Suggestions from the experts?

or Register to post new content in the forum

64 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Feb 8, 2007 11:35 am

I have a couple, both 50 yoa, who have $500k in non-qualified money they want to put away for 15 years to use in retirement. They have a very high income and don't want to pay additional taxes from their investments.


They say they don't anticipate needing this money between now and retirement, but they don't want to lose it--of course.


I've proposed a strategy to put a portion of the money into a 10-year fixed annuity--that will grow back to $500k upon maturity--and the other portion into a VA. 


Any suggestions for a better way to handle this?

Feb 8, 2007 11:45 am

You might want to consider some tax free bonds, since all the gains in the annuities are going to be taxed when they take them out.   And the yield on tax frees in their high tax bracket will be pretty attractive.


Questions to consider are: What is their tax bracket now?  What type of income from other sources will they have at retirement and will that also put them in a large tax bracket then?  (Of course who knows what the IRS will be using as tax tables in the future, but you can use the ones we have now as a best guess)  If they don't like taxes now, they probably won't like them in the future. 


Also do they have any intentions of leaving these funds to children? If so, the annuities suck as a wealth transfer vehicle and you might want to look into life insurance.  A single premium product can be a good tool for wealth transfer.....and pays you pretty good too.   Some of them even have long term care riders to kill two birds with one stone.  You might want to rephrase that when talking about life insurance.

Feb 8, 2007 12:01 pm

In another thread, I was raving about the benefits of annuities, but I really don't like them for non-qualified money because capital gains is being traded for income tax. 


A diversified portfolio of no to low dividend paying common stocks can be a significant part of the answer. 

Feb 8, 2007 12:11 pm

Ever heard of Zero Coupon Municipal Bonds?


They have a head start, use the money to create the skelleton of a 20 year muni coupon  bond ladder(say 50M for every other year). Once they start, they are likely to add to it with some of their very high income. The objective is to have them add 50M per year which means that when they retire they will have a bond portfolio worth somewhere near 1.5 MM and an income stream of $60,000 tax free (@ 4%).


With the zeros (which are admittedly rare) but they are priced in the 50 range in 15 years (for AAA 0s) and go down from there so you could build a ladder starting there and you might get a greater compounding out of them. At maturity you could take an income and slide the remnants out to the end of the ladder to create an everlasting income stream (say you put 50M, bought 100M of mat Val, when it matured, you take out $60M and use the 40M to buy 100 bonds at the far end of the ladder.)


Mr. A


Mr. A 

Feb 8, 2007 12:13 pm

Funny how the people advocating for Annuities in that other thread are advocating against them here. Goes to show you that just because I think they are a hammer, not everything is a nail!


Mr.A

Feb 8, 2007 12:35 pm
mranonymous2u:

Funny how the people advocating for Annuities in that other thread are advocating against them here. Goes to show you that just because I think they are a hammer, not everything is a nail!


Mr.A



I guess the point that we have been trying to make is that annuities are applicable to some situations and not to others.  The expert advisor should be able to offer many many types of investment strategies based on each individual client's needs and not on the advisor's own predjudices.  The cocksure (and naive) assertion that a 60/40 split is the bulletproof investment strategy for all times and all people is going to come back and bite some guys in the butt. 


Feb 8, 2007 1:28 pm
Borker Boy:

I have a couple, both 50 yoa, who have $500k in
non-qualified money they want to put away for 15 years to use in
retirement. They have a very high income and don't want to pay
additional taxes from their investments.

So if they get $100 in income from the investments, they would prefer to give up $60 so as not to pay $40 to Uncle Sam?


Talk about cutting off your nose to spite your face.



You only pay income taxes if you have taxable income. I would love to pay more income tax.


And with QDI taxed at 15% I want more QDI if at all possible. It beats working on both a pre-tax and after-tax basis.


They say they don't anticipate needing this money between now and retirement, but they don't want to lose it--of course.


What are their return expections? This sounds like a good case for split Muni, TIPS, and stock portfolio. VG has a "tax-aware" fund that is 50% muni's and 50% non dividend R1K stocks. Other companies offer similar tax managed funds.


Of course ETF's make zero capital gains distributions. The best
investment these people could make is to learn more about what works in
investing.


I've proposed a strategy to put a portion of the
money into a 10-year fixed annuity--that will grow back
to $500k upon maturity--and the other portion into a
VA.


This sort of situation is perfect for VA with a principal garantee.
Fixed annuities are usually crap, since you can get worse return to
investing in the underlying bonds that the insurance company would do.


However its possible that muni's will smoke the total return on the annuity (when you take the cap gains haircut on the end)

Feb 8, 2007 1:50 pm

Funny how the people advocating for Annuities in that other thread are advocating against them here. Goes to show you that just because I think they are a hammer, not everything is a nail!


That was an interesting discussion. The dangers of losing principal and outliving income are real. Once we understand the goals (purpose) and beliefs (values and principles) of the client, we have an obligation to consider every solution with an open mind.


Since this cuts across the intellectual stuff of investing to include what is basically spiritual stuff for the client, our obligation comes down to good ethics to at least consider annuities.


It's just that actually putting money into annuites can be really hard, especially if you would not do that for yourself.

Feb 8, 2007 2:28 pm

"It's just that actually putting money into annuites can be really hard, especially if you would not do that for yourself." [emph mine] Planet.


How many times has a client asked you what you have in the market?


How many times have they asked you if YOU owned what you were recommending?


I tell them I have EVERYTHING in the market, my home, my food, my kid's education, everything! I do, this is how I make my living.


But I don't own most of the things I buy for my clients. I cannot and I should not either (skews the perspective). Each person is their own person and I can't make them me. Therefore, I won't judge an investment solely on whether I would buy it for myself.


I told you, this business just is not simple.



Mr. A  

Feb 8, 2007 2:49 pm

But I don't own most of the things I buy for my clients. I cannot and I should not either (skews the perspective). Each person is their own person and I can't make them me. Therefore, I won't judge an investment solely on whether I would buy it for myself.


I told you, this business just is not simple.


That's cool.


Some people would say, when all the elements "line up", this business is profoundly simple, but it is not easy.


Like, if you see more people, and are slightly more successful in how you interact, and if your case sizes are just a little bigger, then your growth is exponential.


That would be, the profound simplicity of exponential growth.

Feb 8, 2007 3:01 pm
planrcoach:

Since this cuts across the intellectual stuff of
investing to include what is basically spiritual stuff for the client,
our obligation comes down to good ethics to at least consider
annuities.

It's just that actually putting money into annuites can be really hard, especially if you would not do that for yourself.


The only annuities I use are Vanguard's SPIA annuities done with
AIG.  These make sense, and I explain to clients that we are
investing so that at the date of retirement they can buy into their own
personal pension plan. Generally it makes sense to annuitize about 25%
of the retirement portfolio with an CPI-linked SPIA.


VA's and FA's are just paying the insurance company to do stuff you
are afraid to do yourself. In that case it makes sense to go with the
simplest and cheapest providers such as VG or Fidelity.


Feb 8, 2007 3:20 pm

VA's and FA's are just paying the insurance company to do stuff you are afraid to do yourself. In that case it makes sense to go with the simplest and cheapest providers such as VG or Fidelity.


Point taken. Since FAs have to use an insurance product to accomplish risk transer (outliving income)  it's not really a matter of being afraid.


It does make sense to use the simplest and cheapest, especially if that is your business model, but you don't have to -that would stifle things like: taking risk, branding, perceived value, focus on comparative advantages, and just paying for more human interaction.  Being costco is a nice niche, some folks like to go to the mall or speciality golf shop instead of Golf Galaxy.


What a great country.


Feb 9, 2007 2:10 am
planrcoach:

VA's and FA's are just paying the
insurance company to do stuff you are afraid to do yourself. In that
case it makes sense to go with the simplest and cheapest providers such
as VG or Fidelity.


Afraid of outliving your income streams. With the right investment plan that is highly unlikely to occur.


Underneath a fixed annuity is big portfolio of 30 year bonds,


Underneath a fixed annuity with CPI-link is a big portfolio of TIPS.


Underneath a variable annuity is big portfolio of mutual funds, and some out of the money hedges.


Underneath a Equity Index annuity is a is big portfolio of bonds, and some index call options.


There is no magic, just alot of smoke and mirrors with an very expensive admittance ticket.


[quote]It does make sense to use the simplest and
cheapest, especially if that is your business model, but you don't
have to


Actully I do, because it is what a prudent man would do in the best
interest of the clients. For others the choice is "purely incidental" .


There's the sardine key again.


[quote]that would stifle things like: taking risk, branding,
perceived value, focus on comparative advantages, and just paying
for more human interaction.  Being costco is a nice niche,
some folks like to go to the mall or speciality golf shop instead of
Golf Galaxy.

What a great country.


Andy Warhol said that he loved america, because in this country Andy Warhol and Elizabeth Taylor both drink Coca-Cola.

We all have acess to the same market risk exposures.After you take
those out, investment manager alpha vanishes in a puff of fund
expenses.

What is in the best interests of clients is usually clear and
without alot of wiggle room. How you package it up and serve it is
something else.


"taking risk, branding, perceived value, focus on comparative advantages, and just paying for more human interaction"


Investment performance is pretty much a measurable thing, everything else is a human foible.


If people want to  pay for human interaction, IMHO it is more ethical to pay for that openly and directly, than to hide it in commisions and trailer fee's.


Anyways going back to the client in question and the topic of this thread.


You have a few choices among them:


1) Educate the client about investing and set up a conservative investment plan.


2) Sell them an annuity.Very likely a variable annuity --> SPIA scheme.


Choice one involves more effort on your part, pays less, but it may
add greater value to the client. Choice two, involves less effort, pays
more, but may not add the most value to the client's life. It could
also be the best fit.


All in we need to do more research to uncover the clients real
motivations and desires, since alot of these they may not even know.

Feb 9, 2007 11:39 am

1) Educate the client about investing and set up a conservative investment plan.


Amen.


What is in the best interests of clients is usually clear and without alot of wiggle room. How you package it up and serve it is something else.


Amen.


If people want to  pay for human interaction, IMHO it is more ethical to pay for that openly and directly, than to hide it in commisions and trailer fee's.


When you start using terms like "hide", this could sound preachy and a little self-interested.


Here's Mary Rowland from FA magazine, 2/7, page 58:


"Who made fee-only the Holy Grail? Seems to me it was the National Association of Personal Financial Advisors and the media. NAPFA wanted to promote its fee-only members as the cream of the crop.


The press wanted a rule-of-thumb to  help readers pick a financial planner: Get a fee-only planner ... the elevation of "fee -only" to a sacred place in planning brought about a change in the behaviour of lots of advisors who wanted to get in on that list. The changes were not always to the client' benefit."


(I know, you are saying, but I am fee-based, not fee only.)



" Why should it make that much difference how and advisor gets paid? In the rush to be redeemed, many planners have converted to fees to distinguish themselves from brokers. Theses planners need a new strategy. Soon brokers will be fee-only.  Advisors in some countries have been more creative, charging fees and offsetting them with commissions when that proves cheaper for clients.


An advisor is trustworthy. Or not. ... The real problem is the asset-based fee. That structure may make sense as a method of compensation for money management, but it doesn't work for fiancial planning. You do much more than manage money.


(Anyway, I am just getting a little tired of the apparent holier-than thou attitude of some fee based, fee only, or fee based plus commission "planners". Not you, of course. :). )




 

Feb 9, 2007 12:01 pm

"What is in the best interests of clients is usually clear and without alot of wiggle room."


What a load of crap!


There are so many variables in every person's life and they change every minute of every day and many times by forces that cannot be controlled, or will not be controlled that it is impossible to be absolutely "clear" as to what the best interests of the client are.


We can only take our best guess and give our best advice and weigh this client's situation with similar situations that we have dealt with before.


The Ayatollah of Reit is giving fervency and fanaticism  bad names!


Mr. A


Feb 9, 2007 12:39 pm

We can only take our best guess and give our best advice and weigh this client's situation with similar situations that we have dealt with before.


This is a huge part of our value proposition - experience.


If I was an advisor in the year 1999, I learned that retirees need to be very careful about assumtions regarding market behaviour in the first years of portfolio withdrawal, and share that cognitive and emotional "knowlege" and experience with newly retiring clients today.


All in we need to do more research to uncover the clients real motivations and desires, since alot of these they may not even know.


Absolutely. Another example of why experience is so valuable. Ask someone who is just starting in our profession what this means. Huh?


If people want to  pay for human interaction, IMHO it is more ethical to pay for that openly and directly, than to hide it in commisions and trailer fee's.


Now, when you attack the messenger, you attack a large number of experienced professionals in a wholesale and potentially self-serving manner. In the sense that the NAPFA and the media have latched on to "fee only" (and apparently fee based), you destroy our profession while seeking to define the playing field.


You might argue this is a competitive economic activity. Since ethics and morality always comes down to the individual practitioner level, it is ironic that any individual would condemn an entire platform (broker dealer).


Here is your point of view: What is in the best interests of clients is usually clear and without a lot of wiggle room.


I think we are talking about costs here. According to your business model, there is always the risk that you'll take on a client and won't be able to meet their needs because of your (efficient) cost structure.


So it comes down to individual situational ethics, again.

Feb 9, 2007 2:49 pm
mranonymous2u:

"What is in the best interests of clients is usually clear and without alot of wiggle room."


What a load of crap!

There are so many variables in every person's life and they change
every minute of every day and many times by forces that cannot be
controlled, or will not be controlled that it is impossible to be
absolutely "clear" as to what the best interests of the client are.


I never said it was an exact recomendation, just that the set of
appropriate and prudent recomendations tends to be small and
constrained. 


Feb 9, 2007 3:14 pm

Well, let's look at the bond portfolios that I mentioned above, from the POV of overall costs.


Fee based equaling 75 beeps/year.


Coupon bonds done with a point per.


Zeros done at the equivalent of 2 pounds per (two percent).


$500,000 at .75% = $3,750 first year.


$500,000 ladder w/ coupons = $5,000 first year.


$500,000 ladder w/ 0s = $10,000 first year.


Bonds pay on average 4% (for sake of simplicity)


2nd year, assume that interest rates stay static and thus so does market vaule.


$520,000 at .75% = $3,640


$520,000 = $200


$520,000 = $0


If you can convince the client to add the $50,000 per year...


$570,000 = $4,275


$570,000= $700


$570,000 = $1,000 (only 50 to be invested)


Let's say that the account is "managed" for the 15 years until retirement, then we'll add in the next 15 years.


The portfolio is worth about $2,160,000


Fee based collected a total of... let me wait to tell you...


Coupon bond portfolio manager.. $21,588 total costs


Zero coupon bonder ...27,000 to build that ladder!


OK you ready? Do you want to guess first? I'll wait... .75% on the bond portfolio.... for ALL of the first 15 years...



Mr. A (con't)

Feb 9, 2007 3:19 pm

The answer is $167,847! 170M dollars for doing the same work that a guy taking a point is doing for $22M!


Situational THAT ethic!


Highlight above if you want to see the answer.


Mr.A

Feb 9, 2007 4:12 pm

Allreit, I believe you are an RIA who gets a higher payout (% of fees clients pay) - than if you were affiliated with a broker dealer.


In other words, if we both charge 1% at wrap, my broker dealer keeps more.


Tell me if, or how, I am wrong in my understanding.


If your client sues you, they are suing you personally, along with your insurance policy, if you carry it.


My client sues me, also personal. In addition, they can sue my broker dealer - an extra layer of protection, if the claim is legitimate.


Since my client pays for additional protection through my broker dealer at my expense, and you remove a layer of protection by being RIA at a profit, is this a conflict of interest?


What am I missing here?


Maybe someone else knows the answer?