[quote=ChrisB][quote=anonymous]

Bust on annuities all that you want.  My annuity clients outperform my mutual fund clients.  This is because the guarantees of the VA allow the annuity clients to invest more aggressively.

Take a conservative client and have them invest aggressively.  If the client is in mutual funds, they will pull money out if the investments go down.  Thus, conservative clients can't invest aggressively in mutual funds.  If the same client invests in a VA with a guarantee and they invest aggressively, they won't move money if the market goes down.

The end result is that the guarantees of the VA allow one to invest in a manner that is greater than their risk tolerance.

The cost of a good VA is not that much more than a good mutual fund portfolio and can be less expensive.

[/quote]

I could not agree more. 

[/quote]

You shouldn't invest in annuities or mutual funds, they're both too expensive and have too many tax issues.

[quote=AllREIT] [quote=Bobby Hull]

Joe, let's talk about your YTB comment. If I sell an annuity for $100,000, I gross $7500. If you charge a fee on $100,000, how much do YOU gross in 7 years? What if you assume 10% compounded, annual growth? Tell the truth.

[/quote]

I can't believe I'm actually responding to this.

But here goes.

Final Value of $100,000 spent on an annuity assuming 7.5% load, and 1.5% expense ratio, assuming 10% CAGR.

92.5*(1.10-0.015)^7:163.738

Most VAs don't take a load off the top so your equation should read:
100*(1.10-0.015)^7:177.014

Final value of $100,000 invested at a 1.25% expenses ratio.

100*(1.10-0.0125)^7:179.889

----
Net difference to client 179.889-163.738:16.151

Net difference to the client is now 179.889-177.014:2.875. 

So buying the VA cost the client $16,151 more vs just straight up investing @ 1% management fee and 0.25% ETF expenses.
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So buying the VA cost the client $2,875 more vs just straight up investing...so the question is, is a guarantee of lifetime income worth this much vs. being 100% exposed to equities?  If the markets do return 10% both clients will reach their goals.  However, I believe most people that have any angst over the market at all will pay this extra amount, others that have no worries won't (and are probably do it yourselfers anyway).  

Now most advisors don't put clients age 50+ in 100% equity portfolios.  Add 35% bonds (or cash) at 5% and now the after expense return drops to 7.4% and the result is $164,830. 

So buying the VA earns the client $12,184 more vs investing in a balanced equity/fixed income portfolio (that still doesn't have any guarantee).


[/quote]

Allreit, your post shows that you don't understand the product.  Additionally, it makes the assumption that the person would invest in the same manner inside and outside of the annuity.

The guarantees of the annuity allow the conservative investor to invest more aggressively inside of the annuity than outside of it.

At least if you are going to compare, do it properly.  The VA that I tend to use is "all in" at 2.3%.  Just because I get paid upfront, doesn't mean that the client pays.  It is part of the 2.3%.  A fair comparison would be an aggressive VA portfolio with total expenses of 2.3% vs. a conservative portfolio of something else with 1.25% (or whatever the % of the something else).

anon:

Do you invest every annuity client aggressively? Also are YOU doing the investing or the client? Do you make tactical changes to the portfolio? Do you have discretion with regard to the portfolio?

I'm just curious about the management of the investment in an annuity. My experience with annuities (from Jones) was that it was difficult for the advisor to manage them. Of course, the systems at Jones sucked monkey butt anyway.

Can you create your own model portfolios and then change them globally when appropriate? This is not meant to antagonize...

But he reads Suze and Suze says…

Suse eats monkey butt.

Suse eats monkey butt.

With very few exceptions all of my annuity clients are invested aggressively and we're dealing with qualified money.   I don't see an advantage for someone if we are investing conservatively.  I also don't see an advantage of the annuity if the client would invest aggressively outside of the annuity and stay invested aggressively.

We're using model portfolios, so I can make changes, but the changes are limited to the models.

I need to ammend my first sentence.  All of my VA clients start out investing aggressively, but with many, we have changed to be much more conservative.

Ex. Conservative client is willing to invest aggressively, but only if he can't lose money.  He invests $300,000 initially.  The account is now worth $420,000.  We may start to invest more conservatively because the guarantee is for $300,000 and he wants to keep his value at above $420,000 now that he has it. 

Thanks!

You're welcome.  I'm not pro or anti-annuity.  Sometimes, I run into client situations where they are the best solution.  Most of the time, they aren't the best solution.

Buying an annuity is roughly twice as expensive to the client as having your assets managed for 1.25% all in.

Plus, they are confusing as h*ll. The rep gets paid up front, versus over time. When was the last time you paid someone up front for six years worth of yard work?

Let's focus on the consumer a little, rightly or wrongly, they are all confused, and the commission part is a big problem.

In your heart, everyone knows there is something wrong with commissions when it comes to dealing with a professional who provides comprehensive advice and service over time. Problem is, we are stuck with a very dysfunctional system - why does this always end up detracting from the overall integrity of " us "? We are just victims of the system. Change can happen slowly, or fast, it is our choice.

In your heart, everyone knows there is something wrong with commissions ...

My heart doesn't know this.  My heart does know that I prefer to work with fees because fees pay me more.

You’re only paid in annuity upfront if you so choose. Many have options and many times reps choose the 1% per year option. So how again in this scenario would you use the commission vs. fee argument?

[quote=bankrep1]The 7.5% doesn’t come off the top moron, I hate people
like you that bash something and they don’t even know how it works. [/quote]



Then where does that commision come from? From the land of magical fairy dusts?



Even if you ammortise it over the life of the annuity. You end up with  same result. There is a heavy economic cost to annuities.



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Scenario Underlying investments grow 10% CAGR, and investments costs of 1.25% (managed account) or 1.5% (annuity) and 7.5% load.



0.075/7:0.011 per year ammortisation.



92.5*(1.10-0.015)^7:163.738 <— Take the 7.5 Load up front.



100*(1.10-0.026)^7:164.828 <— Take it the 7.5 load out over 7 years straightlined.



100*(1.10-0.0125)^7:179.889 <— Invest straight up.



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So Bankrep, would you like to buy an annuity?

[quote=anonymous]

You're welcome.  I'm not pro or anti-annuity.  Sometimes, I run into client situations where they are the best solution.  Most of the time, they aren't the best solution.

[/quote]

The difference between you and I and others who use annuities on occasion when it is appropriate and the guys who say annuities are never good, is that we are willing to be more flexible with the client's money and understanding of their emotions.

I also have been in the business long enough to see several up and down markets and know that there is no sure thing or bullet proof portfolio.   I don't care how much portfolio theory you use or how actively you manage it, there is NO guarantee in an equity portfolio.

Does the client give up some of the possible gain by being in an annuity with higher expenses? Of course. Risk adverse clients will sleep better with the guarantees, and as Anon says, we can then get them to actually invest in a more agressive manner.

[quote=anonymous]

At least if you are going to compare, do it
properly.  The VA that I tend to use is “all in” at 2.3%. 
Just because I get paid upfront, doesn’t mean that the client pays.  It is part of the 2.3%. 
A fair comparison would be an aggressive VA portfolio with total
expenses of 2.3% vs. a conservative portfolio of something else with
1.25% (or whatever the % of the something else).

Then where does that commision come from? From the land of magical fairy dusts?

Even if you ammortise it over the life of the annuity. You end up with  same result. There is a heavy economic cost to annuities.

You really don't get this do you?   Let me type veeeeery slooowly so you can understand.

The money comes from the insurance company, not taken from the clients annuity.  The insurance company makes a profit...gasp.....hard to imagine that they are in business to make money, but there you have it.  In order for them to get more of their annuities sold, they pay agents to market their annuities.  

You cannot amortize the commission paid to the agent over the life of the contract because it wasn't paid by the client and you don't know what the life of the contract is going to be.  You can deduct it from the companies overall profitability. 

Annuities have surrender periods during which if the client withdraws the contract the annuity company takes back money from the client (surrender charge). Money that would offset some or most of the commissions paid to the agent.  If the client withdraws the annuity within a short period of time sometimes the agent is also charged back for a portion of their commissions.   This is why we make sure the client understands and will keep the product. 

How do they make a profit.? Lots of ways.  They charge an annual fee, they charge M&E fees, they charge extra fees for the extra benefits.  The reality is that the benefits are rarely used so the insurance company gets to keep those fees.  More profit.  But IF the rare client does actually use the enhanced death benefit or the GRIB the company has plenty of reserves to cover the losses on that one particular contract by the millions of other contracts that pay the insurance costs but don't use them..   

Think of it like your house insurance or your life insurance, now there's an expensive cost over time. Unless your house burns down or you drop dead you are just money out of pocket.  Do you feel gyped that your house didn't burn down?   Do you amortize the cost of your home insurance into the value of your home and feel that your house should appreciate by that exact value? 

allreit, I really hope that you are a rookie or your brain went away for the weekend before you did.

Do you understand "B" shares?  It's the same thing.  The company pays out commissions before they are earned which creates the need for the surrender charge.

If the upfront commission came directly from the client, the ongoing expenses would be lower, thus you'd have an "A" share annuity.

Thanks for explaining Dust Bunny, again Allreit learn about something before you choose to knock it. You make yourself look stupid calling someone else stupid when your wrong!



To keep it simple, part of the 1.25% goes toward commissions costs. Let me say agian the client pays 0, 0 upfront, 0 amortized. You cannot compare the costs of annuity to a mutual fund that is like comparing apples to oranges. Oh ah oh ! If someone sat down with a reporter and explained a fee based account vs. a VA you wouldn’t see anymore negative articles about fees.

[quote=Dust Bunny]The money comes from the insurance company, not taken from the clients annuity. 
[/quote]

So you do beleive in the tooth fairy.

That statement makes about much sense as saying "The money comes from the government not from the tax payer".

[quote]You cannot amortize the commission paid to the agent over the life of the contract because it wasn't paid by the client and you don't know what the life of the contract is going to be.  You can deduct it from the companies overall profitability. [/quote]

That's nice, but it is not how the IRS nor Auditors account for things.

See that line item for "Deferred Aquisitions Cost"

[quote]Annuities have surrender periods during which if the client withdraws the contract the annuity company takes back money from the client (surrender charge). Money that would offset some or most of the commissions paid to the agent.  If the client withdraws the annuity within a short period of time sometimes the agent is also charged back for a portion of their commissions.  [/quote]

That comes from the accelated amortisation of the comission. If the Amortisation is higher than the run rate profit, you charge the agent back. Otherwise the insurco is paying out more than it takes in. That's a big no-no.

[quote]How do they make a profit.? Lots of ways.  They charge an annual fee, they charge M&E fees, they charge extra fees for the extra benefits.  The reality is that the benefits are rarely used so the insurance company gets to keep those fees.[/quote]

Except for the amount of fee's that they kickback to the agents for selling the contracts. That is an expense which gets spread out over the life of the contract.

I'm starting to think that the biggest take away from this thread is not that annuities are bad (everyone knows that), but of how many people need to take Accounting 101/102.

[quote]Do you amortize the cost of your home insurance into the value of your home and feel that your house should appreciate by that exact value?