIA with a starting value of $148,000.  XYZ insurance company will only make a monthly payment of $1,000 for a GMIB value that starts at $196,000.  Lo and behold $148,000 is greater than $196,000.  In other words, the actual value of this 7% GMIB is something less than 4% because if your actual return is 4%, it makes no sense to use the GMIB. 

To the best of my knowledge, ALL insurance companies use lower annuity rates for GMIB rates.  For the record, I do not have a problem with the GMIB rider.  I just wish that the company would make it a lower percentage such as 3% and use their SPIA rates.  It gives the industry a black eye by playing these types of games.

In dealing with clients, I find it to be very dishonest to talk about the GMIB percentage.  What is honest is to say, "If you invest X dollars, the insurance company will promise you a minimum of Y dollars a month for the rest of your life after Z years!"

Sep 30, 2005 10:31 am

What other investment allows you to spend down your entire account value, then turn around and get a monthly check for life based on your original investment. I don't care how good of a mutual fund portfolio is built, you don't get these assurances. And for those who just don't want an annuity - god bless, we'll use funds. Give the client a choice - we can accomplish a lot with both options, my pay can be almost the same for both, long as I am the one getting the account - who frkn cares.

Sep 30, 2005 4:04 pm

I will make up annuitization numbers

I would like to see this in an actual illustration and not one made up off the top of your head.  I am not doubting you, but I was born in Missouri.  Show me.

I have clients who have transfered in VA's that they have owned beginning in 1999 and 2000.  Remember those days?  The market was flying high and you couldn't lose money in a stock mutual fund picked out by a team of monkeys. So their advisors (if you can call them that) put them into agressive funds, chasing previous returns, and then left them on autopilot.  Guess what their values are even now?  They lost an average of 22 to 25% a year for several years!! We are still playing catch up.

Given the choice between a guaranteed pool of money that "may" be annuitized at a lower rate than a fixed annuity spia or an annuity worth substantially less than you invested, I believe that most people would prefer the guarantee.  Annuitizing something at a lower yield is better than taking a loss.   I believe that a well managed mutual fund portfolio "should" be able to beat a minimum guaranteed growth rate of 6 or 7%.  Should is the operating factor.  If you get the perfomance you want then the riders on the annuity are a moot factor, except for a small loss of investment performance.  If you don't get the performance, then the extra cost is well worth it.

And after all it is also about the client's peace of mind.  Some clients are willing to take a leap of faith and others aren't.  If you have a client who is willing to be more agressive then, an annuity is probably not the right vehicle.  If you have a client who doesn't want to fly without a safety net, then consider an annuity.

Oct 3, 2005 4:50 pm

BL  - That's good logic. If the client is comfortable with me using funds, I don't talk about annuities. If they need growth, and are skeptical on equity markets....we talk about annuities with GRIPS.