Guarantee 100% in ten years

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Jun 6, 2006 1:27 pm

A client of mine mentioned they were solicted a product from Equitable that guarantees a 100% return in ten years no matter what happens in the market.


Is this possible?


thanks in advance for your feedback.


scrim

Jun 6, 2006 1:29 pm

I called EQ myself and they said there is no such product.  


They did say they have something that guarantees 6% annually but to get this you have to annuitize your contract.


scrim

Jun 6, 2006 2:00 pm

Yes it is possible.   ING has an annuity that has a guaranteed 7% annual compounded living benefit.  Yes, you have to wait 10 years and must annuitize to receive the benefit.  But as long as the client is aware of these conditions, aware that they are paying for this benefit and hasn't put all of their money in the account, I don't see an issue.


If the contract market performance is greater than 7% annually (which we hope will happen) then they don't have to annuitize they can take the market value and withdraw as they see fit.  If the market performance is less, then the client is guaranteed an income stream on his higher 7% return.


This seems like a good safety net to me.

Jun 6, 2006 2:30 pm

Scrim,


It is this kind of product that you will forever be competing with.  Sure, the costs are higher, but the client is paying for a guaranteed double, with some nice income options, and contracts are just getting more and more competitive.  The key to your success is recognizing which clients are willing to accept the risk (your managed money account) in return for potentially greater reward, vs. which ones are uncomfortable with fluctuation and should definitely be steered toward a product that guarantees their principal, which providing a respectable, albeit lower average annual return (the variable annuity).  Embrace the alternatives and watch your business blossom.


A nice added side-effect is that the VA business is much easier to move if you decide that life in the bank no longer agrees with you.

Jun 6, 2006 2:45 pm

wow!


indy "senior members" recognizing that the lowly and hated annuity has a viable place in some portfolios-- what next, a cure for cancer?


Jun 6, 2006 3:20 pm

Indy,


Point well taken.


My feeling is that if I offered side-by-side both options most people would take the guarantee.


As I've always said, I hesitate to place my client's hard earned assets in products they cannot reasonably understand.    VA's are convoluted IMHO so I refrain from using them.


I don't want to build my practice that way; unless I absolutely feel they will keep their assets in cash otherwise.     So far, I feel I've lost very little business by recommending non-insurance products.


When, not if, we have a market correction or bear market perhaps I will rue building my practice this way.   I'm just more comfortable builiding this way but the problem of course is I should be making my clients more comfortable as opposed to myself.   It's almost a conundrum!


scrim


Jun 6, 2006 4:19 pm

Scrim,


Do you really think your clients understand completely the amortization on their mortgage works, how their health insurance premium was determined, or even all the details of their 401K at work?


Most folks do not.  You are the expert Scrim.  That's why you are a paid professional.  You are supposed to make recommendations, and explain them clearly, but in the end, it's still up to you to do whats best for the client.


If someone would be more satisfied with 2% less return and a guarantee of principle and and guaranteed income for life (many times w/o annuitization), then you should give that to them.


If a man wants a brown suit, sell him a brown suit.

Jun 6, 2006 4:33 pm

I don't think they fully understand the above, however, I do believe they understand it more than an insurance contract.


Asset allocation is a much easier concept to grasp.


If we are the experts, don't we have a fiduciary responsibility to put their assets into the products that best (brown, gray, charcoal) suits their needs with a reasonable cost, tax implicatons and liquidity?


Perhaps one day I will be able to make a case for VA's but until that day comes I am bound by my conciousness to build my practice the way I feel is best.


YMMV


scrim

Jun 6, 2006 4:38 pm
TexasRep:

wow!

indy "senior members" recognizing that the lowly and hated annuity has a viable place in some portfolios-- what next, a cure for cancer?


 Maybe I'm an anomaly, but I've never felt that VAs don't have a place at the table...

Jun 6, 2006 4:51 pm

"reasonable cost"


Scrim, I respect your seemingly good work ethic and genuine concern for your clients interests, but I do question your willingness to learn new products (even if you are to learn you don't want to use them).


VA's cost in my opinion are reasonable.  Take for example John Hancock Venture VA.  M&E of 1.15 (pays for the guarantee), and subaccount allocation models (rebalanced daily) for between 0.80% (index allocation) and 1.19% (I'm quoting these numbers from my head, but I think they are accurate).


So you are all in for around 2% (maybe 1% more than your avg mutual fund), plus you get the safety of the guarantees.


Food for thought.

Jun 6, 2006 5:01 pm

cost if very reasonable in the above case.    I'm talking about some of the contracts where the costs are much more prohibitive.....with all the bells and whistles they can approach 2.5-3%.


I also enjoy keeping assets liquid and tax implications at withdrawal favorable.


I'm not saying all VA's are bad, that would be a stereotype.    I just choose not to use them in my practice in almost all situations.


scrim


Jun 6, 2006 5:02 pm
Indyone:
TexasRep:

wow!

indy "senior members" recognizing that the lowly and hated annuity has a viable place in some portfolios-- what next, a cure for cancer?


 Maybe I'm an anomaly, but I've never felt that VAs don't have a place at the table...




maybe you are....but more often than not, whenever the 2 words: annuity/bank get mixed in the same sentence, the indy and wirehouse guys come out with guns blazing about how all bank FA's sell annuities to little old ladies----- all the while, the trophy $15,000 fee based acct NEVER gets scrutinized, in fact it's held up as the standard, as if these accts, 1 year and 2 years in, are really going to be getting the attention they are paying for--




Jun 6, 2006 5:03 pm
scrim67:

I don't think they fully understand the above, however, I do believe they understand it more than an insurance contract.

Asset allocation is a much easier concept to grasp.


If we are the experts, don't we have a fiduciary responsibility to put their assets into the products that best (brown, gray, charcoal) suits their needs with a reasonable cost, tax implicatons and liquidity?


Perhaps one day I will be able to make a case for VA's but until that day comes I am bound by my conciousness to build my practice the way I feel is best.


YMMV


scrim


Scrim, I've been in your shoes, and I've questioned the VA much as you do, but the bottom line is, you have to make the investment fit the client's profile.  Before you recommend anything, you need to spend some time getting to know the client/prospect, their likes/dislikes, risk tolerance, etc.  Usually, by the time I'm done with the profiling part, I already know what the client wants/needs.  In rare instances where I'm not pretty positive as to what fits best by that point, I'll lay the alternatives side by side and go through a pro & con with the client/prospect and help them reach a conclusion.  Usually, though, by that time, it's obvious if they are a fee-based, or retail mutual fund, or municipal bond, or VA, or whatever-type of client, and that it what I recommend.


If you spend some time really learning a couple of good VAs, and then really profile your clients, you'll find they will fit other products like VAs more often than you think.  If you steer that kind of client into managed money, my experience is that you'll spend a lot of time hand-holding in the next market downturn and still have some nervous clients cashing perfectly good investments at the bottom of the market.  At that point, it really doesn't matter if you or I think that the investment being liquidated was the best choice for the client...the best choice is the one that they'll keep...

Jun 6, 2006 5:04 pm

the guarantees are covered in the M&E?


The contracts I've seen that have a GMIB usually cost around 40-60 basis points and I was always under the impression it was a separate fee.


Can any experts clarify as VA's are self admittedly not my forte?


scrim

Jun 6, 2006 5:05 pm

Scrim,getting back to your original question,It is your principle is protected 100% and will be returned( they allocate a portion to fixed and a portion to subaccts) . NOT A 100% RETURN ON THE INVESTMENT.

Jun 6, 2006 5:06 pm

Excellent post Indy.


That is why I always "sell" myself first and not a product.


I hope this strategy helps when we hit a bear market!!!!!


Time will tell.


scrim

Jun 6, 2006 5:08 pm

Waterboy,


I was told it was 100% on the investment.    


There money will double in 10 years worst case scenario.


scrim

Jun 6, 2006 5:08 pm
waterboy:

Scrim,getting back to your original question,It is your principle is protected 100% and will be returned( they allocate a portion to fixed and a portion to subaccts) . NOT A 100% RETURN ON THE INVESTMENT.


Au contraire...some annuities guarantee principal only and some guarantee a double, which is basically a 7% return for 10 years.

Jun 6, 2006 5:25 pm
scrim67:

the guarantees are covered in the M&E?


The contracts I've seen that have a GMIB usually cost around 40-60 basis points and I was always under the impression it was a separate fee.


Can any experts clarify as VA's are self admittedly not my forte?


scrim



Although far from an expert, I know that SOME VA benefits are built into the M&E's but most are "a la carte".

Jun 6, 2006 5:35 pm

"At that point, it really doesn't matter if you or I think that the investment being liquidated was the best choice for the client...the best choice is the one that they'll keep"


Indy,


I respectfully disagree with you on this one.


If this was true, I'd put clients into the investments they perceive as the most safe.    Their accounts would probably only grow around 5% annually before taxes.   I would probably never lose the accounts though!


scrim