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Jan 17, 2010 11:48 am

I'd be interested in a conversation about fees - For a while now my pricing strategy has been that total costs shouldn't exceed 2%.  Mutual Funds are about 1% so I charge a 1% wrap fee.  No problem.  Sometimes it makes sense to use a C share - so again just under 2% total.  I don't do VAs for a couple reasons, and coincidentally i never figured out how to get the expense below 2% total.  Sometimes a separate account ~1.5 or 1.75% all-in.  Discretionary accounts at the stock level I charge 1.5% - (not consistently).

 
I lost a $4 million prospect about 9 months ago.  He ended up going to TD ameritrade with a "1-800 catch me if you can" arrangement.  "It's all I need and I couldn't justify the extra cost"./
 
Having been through that I wonder why I didn't go the route of mutual funds at NAV, get the 1% upfront then the 1/4 trail.  If I used an American Funds model the total expense would be ~0.69 %.  Maybe couple that with a discretionary portfolio to brand it NOVA.
 
Now that I think about it, if someone had $10 million to invest - seems like this would cover a big portion of those folks.
Jan 17, 2010 11:28 pm

Your job needs to be about justifying your higher fee.  1% wrap fees???  Do you pay your own ticket charges?  Whats the company haircut from that 1%?  You should be netting 1% from your average wrap fee, not grossing 1%.  A $4 million prospect couldn't see the value in paying 1% for your services.  When you went to bed that night could you look yourself in the mirror and tell yourself that you gave that prospect every reason you have in your arsenal why you are worth 1%?  Actually for a $4 million prospect I'd have charged around .75% or so.  Put $250,000-$500,000 in REIT's.  There are no fees there and the prospect would have loved hearing that.  Fact of the matter is don't advertise to clients about the internal fees of funds.  Its not gonna help you get them as a client. 

Jan 18, 2010 12:35 am

Interesting, EIA's don't have fees?  I always thought the insurance company kept the dividends of the index, put a cap on annual returns, and had a participation rate, and forced you to hold it 5-15 years before you could unload it without a CDSC. 

Jan 18, 2010 6:30 am

Nova, my guess is that you talked to your client about the importance of low fees or the disadvantage of high fees.  He took your advice and found something lower.

 
Rankstocks, You don't have to like EIA's.  BioFreeze is absolutely correct.  There are no fees.  When you say things like "I always thought the insurance company kept the dividends of the index", it means that you don't understand the product. 
 
The client doesn't get the dividends of the index because their money isn't invested in the index.   Their money is invested with the insurance company.   I don't know why people can't understand that an EIA is nothing more than a fixed annuity with a different crediting method. 
 
When you buy a 2.0% CD, what are the fees?  There aren't any.  When you buy a 3% fixed annuity, what are the fees?  There aren't any.  When you buy a fixed annuity that pays 1.5% at a minimum, but will pay more if the S&P goes up by more than this amount, what are the fees?  There aren't any.
 
One may not like the terms of an EIA contract, but there are no fees.
Jan 18, 2010 8:25 am
rankstocks:

Interesting, EIA's don't have fees?  I always thought the insurance company kept the dividends of the index, put a cap on annual returns, and had a participation rate, and forced you to hold it 5-15 years before you could unload it without a CDSC. 




Jones propaganda.

Jan 18, 2010 8:52 am
Moraen:
rankstocks:

Interesting, EIA's don't have fees?  I always thought the insurance company kept the dividends of the index, put a cap on annual returns, and had a participation rate, and forced you to hold it 5-15 years before you could unload it without a CDSC. 


Jones propaganda.

 
Just curious ... any part of what you've put into bold not true? Of course not. I don't think that makes it "propaganda". But of course, I know you're just stirring the drink and trying to get a rise out of people.
Jan 18, 2010 9:04 am
LockEDJ:
Moraen:
rankstocks:

Interesting, EIA's don't have fees?  I always thought the insurance company kept the dividends of the index, put a cap on annual returns, and had a participation rate, and forced you to hold it 5-15 years before you could unload it without a CDSC. 


Jones propaganda.

 
Just curious ... any part of what you've put into bold not true? Of course not. I don't think that makes it "propaganda". But of course, I know you're just stirring the drink and trying to get a rise out of people.



I admit, I am trying to stir the pot.  It's been a few days since we had a good Jones vs. everybody else debate. 

But, I remember all of the the anti-EIA efforts.  The only downside I could ever see was the CDSC, but what confused me was that if you are servicing the long-term investor, what's the problem with a 5-15 CDSC?

The fact that Jones is anti-EIA and actively tells advisors that they are bad, makes it "propaganda".

Jan 18, 2010 9:38 am

LOL. Well, Morean, I won't be getting into that fight.

 
Hope y'all enjoy MLK Day. I'm off to see if I can steal some business from LPL.
Jan 18, 2010 7:56 pm

iceco1l,

   I like your intimate knowledge of EIA's.  But let's just back up for a second.  Obviously I've sold against several index annuities, or had clients go to marketing dinners and the insurance agents try and sell them EIA's.  I've only lost 1 client in 15 years, for only part of an account for around 100k, every other time I've brought the money over or kept it at my office.  If the complexity of the EIA doesn't confuse the client enough, I give them a scenario that would work significantly better:
    Take a 10 year AAA-GO muni zero bought at 60 cents on the dollar.  Take the remaining 40 cents on the dollar and buy the SPX.  On an average decade you are looking at around 6-10% annually, and at cashout at the end, around 85% tax efficiency.  No ticking tax timebomb, no complex crediting formulas, more money in the clients' pocket.  If you were truly doing what was in the best interest for the long term return of the client's portfolio, this strategy would outperform in virtually every 10-year rolling average.
    I'm not saying using an EIA in itself is immoral.  But how they are sold is.  "How would you like the upside of the market without the downside risk?" or "Don't worry client, there are no commissions, you don't pay me anything directly" never letting the client know the true cost....opportunity. 
Jan 18, 2010 8:04 pm
rankstocks:

iceco1l,

   I like your intimate knowledge of EIA's.  But let's just back up for a second.  Obviously I've sold against several index annuities, or had clients go to marketing dinners and the insurance agents try and sell them EIA's.  I've only lost 1 client in 15 years, for only part of an account for around 100k, every other time I've brought the money over or kept it at my office.  If the complexity of the EIA doesn't confuse the client enough, I give them a scenario that would work significantly better:
    Take a 10 year AAA-GO muni zero bought at 60 cents on the dollar.  Take the remaining 40 cents on the dollar and buy the SPX.  On an average decade you are looking at around 6-10% annually, and at cashout at the end, around 85% tax efficiency.  No ticking tax timebomb, no complex crediting formulas, more money in the clients' pocket.  If you were truly doing what was in the best interest for the long term return of the client's portfolio, this strategy would outperform in virtually every 10-year rolling average.
    I'm not saying using an EIA in itself is immoral.  But how they are sold is.  "How would you like the upside of the market without the downside risk?" or "Don't worry client, there are no commissions, you don't pay me anything directly" never letting the client know the true cost....opportunity. 



Rank - if this were the case all of the time, I would agree with you.  But I would say the unscrupulous EIA salesman is just as common as the unscrupulous advisor at Jones (or anywhere else for that matter).

But isn't it just as disingenuous to say, "Mr. Client, that EIA you have is chock full of fees.  Did you know Mr. Client, that the insurance company KEEPS the dividends that you are supposed to get?".

There are slimeballs everywhere.  Just because your firm doesn't sell EIA's doesn't make them bad. 

Jan 19, 2010 10:02 am
rankstocks:

iceco1l,

   I like your intimate knowledge of EIA's.  But let's just back up for a second.  Obviously I've sold against several index annuities, or had clients go to marketing dinners and the insurance agents try and sell them EIA's.  I've only lost 1 client in 15 years, for only part of an account for around 100k, every other time I've brought the money over or kept it at my office.  If the complexity of the EIA doesn't confuse the client enough, I give them a scenario that would work significantly better:
    Take a 10 year AAA-GO muni zero bought at 60 cents on the dollar.  Take the remaining 40 cents on the dollar and buy the SPX.  On an average decade you are looking at around 6-10% annually, and at cashout at the end, around 85% tax efficiency.  No ticking tax timebomb, no complex crediting formulas, more money in the clients' pocket.  If you were truly doing what was in the best interest for the long term return of the client's portfolio, this strategy would outperform in virtually every 10-year rolling average.
    I'm not saying using an EIA in itself is immoral.  But how they are sold is.  "How would you like the upside of the market without the downside risk?" or "Don't worry client, there are no commissions, you don't pay me anything directly" never letting the client know the true cost....opportunity. 
 
I think this scenario is fine for someone conservative in the accumulation phase, or saving for college.  For those in retirement, I don't think this is what an EIA buyer is interested in.  I obviously don't use them, but they are basically an alternative to a fixed annuity (just a little more upside).  As far as the surrender charge, it's not unlike buying a SPIA - you lose control of the principle (although with the EIA, there is still some control).
Jan 19, 2010 12:44 pm
rankstocks:

Interesting, EIA's don't have fees?  I always thought the insurance company kept the dividends of the index, put a cap on annual returns, and had a participation rate, and forced you to hold it 5-15 years before you could unload it without a CDSC. 






I think the implication here is that EIA's are tracking the price return index as opposed to the total return index (dividends reinvested).  I read an article the other day that made the same implication as well.  Since I don't offer them and have no idea, does anyone care to clarify the issue?
Jan 19, 2010 8:54 pm
BioFreeze:

Index annuities don't have fees. "The first thing we're gonna do is turn off those broker fees." For some reason, people like that. 

 
Ahhh yes the silver tongue man in black. I can't compete with that unless I produce returns like I did in 09. My fees are increasing by 1 point across the board this year for all accounts. That's why my goals are going to be pretty easy.
 
Me to client ... "if I find a $100 bill and give you $98 are you going to be unhappy? What about 80, 70, 60 ?????"
 
Don't get a lot of no's 
Jan 20, 2010 9:53 am
iceco1d:

B24 - There are plenty of EIAs out there with shorter surrender periods than a Prudential or Jackson or Metlife VA.  The product itself has nothing to do with the lengthy surrender charges.

Joel - EIAs aren't "tracking" any index.  They aren't meant to be compared to any index, or any equity market.  They are JUST a fixed annuity, with a different method for crediting interest.  They are for people that will NOT accept losing money EVER, but are willing to take a LOWER minimum guaranteed rate (so long as it's a positive rate) in exchange for the CHANCE to get a higher rate.  Period.

??????  EIA = Equity Indexed Annuity.  I guess they are JUST a fixed annuity if you do not hit on the formula, granted a fixed annuity with a lower rate than a traditional fixed annuity.
Jan 20, 2010 1:00 pm
AGEMAN:
BioFreeze:
rankstocks:

Interesting, EIA's don't have fees?  I always thought the insurance company kept the dividends of the index, put a cap on annual returns, and had a participation rate, and forced you to hold it 5-15 years before you could unload it without a CDSC. 



That's what I said...No fees.

No fees because they limit your returns since they are fixed annuities.  It's like the bank who makes money by investing your money and making more than what they guarantee to you.    The fact that they have no fees doesn't make them a good investment; however.
 
So, you recommend all your clients to be 100% equities and other products that can lose money?  Seems to be a sure-fire way to leak AUM to guys who actually listen when a prospect says "I don't want to lose a penny of this pile of money."
Jan 20, 2010 4:46 pm
Gaddock:
BioFreeze:

Index annuities don't have fees. "The first thing we're gonna do is turn off those broker fees." For some reason, people like that. 

 
Ahhh yes the silver tongue man in black. I can't compete with that unless I produce returns like I did in 09. My fees are increasing by 1 point across the board this year for all accounts. That's why my goals are going to be pretty easy.
 
Me to client ... "if I find a $100 bill and give you $98 are you going to be unhappy? What about 80, 70, 60 ?????"
 
Don't get a lot of no's 
 
Who the hell finds a $100 bill and willing gives away $60 of it?  For the love of common sense trade for yourself! Please!
Jan 20, 2010 5:07 pm
joelv72:
iceco1d:

B24 - There are plenty of EIAs out there with shorter surrender periods than a Prudential or Jackson or Metlife VA.  The product itself has nothing to do with the lengthy surrender charges.

Joel - EIAs aren't "tracking" any index.  They aren't meant to be compared to any index, or any equity market.  They are JUST a fixed annuity, with a different method for crediting interest.  They are for people that will NOT accept losing money EVER, but are willing to take a LOWER minimum guaranteed rate (so long as it's a positive rate) in exchange for the CHANCE to get a higher rate.  Period.

??????  EIA = Equity Indexed Annuity.  I guess they are JUST a fixed annuity if you do not hit on the formula, granted a fixed annuity with a lower rate than a traditional fixed annuity.
 
Joel, no matter how you slice it they are simply fixed annuities.   For example, an EIA may pay a minimum of 1%, but the opportunity is there to earn more based upon how an index does.   A traditional fixed annuity may promise to pay a minimum of 2%, but the opportunity is there to earn more based upon prevailing interest rates. 
 
In both cases, the money from the annuity buyer is in the general account of the insurance company.  It's just that with an EIA, an insurance company will hedge their risk.
Jan 22, 2010 1:27 am
iceco1d:
joelv72:
iceco1d:

B24 - There are plenty of EIAs out there with shorter surrender periods than a Prudential or Jackson or Metlife VA.  The product itself has nothing to do with the lengthy surrender charges.

Joel - EIAs aren't "tracking" any index.  They aren't meant to be compared to any index, or any equity market.  They are JUST a fixed annuity, with a different method for crediting interest.  They are for people that will NOT accept losing money EVER, but are willing to take a LOWER minimum guaranteed rate (so long as it's a positive rate) in exchange for the CHANCE to get a higher rate.  Period.

??????  EIA = Equity Indexed Annuity.  I guess they are JUST a fixed annuity if you do not hit on the formula, granted a fixed annuity with a lower rate than a traditional fixed annuity.



Joel, no offense, but based on your post, I get the feeling that you have absolutely no idea what you're talking about.

This is the last I have to say, web defintion:
 


equity-indexed annuity
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Definition

An annuity whose returns are based upon the performance of an equity market index, such as the S&P 500, DJIA, or Nasdaq. The principal investment is protected from losses in the equity market, while gains add to the annuity's returns.
What am I missing?
Jan 22, 2010 6:05 am

cost = prob(gain) x (market return - EIA return)

Jan 22, 2010 10:27 am

I was told there'd be no math.