Riversource innovation

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Jan 15, 2010 8:01 pm

So I have been researching for a variable annuity for those Clients who are looking for income 3 to 5 years from now and came up with riversource innovation where the income base increases to 20 percent of original premiumt after 3 years which at that time the clients can withdraw 6 percent income for life. Looks pretty good to me but anyone see any negatives with this contract. Rider costs about 1.1 for single and 1.5 for joint life

Jan 15, 2010 10:01 pm

I think you may be misunderstanding the rider.  It's called SecureSource Flex.  It basically means that after 3 years (and be at least 65 yrs old) you can withdraw 6% of the annuity for life.  Immediately you can withdraw 7% for 14.2 years.  If the contract drops 20%+ of the original contract value then the withdraw rate drops to 5% for life, until it gets back to within 80% of the original value.  As the value of the contract increases then on the contract anniversary there is a step-up in the basis where the new value is locked in and the income is now guaranteed based off the new value. 

 
As of right now its the only variable annuity that I can sell.  Starting in a couple months we'll have a few more added to our arsenal.
Jan 15, 2010 10:19 pm

No. I think we are talking about a different annuity product through riversource. There is a 20 increase in income base after 3years

Jan 15, 2010 11:17 pm

What's the name of it? 

Jan 15, 2010 11:41 pm

3rd, trying to be positive here. If the client (and the advisor) understand the terms you described (seriously, I worked late tonight closing a big add-on to a wrap account by drawing pictures), can't the issuer just raise the internal fees if the market underperforms? Doesn't that kind of undermine the guarantee? How do you sell this this idea?

Jan 16, 2010 12:24 am

This happened last year.  What Riversource did was this:  Jan 10, 2009 - Put out announcement that the last day to make new sales under the current terms/fees is Jan 25th.  The company guaranteed that the fees on existing contracts wouldn't increase, but there were no more allowable add-on purchases after Jan 25th.  After Jan 25th all new sales would be under the new fees, which were about .15% or .2% higher than what the pre-Jan 25th contract fees were.

Jan 16, 2010 12:35 am

So, Riversource guaranteed that fees on existing contracts wouldn''t increase? I thought any variable annuity contract with any insurance company could be subject to a review of fees if the insurance company experience adverse conditions.





 
Just trying to understand.  At one point, RVS had a contract that would pay out 6% for life at age 65, (withdrawals decrease the principal) and the survivors got anything that was left  on the subaccounts, after performance and fees- but the internal fees could change.
Jan 16, 2010 1:40 am

Sorry about the wording.  There is a "maximum fee" in the prospectus that hypothetically if worse came to worse they could increase the fee.  I meant it more as a "We are not going to increase the fees on the existing contracts, but we are going to increase the fees for new contracts."  Shouldn't have said 'guarantee'.

Jan 16, 2010 2:12 am

Yeah. I just don' get those contracts. I mean, they provide guarantees, but the internal fees can go up if the insurance company has an adverse experience with the investment portfolio. It's hard to understand the benefit of risk transfer through a contract. That's why I don't use them.



In old contracts, what does the company have to do to justify raising the admin fees? I just don't understand, everyone talks about the bells and whistles, but from my point of view, basically you are buying the promise of an annuitized contract, a pension. You could annuitize the money at any time, so the real value of the contract is the potential for tax deferred growth, which could be nice IF the market does well. Just trying to understand here.
Jan 16, 2010 2:39 am

The only annuities I've been selling the past few years have had a guaranteed withdrawl benefit living rider on them.  Take for example:

 
Client buys $250,000 annuity in 2003, with auto step-up each year if contract value is higher.  Guaranteed 6% withdrawl for life starting at age 65.  Annuity is worth $350,000 on anniversary date in 2007.  That amount is locked in, so the client's guaranteed income will never go below $21,000/yr (6% of $350,000).  At the end of 2008 the annuity is worth $280,000 (No withdrawls up to this point, account lost 20% in market performance).  Without the step-up, they'd now be withdrawing $16,800 to get the 6%.  In a regular brokerage account they'd be withdrawing less than that because 6% wouldn't be a safe withdrawal rate throughout retirement.  Say the $280,000 was in a fee-based IRA in a bunch of funds.  The safe withdrawal rate would be 4%, and they'd have to take out only $11,200.  With the living benefit rider of the annuity they bought, they got themselves an extra $10,000 of income due to the step-up in their annuity.  Of course this example worked perfectly because of the 2008 collapse, but this really happened.  This situation probably rang true for a lot of folks out there.
 
Over time the markets will go up and accounts will continue to rise, but a ton of people will begin to start making withdrawls in one of those years where things don't go exactly right and they'd be glad they locked in their income power.  For many people they wouldn't mind paying 1% or so for this kind of insurance. 
Jan 16, 2010 6:19 am
Please bear with me, I'm not trying to be difficult, and I appreciate your investment of time and energy.
 
So, if I understand, the client begins the 6% annuity withdrawal at age 65, with the option to pass on whatever principal is left to the survivors, at death.
 
I imagine the 6% payout stops if the client takes any principal? So you wouldn't put all of the portfolio into the annuity, which means you could have invested the annuity money in stocks and bonds, and taken the "6%' from a side fund of cash or short term bonds in down years, and left the stocks and bonds alone?
 
So yeah, under perfect conditions, the annuity lock in created value.
 
But looking over ten years, say, in a flat stock market, no real advantage. The real benefit is an annuitization type feature, " you leave the money alone, and you get 6% for as long as you live, and if there's anything left, you can pass it on to your heirs?"
 
Without the annuity, until age 65, I go 60% stock and 40% bonds, at age 65, I go 30% stock and the rest fixed, with a 4% withdrawal rate. (And take 2% from a "side" fund of cash. With a 4% withdrawal rate on that mix, I can probably get an inflation adjustment each year from the withdrawal.
 
"Annuitizing", taking a 6% withdrawal rate from the variable annuity, the first few years I come out ahead, but there is no COLA. When I think of annuities and insurance, I think of insurance against the risk of living too long, and transferring that risk to folks with a shorter life span, and sharing the profits with an insurance company.
 
I don't see how you locked in income power. What am I missing here?
 
Is there a "feel good" feature. So, client locks in 350k at age 65 at 6%, and the market and subaccounts go down - does the statement still show 350k, or does it show the value of the subaccounts?
 
Because, basically all you are doing is saying, you can continually recognize program A, which is, we annuitized 350k at 6%, with the potential for increases going forward if the market does well.
 
But, we're going to subtract 6% per year from the subaccount value, minus expenses.
 
I only kind of get it. Logic says, it will be harder to make money going forward, and downward volatility will win. In down years, if the market goes down 25%, you have to go back up 35% the next year to get back to even. (Plus withdrawal amount.)
 
It seems you end up with the major feature being the annuitization, along with the M&E expense and the proprietary fund fees.
 
Is there any objective research to prove the viability of these contracts - I'm sure there's value in peace of mind, but it feels like smoke and mirrors, especially with regard to having your money locked up.
 
Very few folks will choose to annuitize money, not saying that's smart, just reporting the fact.
 
Believe me, I have studied the RVS product, but I just can't hack it.
Jan 16, 2010 7:23 am
skbroker:

So I have been researching for a variable annuity for those Clients who are looking for income 3 to 5 years from now and came up with riversource innovation where the income base increases to 20 percent of original premiumt after 3 years which at that time the clients can withdraw 6 percent income for life. Looks pretty good to me but anyone see any negatives with this contract. Rider costs about 1.1 for single and 1.5 for joint life


 
First of all, this post makes no sense.  If it increases to 20% of the original investment, then a $100,000 investment becomes $20,000.   Anyway, I don't know exactly how this works, but I can address the negatives of this type of contract in general.
 
1)The high fees are a major drag on accumulation. 
2)The fees are much higher than they appear.  When one starts withdrawing money, it is very possible that all that the person will get is the guarantee.
 
These are like cross training shoes.  They are mediocre for a bunch of purposes, but good for nothing.
 
Examples:
1)High Fees: On a $250,000 investment, an extra fee of 1% will typically cost the client $100,000 in lost accumulation.  $250,000 growing at 7% will equal $689,000.  $250,000 growing at 8% will equal $793,000.  1.5% in extra fees will bring it down to $643,000.
 
2)Fees are higher than they appear:  Client invests $100,000.  Market crashes.  Client has contract value of $50,000 and a rider value of $120,000.  How much does the rider cost?  $1,320.  What is this as a percentage of the contract value? 2.64%  What are the M&E and admin expenses? 1.5%?  Fund expenses?  1.0%?  All of a sudden, the client has an investment that has an expense ratio of above 5%!
 
Assume that the market does well and the contract value comes back to the level of the rider value.  (Keep in mind that without that rider, the contract would now be well above the rider value.)  What happens at withdrawal? 
 
The client has $120,000 and is able to take 6% ($7200).  Let's assume that they take this money and the market stays flat that year.   What happens?  Rider fee =$1,320.  All other expenses =$3000.  Total fees = $4320.  $4320 +$7200 withdrawl =$11,520 being removed from the investment.  The contract value now equals $108,480.   Forget the calculations for a minute.
 
You are trying to take 6% out of an investment that has fees in the 3% neighborhood (and much higher when the contract value goes down).  The very likely outcome of this is that the contract value will go to zero which means that all that the person receives is the guarantee.
 
It's smoke and mirrors.   There are better products for accumulation.  There are better products for income.
Jan 16, 2010 10:34 am
anonymous:

[

2)Fees are higher than they appear:  Client invests $100,000.  Market crashes.  Client has contract value of $50,000 and a rider value of $120,000.  How much does the rider cost?  $1,320.  What is this as a percentage of the contract value? 2.64%  What are the M&E and admin expenses? 1.5%?  Fund expenses?  1.0%?  All of a sudden, the client has an investment that has an expense ratio of above 5%!
 
The percentage of the rider cost would always stay the same.  If its 1%, then if the value drops to $50,000 then the rider cost would be $500.
 
Another thing:  If a client knows that they have their income locked in and the amount they can take out can never decrease, wouldn't that hypothetically mean that their risk tolerance on this investment can be bumped up 1 or 2 notches?  A 65 year old that is otherwise Conservative can invest in this closer to Moderately Conservative, right?  There's a little extra leeway as far as investing goes, and over a 10-15 year period would you think thats good for at least 1-2% per year?  As long as the market doesn't suck over that period?  I'm not trying to sound like a wholesaler but thats not a bad example right there.
Jan 17, 2010 9:29 am

3rdyrp2,


Do yourself a huge favor.  Read the prospectus and then post again. 
Jan 17, 2010 10:01 am

... What are the M&E and admin expenses? 1.5%? Fund expenses? 1.0%? All of a sudden, the client has an investment that has an expense ratio of above 5%!



On the whole, I agree with most of the post. But ... there are a couple of overstatements here. Generally speaking the fees associated with insurance funds tend to be lower from what I've seen than is normally available in ... let's say A shares. On the whole, the performance suffers not one wit.



And I haven't placed an annuity with higher fees than 1.35 for M&E. I'm quibbling, I know. I do place variable annuities, with the express statement that they are expensive tools and only a part of one's portfolio should be placed in them. In point of fact, I used one recently (1035 exchange, out of surrender) in a NQ account to give the client exposure to international funds he couldn't get through his 401k.





Jan 17, 2010 10:55 am

Riversource is actually higher.  It is 1.55 M&E + .15% Admin fees.  Additionally, the typical fund expenses are higher than 1%.  They charge a management fee + 12b1 fee + other expenses.

 
If I made an overstatement, I'd like to hear about it, but I don't think that I did.
Jan 17, 2010 12:04 pm
anonymous:

3rdyrp2,


Do yourself a huge favor.  Read the prospectus and then post again. 
 
That I did.  You are correct. 
 
Nonetheless, I think there are a lot of people out there that would pay for this type of insurance to protect a part of their income.  This fee is nothing different than charging someone 1.5% in a wrap account.  Only difference is the insurance company keeps the fee instead of the advisor.
Jan 17, 2010 1:31 pm

Do you understand the impact of the fees?  Assuming 1% fund expenses, the fees are 3.8% at the very cheapest.  In a down market, the fees are much higher than that. 


If the underlying investments get 10% for 15 years, a $100,000 investment would equal $417,000.  With the fees, it would equal $246,000 at the most.
 
What happens with withdrawing money?  If one tries to take 6% out of an account that has fees of higher than 3.8% (and very possibly higher than 5%) do they have any reason not to expect their contract value to go to zero?
 
It's different from a 1.5% wrap account because the total fees are much higher and a wrap account doesn't increase their fees as the account value decreases.
 
It's the decoupling of the fees from the contract value that really screws the client.
 
Jan 17, 2010 5:32 pm

Good points, Anonymous. And thanks for the discussion, P2.




 
In the end, I can't see where these annuities are in most clients' best interest. In fact, P2, I hope you are doing your due diligence.
 
Annuitizing a certain amount of money makes sense. But using an annuity as an accumulation vehicle probably doesn't, for the reasons mentioned. If I am in a high tax bracket, maybe, but then, I'm probably wanting more a more "sophisticated" portfolio.
 
I think the problem with all of this is it confuses folks about the true value or trustworthiness of financial advice. Using smoke and mirrors to make folks feel good can backfire.
 
I suspect the insurance company is also banking on a number of folks needing to invade principal during the withdrawal phase, thus voiding the guarantees? Look at long term care insurace, product manufacturers assumed these policies would have a high lapse rate (like term and perm) - and in fact folks have held on to them, and now the premiums on old policies, which were designed to be level, are being jacked up.
 
How can you feel good about placing money in something that has the potential to blow up for the client? Compared with, say, at retirement, placing 1/3 of the money in stocks, and the rest in cash and bonds.
 
I'm sorry our industry still struggles with honesty issues.
Jan 17, 2010 5:41 pm

Ice, you're right. I was thinking in this case, use the VA as an accumulation vehicle, and then annuitize the (untaxed) growth and principle, based on the owner's life expectancy. Annuities are lousy estate planning vehicles.


 
To maximize the value of untaxed growth, you have to take on more risk (even if it's high yield bonds) - that doesn't really go along with the whole idea of feeling good about guarantees, experiencing less volatility, and so on.
  
One of this biggest "features" of the product is the guaranteed withdrawal rate, while technnically not an annuitized contract, acts like one. They are in effect preselling the withdrawal feature, and the only thing you can put up against the high expenses (that you couldn't get outside an annuity or life insurance contract), in non qualified money, is tax deferred growth.