[quote=bankrep1]I know earnings don't drive a stocks short term price. FOr example MSFT might trade at 20X and then trade at 10X even though earning rose the stock price can be less I get that.

What I am saying is that there is no way that all stocks will tarde lower in 10 or 20 years. Why because earnings rise with inflation. Is anyone gonna make the argument that we won't have inflation?

VA's will become more and more common. I think the fees and commissions will come down. Guess what I will still use them, they are a great risk management tool.[/quote]

I disagree with the statement: there is no way that all stocks will tarde lower in 10 or 20 years.

No way huh?  There are no stockmarkets in the entire world in all of history (last couple hundred years or so) that have ever traded lower over a 10 OR 20 year time horizon?  I know of a few periods here in the US and one in particular in Japan.  Hell the Nasdaq is on track to be trading lower for a 10 year cycle......if not longer.  What about Japan?  C'mon now.

I hate to agree with NASD but you are wearing your ignorance on your shirt sleeve with the above statement.

In addition you definitely shouldn't be selling VA's with a guarantee if you believe that: "there is no way that all stocks will tarde lower in 10 or 20 years."

Pretty much makes the guarantee useless if that's the truth.

[quote=munytalks][quote=Maxstud]

Muny,

Thanks for the info, I do understand what your saying and I think that is a very valid concern.  I just find that quoting percentages to people is just like quoting the cost of something by saying it will only cost $2 a day.  What's wrong with giving them the real numbers and facts so they can make an informed decision.  A decision that is the most important one in their lives.

Does BankFC really know what that 3/4 of a percent really costs?

[/quote]

Max,

ABSOLUTELY agree with you there. In fact, since going INDY and getting the 24 I make certain we go over all options. AND then have the client sign acknowledgement of same. Regardless, no client has 100% of assets locked into an annuity. 

And on another note, how was Summer Regional? Did you have that free drink on me?

[/quote]

It was OK, I'm not real big on group activities but the kids loved hanging out at the pool and we did get away from everyone in the afternoons.  I did pop into the hotel bar to get that free drink on you and got into a very weird conversation with a lady from MI who was there for an insulation convention.  My wife bailed on me early in the conversation and it took a bit of effort to remove myself.  The downside to being Maxstud I guess. 

Theory and reality often collide.  I love all the pawns that put their faith in the Nobel prize winning GODS of finance. 

Yeah, did you give your money to LTCM too?  Oops, did I just get down to brass tacks or what?  

Wake up people, it's HUMAN BEINGS who drive the market with all their complex issues.  If the market was as easy to quantify and serve up as all the theory pundits would have you believe, the market wouldn't exist since all risk and therefore opportunity would be squeezed out.  Makes for great marketing and establishing a paradigm to try and understand specific aspects of the market, but still far from REALITY.

Truly understanding the market is like truly understanding women......an excercise in madness.  It's fine for technicaly oriented subjects like math and physics, but as we all know as sales people; EMOTION is the dominant driving factor in the world (and therefore all things of the world including financial markets).  If human beings were as motivated by logic as emotion, we would live in a much different world.

[quote=NASD Newbie][quote=Indyone]That’s exactly what I’m saying.  Pretty neat, huh?  The insurance company is banking on the market going up over time and skims about 2% off the top for their charges/guarantees.  My decisions are, of course limited to which managers (on the company’s approved list of managers) I park the funds with at any given time.

Unlike what Suze Orman says, variable annuities are not of the devil.  Many of the newer ones come with some very reassuring guarantees.[/quote]

And the commissions are the most compelling reason to shove them down unsuspecting client's throats?[/quote]

If that were the case, they would certainly make up more than 4% of my book, wouldn't they?  They pay a little better, but I don't sell any that pay more than 4% up front/1% trail.  The thing that will blow you away is that when asked, I tell them exactly what I will make...and I've never lost a sale over it yet.

[quote=NASD Newbie][quote=Indyone]

That's exactly what I'm saying.  Pretty neat, huh?  The insurance company is banking on the market going up over time and skims about 2% off the top for their charges/guarantees.  My decisions are, of course limited to which managers (on the company's approved list of managers) I park the funds with at any given time.

Unlike what Suze Orman says, variable annuities are not of the devil.  Many of the newer ones come with some very reassuring guarantees.

[/quote]

And the commissions are the most compelling reason to shove them down unsuspecting client's throats?

[/quote]

How do you assume that they are unsuspecting?  When I discuss (and I'm pretty sure that Indyone does the same) annuities we talk about the holding period, surrender charges, the unfavorable converson of capital gains into ordinary income, the additional costs for the benefits and the internal charges for the mutual fund subaccounts.  There is no shoving down the throat. The client is fully informed and makes a decision to buy or not to buy.

And yes, there are guarantees where if the market goes to hell in a handbasket the client has a guaranteed income or return.  If my client has a VA we also do more agressive investing than they would otherwise since the annuity guarantee is a safety net

[quote=babbling looney]

And yes, there are guarantees where if the market goes to hell in a handbasket the client has a guaranteed income or return.  If my client has a VA we also do more agressive investing than they would otherwise since the annuity guarantee is a safety net

[/quote]

Pardon my cynicism, but when an insurance comany is guaranteeing the principal the choice of investments is not going to include "aggressive."

The risk reward ratio has not been repealed by the insurance industry.

I think a logical question is the same that is faced when recommending that a client buy a put to protect their stock--if it's not going to go up why should I buy it in the first place?

I hate to do this again but I'm going to have to SOMEWHAT agree with NASD.  I must also concede that NASD has a demonstrated understanding of the types of vehicles that insurance companies use to 'manufacture' these VA's: derivatives.  Most Advisors do not REALLY understand derivatives in the least, which I believe is very unfortunate and would help them evaluate these products from a more 'holistic' perspective.

My take on VA's is that it is often very difficult to get clients to understand the risk/reward relationship on an EMOTIONAL level and in some circumstances it is a way to help with good investing habits (keeps them from making drastic changes during market volatility), but only where the costs of the annuity and guarantees is VERY low and the client (or broker) is not savvy enough to dive into options.

[quote=NASD Newbie]

[quote=babbling looney]

And yes, there are guarantees where if the market goes to hell in a handbasket the client has a guaranteed income or return.  If my client has a VA we also do more agressive investing than they would otherwise since the annuity guarantee is a safety net

[/quote]

Pardon my cynicism, but when an insurance comany is guaranteeing the principal the choice of investments is not going to include "aggressive."  Well, guess what? It does.  I can use growth and even emerging markets if I want to.

The risk reward ratio has not been repealed by the insurance industry.  No, but the insurance industry assumes that over time, the markets will make money, thus they assume the safety net will rarely come into play.

I think a logical question is the same that is faced when recommending that a client buy a put to protect their stock--if it's not going to go up why should I buy it in the first place?[/quote]

That is a valid comparison.  Puts are in some ways, very similar to VA guarantees.  It wouldn't surprise me at all that the insurance industry might use options to cover their guarantee risk.  Perhaps someone closer to the industry would know if this is done.

[quote=Indyone][quote=NASD Newbie]

[quote=babbling looney]

And yes, there are guarantees where if the market goes to hell in a handbasket the client has a guaranteed income or return.  If my client has a VA we also do more agressive investing than they would otherwise since the annuity guarantee is a safety net

[/quote]

Pardon my cynicism, but when an insurance comany is guaranteeing the principal the choice of investments is not going to include "aggressive."  Well, guess what? It does.  I can use growth and even emerging markets if I want to.

The risk reward ratio has not been repealed by the insurance industry.  No, but the insurance industry assumes that over time, the markets will make money, thus they assume the safety net will rarely come into play.

I think a logical question is the same that is faced when recommending that a client buy a put to protect their stock--if it's not going to go up why should I buy it in the first place?[/quote]

That is a valid comparison.  Puts are in some ways, very similar to VA guarantees.  It wouldn't surprise me at all that the insurance industry might use options to cover their guarantee risk.  Perhaps someone closer to the industry would know if this is done.

[/quote]

This and exotic 'private' derivatives are used extensively to manufacture these products.  How else could they afford the risk?

This = Call and put options.

NASD, maybe you could verify or villify my following logic:

The VA riders and guarantees are in essence an expensive way to  participate in an options like strategy and that better results could very well be obtained by cutting out the middle man?

What do you think?

That’s probably true, but cost-effectively running this strategy probably takes more money than most of my VA clients have.  VAs may just be a poor man’s option package.

You are echoing my suspicions Indyone.

The fees being discussed for the guarantees do not seem high enough to afford continuing coverage with puts.

Plus, in order to squeeze the water out of the puts they would have to be very deep in the money.

If they are, and if the market moves higher as it should in order to benefit the investors the insurance company would be taking huge losses in puts that were expiring.

No doubt there is a cushion if the guarantee is, say, 5% if the market appreciates more than that in good years.

It's all buried in that actuarial crap that I didn't study which is why I ended up a peddler instead of a scientist.

What I don't believe is that the average person could possibly afford to continue to buy puts in order to eliminate the risk of holding positions--not on his individual issues or on an index, which would be a form of overkill for most folks.

I'm not saying buying puts on the whole position.

I'm talking about partial position coverage.  Multiple option strategies and the like to manage risk.  There are many ways to achieve the hedging necessary to reduce the insurance companies exposure.

Also, I'm sure that it's not nearly as expensive for insurance companies to trade options as say you or I.  In addition I am suspecting that there are privately drafted exotic derivatives that achieve similar results to a put/call strategy to manage risk that these insurance companies use maybe at a lower overall cost than actually trading options.

Any thoughts?

[quote=dude]

I'm not saying buying puts on the whole position.

I'm talking about partial position coverage.  Multiple option strategies and the like to manage risk.  There are many ways to achieve the hedging necessary to reduce the insurance companies exposure.

[/quote]

One of the holy grails of investing is "the pure hedge."  A strategy that completely eliminates risk while affording reasonable profit potential.

You can come close with hedge wrapper strategies--collars, whatever.  Buy a put for protection and pay for it by writiing a call.  Such strategies are available all day long--yes you can reduce the risk to zero, but the gain is no more than t-bills would be paying at the time so the argument is why bother?

HOWEVER, if you charge the client a premium for the guarantee you could buy a call option with a strike price right above the one you sold to pay for the put.  Because they are out of the money they will be cheap--about what the client is paying for the insurance?

If the market crashes a gain in the put will equal the loss in the portfolio's value--net change zero, no gain no loss.

If the market rises the gain will accrue to the benefit of the investor until it reaches the strike price of the short call which was written to pay for the put.  As stated earlier, the gain at that point should approximate T-Bills and other riskless vehicles with a similar time horizon.

Should the market soar well beyond the short call in the step above, the long call--bought with the annuity owner's additional premium--will catch and the gain in that call will offset the lost gain in the portfolio due to the call that was shorted to pay for the put.

The secret is that the client is buying the out of the money call with their additional payment--as always, there is no free lunch.

Without giving it more thought than I want to on this particula occasion I think it sounds like a very viable thing that anybody could do--even with Google or some other steppers--I'll try to work up an example with today's closing prices and see what the percentages look like.

Best Regards,

Stephen Hawking
or maybe not

[quote=dude]

Also, I'm sure that it's not nearly as expensive for insurance companies to trade options as say you or I.  In addition I am suspecting that there are privately drafted exotic derivatives that achieve similar results to a put/call strategy to manage risk that these insurance companies use maybe at a lower overall cost than actually trading options.

Any thoughts?

[/quote]

I am old enough to remember the old put and call houses.  There was no listed exchange so you had to go to investors an make offers, "Wanna sell ten calls on IBM--328 7/8ths to expire in 48 days?  The guy will pay 2 1/8th each,"

No doubt there would be speculators who would be happy to take the other side of an insurance company's hedge--hey, I bet a hedge fund might do that .

Thanks NASD, I think it would be very interesting to see how a similar result could be achived using options instead of a VA and what the cost differences would be.  Even though I don't use options for clients (haven't figured out how to make it scalable and efficient) I am very intrigued by the possibilities.

I guess I may have been wrong about your contributions to this board.  Although you can be a little bit of a hard ass, you definitely bring an expertise that is rarely seen on these boards and is certainly valuable. 

Again.....thanks.

[quote=NASD Newbie]

[quote=babbling looney]

And yes, there are guarantees where if the market goes to hell in a handbasket the client has a guaranteed income or return. If my client has a VA we also do more agressive investing than they would otherwise since the annuity guarantee is a safety net

[/quote]

Pardon my cynicism, but when an insurance comany is guaranteeing the principal the choice of investments is not going to include "aggressive."

The risk reward ratio has not been repealed by the insurance industry.

I think a logical question is the same that is faced when recommending that a client buy a put to protect their stock–if it’s not going to go up why should I buy it in the first place?