Newsweek's Jane Quinn on VAs

people love bashing annuities...they are an easy target. it's like anything else, they work well for people in certain situations. but unfortunetly some advisors over sell/use them.

you would expect more jounalisit integrity from a publication like newsweek

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

That's probably because you haven't been in the business long enough.

[quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

I have.

[quote=EDJ to RIA]I’ve never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...[/quote]

Rather than educate you, we'll just keep taking those accounts where a VA works well...

It seems like it is a matter of free choice, unresolvable. Companies have the freedom to manufacture a product, reps to disclose and sell, consumers to choose. And we know what the market is doing - annuity sales are booming, and a lot of folks are making money dissing them. There you have it. What we think almost doesn’t matter.

[quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

never? let me guess you use wrap accounts...

[quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

If an average annual return, net of ALL fees, of 25% compared to 17% on the S&P 500, over the exact period is not working well, then I haven't seen one either.

[quote=Bobby Hull] [quote=EDJ to RIA]

I’ve never seen a situation where a VA works well.

Ok, let’s hear it from the annuity gang…

[/quote]

If an average annual return, net of ALL fees, of 25% compared to 17% on

the S&P 500, over the exact period is not working well, then I haven’t seen

one either.

Annuities are not just about best returns. You can’t just compare the

return to say, a mutual fund. Sometimes people need some guaranteed

income. The right annuity will provide that for you (with decent returns).

But, I stress two things: SOME guaranteed income (not ALL of your

assets), and the RIGHT annuity - not one of these 15 year surrender

indexed annuity BS products sold to an 80 year old.



The problem is not necessarily the product, but to whom and how it is

sold. I am not a big user of annuities, but I think a well-built annuity is

appropriate in certain situations.

Broker24, it’s ALL about returns…everything we do.



All the rest is just talk.

[quote=Philo Kvetch] [quote=Bobby Hull] [quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

If an average annual return, net of ALL fees, of 25% compared to 17% on
the S&P 500, over the exact period is not working well, then I haven't seen
one either.

[/quote]

That's particularly true if you happen to know of a variable annuity whose
total expenses are lower than that of most mutual funds of the same share
class.[/quote]

I think I might have one.

[quote=Philo Kvetch]Broker24, it's ALL about returns...everything we do.

All the rest is just talk.[/quote]

No it isn't.  It's about meeting the client's needs.  Some people need more security and will be satisfied with trading off all of the possilbe return in the market for that.

[quote=Dust Bunny]

[quote=Philo Kvetch]Broker24, it’s ALL about

returns…everything we do. All the rest is just talk.[/quote]

No it isn’t. It’s about meeting the client’s needs. Some people need more

security and will be satisfied with trading off all of the possilbe return in the

market for that.

I have to agree with Dust Bunny on this one.  Nobody is saying that clients don't want higher returns.  They all do.  This just isn't usually their primary goal.

[quote=anonymous]

I have to agree with Dust Bunny on this one.

Nobody is saying that clients don’t want higher returns. They all do. This

just isn’t usually their primary goal.

They want help accomplishing their financial goals.  Accomplishing goals often means taking less risk and getting lower returns.

Protection goals certainly have nothing to do with getting higher returns.  This is why my clients buy lots of life and DI insurance.

With retirement planning, it's about putting together a portfolio that the client won't outlive.   You can have 2 clients with the exact same amount of money and the same retirement goals.  One client can get a higher rate of return on their money, yet still run out of money first because of volatility.

And how does one do all that without returns?

The fact that one needs returns does not equate to "it's ALL about the returns"

If it was all about returns, wouldn't clients simply be looking for money managers and not financial advisors? 

[quote=anonymous]

The fact that one needs returns does not equate to

"it’s ALL about the returns"

If it was all about returns, wouldn’t clients simply be looking for money

managers and not financial advisors?

[quote=Philo Kvetch] [quote=anonymous]

The fact that one needs returns does not equate to
"it's ALL about the returns"

If it was all about returns, wouldn't clients simply be looking for money
managers and not financial advisors? 

[/quote]

And just what do the expect an advisor to do for them?[/quote]

Speaking for myself and the clients that I have: 

They expect me to monitor their portfolios so they don't have to think about this stuff. 

Meet with them at least 3 times a year to review their progress and call them if there is anything new or needs attention.

Recommend any moves that would be appropriate when market conditions or interest rate environment changes. 

Some people are only interested in principal protection and an income stream.  Some are interested in growth and total return. Some aggressively while others are more adverse to risk.  They expect me to know which are which and make the investments and strategies something that they are comfortable with.

They expect me to also offer advice and strategies on various topics like estate planning, retirement planning, tax efficiency, protection strategies (life, health and DI insurance).  I also do loan and debt counseling. On occasion I seem to be a family counselor for clients going through death, divorce or other family disasters.

I also make a mean cup of coffee and great coffee cakes.

My main job is to keep the clients' focused on their goals and keep them from emotional swings in their money management strategies. It isn't all about a percent of return on their money. Obviously, my clients don't want to lose money, but it isn't about getting the highest return.  This is why annuities and VAs are appropriate for some people.  They are willing to trade off some of the possible return for safety. 

As an advisor we are obligated to explain both the good and bad about all investments we present.  Do you explain to your clients the positives of VAs or do you only stress the negatives?

The coffee aside, you can do none of the rest without returns.

(Where did I say that I'm opposed to annuities?)

And just what do the expect an advisor to do for them?

Help them accomplish their goals.  Yes, higher returns are a means to helping accomplish this.  Nothing more.

They’re a MEANS to helping?  Can you name another “means” to accomplish financial goals?

Do you think the fact that they're about the only product left that pays 7+% commissions has anything to do with their popularity amongst salespeople?

Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included.

Comments?

Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included

A SPIA has a terrible internal interest rate and when the contract is up the money is gone.  Sure, you have an income guaranteed from the SPIA ....for a while......but in your scenario, there is no guarantee that the other money in stocks will increase to replace the spent SPIA.  

You are taking a big chance that the market is not going to have a downturn just when the clients need the other pool of money, that was not in the SPIA, for income.  It could be that the original pool of money is now drastically reduced by the vanished amount in the SPIA and a market downturn where the remainder has lost a 10 to 20% value.  How happy is your client going to be with you then?

So the answer is NO, you can't get a guaranteed income in your scenario.

I've done this strategy with guaranteed annuites. SPIA for 10- 15 years while the other annuity is guaranteed to grow back to the original amount of cash invested. When the SPIA is spent they can then annuitize the second contract. Maybe we even have a third contract to kick in as well. Its usually something I only do for those older clients who are very risk intolerant and don't care about growing their money. 

This strategy isn't as attractive right now in this low interest rate environment as it was in the past, however.  You need to put more into the SPIA to generate the income needed and have to wait much longer for the second annuity to grow back.

You also seem to be assuming that ALL of the client's money would be going into a VA.

In my cases I use VA's for various purposes and also have portfolios outside of the tax sheltered product.  It would be a bad idea to have everything in one investment.

How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

I thought you said it was all about return.  Yah....client's just love seing their portfolios go down and really appreciate those capital losses as a tax strategy   There is nothing wrong with your managed portfolio strategy. I do it all the time. The issue is that for some people it isn't the most appropriate investment plan.

I think I'll take the guarantee of a multi billion dollar firm (that has been in business for decades) that they will still be in business  to pay out on their fixed annuities.  I'd take that over the guarantee provided by a wet behind the ears former Jones broker who is so cocksure of himself that he won't take precautions with other people's money when they need it.

Philo, easy now…you’re starting to sound like Put Trader…

[quote=Indyone]Philo, easy now...you're starting to sound like Put Trader...[/quote]

Geez...that's a lousy thing to say!

…sorry…I just couldn’t help but notice the debate style you were using…it brought back memories…some not all that bad to be honest…

[quote=Indyone]Philo, easy now...you're starting to sound like Put Trader...[/quote]

That was harsh man.

[quote=EDJ to RIA]

How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

[/quote]

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

[quote=Bobby Hull][quote=EDJ to RIA]

How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

[/quote]

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

[/quote]

Man, annuity salespeople get so defensive!

So you're saying the fees inside the annuity (M&E, management, turnover costs, admin) are less than 1.25% total? Can I get to all of my money anytime I want with no strings attached? How many choices of investments do I get?

[quote=Dust Bunny]

Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

I thought you said it was all about return.  Yah....client's just love seing their portfolios go down and really appreciate those capital losses as a tax strategy   There is nothing wrong with your managed portfolio strategy. I do it all the time. The issue is that for some people it isn't the most appropriate investment plan.

I think I'll take the guarantee of a multi billion dollar firm (that has been in business for decades) that they will still be in business  to pay out on their fixed annuities.  I'd take that over the guarantee provided by a wet behind the ears former Jones broker who is so cocksure of himself that he won't take precautions with other people's money when they need it.

[/quote]

I didn't say anything about returns. Though after-tax returns are important.

I'd take the stability of a $500 billion company that's been around since the 1800's (Standard Oil/Exxon-Mobil) to be here to pay their dividend also.

I've been investing for 20 years by the way, just the last 4 at Jones.

[quote=EDJ to RIA][quote=Bobby Hull][quote=EDJ to RIA]

How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

[/quote]

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

[/quote]

Man, annuity salespeople get so defensive!

So you're saying the fees inside the annuity (M&E, management, turnover costs, admin) are less than 1.25% total? Can I get to all of my money anytime I want with no strings attached? How many choices of investments do I get?

[/quote]

I'm saying those returns are net of ALL fees. Your liquidity is dependent upon which surrender option we choose. If you can't stay in the market for at least 7 years, you can't be my client.

[quote=EDJ to RIA]

Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included.

Comments?

[/quote]

The problem here is that the scenario you described will PROBABLY work for the client. Some clients are scared of losing all of their money, they DO NOT like PROBABLY as an investment strategy.

Yes, annuities are more expensive. But, be careful you don't miss the forest (protection with predictable income) for the trees (higher fees). 

I'm not saying they are right for every client, or even for all of a client's money. But, having an annuity take care of a client's basic income NEEDS (utility bill, gas, mortgage, etc.) is a nice thing. Use your above strategy for the income WANTS (travel, gifting, etc.).

[quote=Bobby Hull][quote=EDJ to RIA][quote=Bobby Hull][quote=EDJ to RIA]

How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.

Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

[/quote]

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

[/quote]

Man, annuity salespeople get so defensive!

So you're saying the fees inside the annuity (M&E, management, turnover costs, admin) are less than 1.25% total? Can I get to all of my money anytime I want with no strings attached? How many choices of investments do I get?

[/quote]

I'm saying those returns are net of ALL fees. Your liquidity is dependent upon which surrender option we choose. If you can't stay in the market for at least 7 years, you can't be my client.

[/quote]

If you think annuities are good investments, you can't be my client!

I'm just busting your chops on the annuities. To each his own. We all have our competitive side and as long as we follow our respective rules, there's plenty of business to go around!

Get real people!  Everything is determined by the bottom line.  “Suzie O” talks annuities down also, but she does it because the insurance company she was working with would not give her a piece of the action.  She wanted a piece of each policy sold while she was “spreading the word”.  No $, No do!

Ben Bernanke, our Fed Chairman, owns variable annuities.  In fact, they are his largest investment holdings.  Believe it.

Those who bash VA's truely don't understand the product, and to a larger extent there clients .

If you do understand the product, and still feel the need to endlessly bash the product, then you are probably just not that smart.

Hull, what sub account of which VA is bringing in that 24%?

Know what you do about money and investing, pretend you are the client. You are offered an annuity option - it carries no surrender charges, and your advisor gets no commission up front.

Taking that potential conflict of interest and sales pressure off your mind, you decide to choose the annuity option.

Because money is more like health and spirituality than it is like cars or houses, it deserves objectivity. You may or may not believe this, but it is more fun to be free on the side of objectivity.

Since that is a subjective idea, all we can really argue about is preferences.

[quote=Philo Kvetch] And how does one do all that without returns?[/

QUOTE]



Philo-

The idea is not that annuities have no returns. Some people will pay the

extra 75-150 bips over a straight MFD to get the guarantee.

And just why do you suppose that all annuities are 75-150 bps more

expensive than your straight mutual funds?

[quote=EDJ to RIA]

Do you think the fact that they’re about the only
product left that pays 7+% commissions has anything to do with their
popularity amongst salespeople?

Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included.
[/quote]

The simplest case against annuities, is that you are betting against the insurance companies actuaries, and those boys don't play to lose.

Ultimately a VA is just a basket of expensive mutual funds, wrapped up in package of options. The actuaries work very hard to make sure those options are mispriced so badly, that even after kicking 6% to the salesman, the insurance company still comes out on top.

The best arrangement from the clients perspective is to invest in solid investment strategy and then buy CPI-linked SPIA's as needed.

The final result of a VA is the purchase of a SPIA when the contract is annuitised. So the question is the path taken to get to that point.

You can do it under a heavy burdern of management/COI fee's (to recover the 6% and give the insurco a profit) or a lighter burden of low cost management fee's.

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=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=the word]

Ben Bernanke, our Fed Chairman, owns variable annuities. In fact, they are his largest investment holdings. Believe it.

[quote=Ashland] [quote=the word]Ben Bernanke, our Fed Chairman, owns
variable annuities.  In fact, they are his largest investment
holdings.  Believe it.[/quote]

While this is true - it also is misleading. Bernanke’s largest
holding is his former 403b invested w/ TIAA Cref. I don’t think this
means that he is for or against VA’s. It means he worked for Princeton
for long time.


http://www.fmcenter.org/atf/cf/{DFBB2772-F5C5-4DFE-B310-D8 2A61944339%7D/2006disclosurereport.pdf [/quote]



Without misleading statements how else would annuities be sold?



It’s also not clear why Bernanke, who is an economist would be/should be an authority on investing.

I agree that Bernanke's holdings are meaningless.

Without misleading statements how else would annuities be sold?

I find that the truth works quite nicely.   With a certain fact pattern, I don't know anything better than a VA with a living benefit.  I prefer GMAB. 

1)Qualified Money
2)Conservative Investor
3)Investing conservatively won't allow them to reach their goals
4)Long enough time horizon that surrender charges are not an issue and they qualify for the living benefit

Anti-annuity people tend to not understand the importance of the living benefits.  The argument is basically that it is a waste of money because the insurance company is smart and won't have to pay on this benefit.  That completely misses the point of the living benefit for the conservative client.  The true importance of the living benefit is that it changes investor behavior.  As we all know, investor performance is what counts, not investment performance.   Living benefits do hurt investment performance because there is a cost.  However, they improve investor performance because investors have no reason to sell during a down market. 

[quote=AllREIT][quote=Ashland] [quote=the word]Ben Bernanke, our Fed Chairman, owns variable annuities.  In fact, they are his largest investment holdings.  Believe it.[/quote]

While this is true - it also is misleading. Bernanke's largest holding is his former 403b invested w/ TIAA Cref. I don't think this means that he is for or against VA's. It means he worked for Princeton for long time.

http://www.fmcenter.org/atf/cf/%7BDFBB2772-F5C5-4DFE-B310-D8 2A61944339%7D/2006disclosurereport.pdf [/quote]

Without misleading statements how else would annuities be sold?

It's also not clear why Bernanke, who is an economist would be/should be an authority on investing.
[/quote]

Without misleading statements how else would REITS be sold?

I agree that Bernanke’s holdings are meaningless.

I don’t agree that they are meaningless.  After all, he is one of the most prominent and powerful economists in the world.  He may not be an investment advisor, but he certainly should know enough to make educated decisions, and have access to good investment advice as welle.

Anti-annuity people tend to not understand the importance of the living benefits.  The argument is basically that it is a waste of money because the insurance company is smart and won’t have to pay on this benefit. 

For what it’s worth, I read an article just yesterday that NAVA reported that in 2004 living benefits paid out over TWO BILLION in benefits over the market value of the underlying contrats.  I am confident in saying that the recipients of those benefits do not feel that they wasted any money when they purchased their annuities.

I am not an “annuity guy”.  In fact, I used to be somewhat anti-annuity.  I still think in some cases they are over-used, and sold merely for the ‘yield to broker’.  Having said all that, I pride myself in thinking objectively about the products I use, reevaluating them on a periodic basis, and putting the client’s needs first in that process.  As stated above, I think annuities work very well for risk-averse clients in the right situation.

[quote=joedabrkr] [quote=anonymous]

I agree that Bernanke's holdings are meaningless.

I don't agree that they are meaningless.  After all, he is one of the most prominent and powerful economists in the world.  He may not be an investment advisor, but he certainly should know enough to make educated decisions, and have access to good investment advice as welle.

Anti-annuity people tend to not understand the importance of the living benefits.  The argument is basically that it is a waste of money because the insurance company is smart and won't have to pay on this benefit. 

For what it's worth, I read an article just yesterday that NAVA reported that in 2004 living benefits paid out over TWO BILLION in benefits over the market value of the underlying contrats.  I am confident in saying that the recipients of those benefits do not feel that they wasted any money when they purchased their annuities.

I am not an "annuity guy".  In fact, I used to be somewhat anti-annuity.  I still think in some cases they are over-used, and sold merely for the 'yield to broker'.  Having said all that, I pride myself in thinking objectively about the products I use, reevaluating them on a periodic basis, and putting the client's needs first in that process.  As stated above, I think annuities work very well for risk-averse clients in the right situation.

[/quote][/quote]

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=AllREIT] <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The simplest case against annuities, is that you are betting against the insurance companies actuaries, and those boys don't play to lose. [/quote]

Wrong, you're not betting against the actuaries, you're betting about YOU PLACE in that risk pool that you assume the actuaries have accurately defined. They use the AVERAGE life expectancy, you’re “betting”, if anything, that you’ll out live the average when the issue is the annuitized income stream.

[quote=AllREIT] 

The final result of a VA is the purchase of a SPIA when the contract is annuitised. So the question is the path taken to get to that point. [/quote]

Wrong, yet again. You're assuming the VA HAS to be annuitized. Are you even vaguely familiar with real world VAs?

YOU PLACE should read “YOUR PLACE”

[quote=AllREIT]
Without misleading statements how else would annuities be sold? [/quote]

As others have said, the truth works nicely.

Now if your question was Without misleading statements would fewer annuities be sold?, I'd say yes, fewer would.

[quote=mikebutler222]

[quote=AllREIT]
Without misleading statements how else would annuities be sold? [/quote]

As others have said, the truth works nicely.

Now if your question was Without misleading statements would fewer annuities be sold?, I'd say yes, fewer would.

[/quote]

Your answer applies to ANY thing that is sold.

[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.

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=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.
---

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.



----

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.



----

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? 

[quote=bankrep1]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. [/quote]



Jesu!



The part of the 2.3% that goes toward commissions is the amortisation of the commisions!

So you do beleive in the tooth fairy.

Well, of course the client is paying for the profitiablity of the company which pays the agents to sell their products so they can have more profits.  DUH... so what?  The insurance companies are not in business to be chairities.  And I'm quite aware that they amortize the costs of business, which includes the cost of commissions paid into their profit/loss accountability.  If they aren't making a profit, they have several options including reduction of commissions, paying the commissions over an extended time period, raising fees, longer surrender periods.

I don't need to have accounting 101, thank you. I was a commercial lending officer dealing with corporations that had many millions of of $$ in assets and revenue streams for me to analyze profitiabiity and credit worthiness.

So the client is paying fees for a benefit that they deem to be worthwhile.  If they didn't want the benefit or it was not worth it to them, then OF COURSE they should invest in something else.

So,  again I say.  So what.  What is your point? Annuities have extra fees??  Again DUH.  

2.3% includes the cost of the subaccount, the rider (optional) and the M&E (which pays commission) how much is a fee based program using the same mutual fund.



1.25% advisory fee + .65% Fund expenses = 1.9% all in , unless you charge other fess custodial, maintence, etc.



There is not that big of a difference and the client is getting a guarantee which may allow them to sleep at night, invest in more aggressive options without worry, etc.



Now if you take out the rider and use ETF’s (Integrity Life) I can get a VA all in for 1.4% or so…

The part of the 2.3% that goes toward commissions is the amortisation of the commisions!

Who cares?  How a company accounts for something has no bearing to the client.  It's meaningless to the client whether the rep gets a 2% commission, 5% commission or 50% commission.  All that matters is that they have 2.3% coming out every year. 

If the total expenses are 2.3% and the investments perform the same, the client will have the same amount of money regardless of the upfront commission.  The amount of the commission will effect the profitability of the company and not the return of the investment.

[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

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

So buying the VA cost the client $16,151 more vs just straight up investing @ 1% management fee and 0.25% ETF expenses.
---

Forgone Opportunity cost of investing vs pure return of the underlying.

100*(1.10)^7:194.872 <-- Underlying return

Annuity

194.872-163.738:31.134

Managed Account

194.872-179.889:14.983

Relative cost: 31.134/14.983:2.078

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





[/quote]

A$$hole, we're talking about the YTB issue.

[quote=Bobby Hull][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

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

So buying the VA cost the client $16,151 more vs just straight up investing @ 1% management fee and 0.25% ETF expenses.
---

Forgone Opportunity cost of investing vs pure return of the underlying.

100*(1.10)^7:194.872 <-- Underlying return

Annuity

194.872-163.738:31.134

Managed Account

194.872-179.889:14.983

Relative cost: 31.134/14.983:2.078

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





[/quote]

A$$hole, we're talking about the YTB issue.

[/quote]

Bobby, don't waste your time.  He doesn't get it, nor does he want to get it.

[quote=Mike Damone]Bobby, don’t waste your time.  He doesn’t get it, nor does he want to get it.[/quote]

Bobby is just bitter because I showed how his proposed annuity is twice as expensive to the client.

Bankrep then chimed in that the sales load is ammortised over the life of the contract. And again I showed that the annuity was still twice as expensive.

And all this was done assuming a steady 10% CAGR, which is far beyond the historical performance of any asset class. Even if you had  a 100% equity portfolio 10% CAGR would be very optimistic. So much for the "but I invest more agressively in an annuity" argument.

Others then chimed in saying that the 6% broker kickback doesn't cost the client a thing except for very high annuity expenses.

Later we had others say that the broker kickback is funded by the insurance company and not the client; leaving unsaid how the insurance company funds itself and makes a profit post-kickback.

Let's be honest, the huge payoffs from the sales of annuities have corrupted everything/everyone that touches them on a regular basis.

Anyone who has been in this industry, and is honest with himself knows that what I say is true.

[quote=AllREIT] [quote=Mike Damone]Bobby, don’t waste your time.  He doesn’t get it, nor does he want to get it.[/quote]

Bobby is just bitter because I showed how his proposed annuity is twice as expensive to the client.

Bankrep then chimed in that the sales load is ammortised over the life of the contract. And again I showed that the annuity was still twice as expensive.

And all this was done assuming a steady 10% CAGR, which is far beyond the historical performance of any asset class. Even if you had  a 100% equity portfolio 10% CAGR would be very optimistic. So much for the "but I invest more agressively in an annuity" argument.

Others then chimed in saying that the 6% broker kickback doesn't cost the client a thing except for very high annuity expenses.

Later we had others say that the broker kickback is funded by the insurance company and not the client; leaving unsaid how the insurance company funds itself and makes a profit post-kickback.

Let's be honest, the huge payoffs from the sales of annuities have corrupted everything/everyone that touches them on a regular basis.

Anyone who has been in this industry, and is honest with himself knows that what I say is true.

[/quote] I'll echo what was touched on in a previous post that annuities are way too convoluted.   Have you actually read a contract?  OMG

Right or wrong, I build my practice with the mantra "If a client cannot understand it, I won't even present it"    Now, I consider myself a relatively intelligent person who is very good at mathematics.  For the life of me, I still cannot with confidence say that even I fully understand how annuities work and why they are beneficial.

What I can understand is an immediate annuity and most of my clients can too.   If someone needs a guaranteed income invest a small portion of their nest egg in one of these products.  The whistles and bells are much, much less.

scrim

"Bobby is just bitter because I showed how his proposed annuity is twice as expensive to the client."

What a foolish statement.   It is only twice as expensive if we use assumptions that make it twice as expensive.  If we us a VA that is 2.3% and compare it to something that is 1.15% then it is twice as expensive.  On the other hand, Bankrep1 used an example of an annuity that is 1.4%.  Compare this to funds that are "all in" at 1.9% and the annuity is about 50% less expensive.

I will hand it to you that a VA will usually be more expensive than the underlying investments.  One of the key questions is "Do the extra expenses add value to the client (M&E, GMAB, GMIB,etc.)?"  If they don't add value to the client, then a VA does not make sense.

In my practice, when I use annuities, they have added a ton of value to my clients.  None of these benefits have ever paid a dime to my clients.  Yet, the added expense has greatly increased their rates of return by changing their investor behavior. 

10% may be overly optimistic, but 100% of my VA clients have returns that are significantly above 10%.   All of these clients would have lower rates of returns outside of annuities.  It is true that if they invested in the same manner outside of the annuity, they would have done even better (by about .5%/year), but the point is that the guarantees effect investor behavior and they would not invest in the same manner.  Thus, in my practice, VA's make sense for qualified investments for conservative clients who understand the need to invest more aggressively, but don't have the stomache for loss.

"leaving unsaid how the insurance company funds itself and makes a profit post-kickback."

It's been said over and over, but you just don't get it.  The money comes from the annual expenses, just like a "B" share mutual fund. 

Scrim,

I have to question your intelligence or your desire to learn.  There isn't that much to understand.  My clients understand them in less than 5 minutes.

If you don't understand, why don't you try asking a specific question?  I've heard you talk negatively about them.  This doesn't make much sense if you don't understand the product.  Ask and we will answer.

[quote=scrim67]

I’ll echo what was touched on in a previous post
that annuities are way too convoluted.   Have you actually
read a contract?  OMG
[/quote]

Even better, I own shares of the companies that come up with those contracts.

An annuity has to be much more expensive than a managed account, because it has more expenses than a managed account.

1) The 6-7.5% broker kickback has to be recovered.
2) The insurance wrappers
3) Underlying fund expenses.

Expense #1 adds zero value to the client, #2 is often of questionable utility, #3 is usually not competative with alternatives.

That huge commision is like a black hole that bends the ethics of anything that comes near it, and sucks many people in.

[quote]For the life of me, I still cannot with confidence say that even I fully understand how annuities work and why they are beneficial.[/quote]

Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

Annuities often have a embedded put options in the form of guarantee minimum values. The acturaial gang at the insurco makes sure that these are overpriced relative to the real option value. The risk of being down in the market after 10 years isn't very high.

Otherwise annuities are wrapped up in layers of smoke and mirrors which obscure an ancient chinese secret: a really big commision check.

[quote]What I can understand is an immediate annuity and most of my clients can too.   If someone needs a guaranteed income invest a small portion of their nest egg in one of these products.  The whistles and bells are much, much less.

scrim

[quote=anonymous]

Scrim,

I have to question your intelligence or your desire to learn.  There isn't that much to understand.  My clients understand them in less than 5 minutes.

If you don't understand, why don't you try asking a specific question?  I've heard you talk negatively about them.  This doesn't make much sense if you don't understand the product.  Ask and we will answer.

[/quote]

I agree. I don't need to know how airplanes work to fly in one.

[quote=AllREIT] [quote=scrim67]

I'll echo what was touched on in a previous post that annuities are way too convoluted.   Have you actually read a contract?  OMG [/quote]

Even better, I own shares of the companies that come up with those contracts.

An annuity has to be much more expensive than a managed account, because it has more expenses than a managed account.

1) The 6-7.5% broker kickback has to be recovered.
2) The insurance wrappers
3) Underlying fund expenses.

Expense #1 adds zero value to the client, #2 is often of questionable utility, #3 is usually not competative with alternatives.

That huge commision is like a black hole that bends the ethics of anything that comes near it, and sucks many people in.

[quote]For the life of me, I still cannot with confidence say that even I fully understand how annuities work and why they are beneficial.[/quote]

Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

Annuities often have a embedded put options in the form of guarantee minimum values. The acturaial gang at the insurco makes sure that these are overpriced relative to the real option value. The risk of being down in the market after 10 years isn't very high.

Otherwise annuities are wrapped up in layers of smoke and mirrors which obscure an ancient chinese secret: a really big commision check.

[quote]What I can understand is an immediate annuity and most of my clients can too.   If someone needs a guaranteed income invest a small portion of their nest egg in one of these products.  The whistles and bells are much, much less.

scrim

[/quote]

The biggest sales gimmick for annuities is the annuitisation process. The options to convert the VA into a SPIA or too make withdrawls without penalty after the surrender period are not worth very much.

Why? because you can convert any liquid asset into a SPIA at any time.

The end result of a VA is conversion to the SPIA or taking withdrawals from it, the main decision is the path that gets you to that point.

Choose wisely.

[/quote]

Less than 2% of all VA's ever get annuitized. You probably knew that, already, didn't you?

[quote=AllREIT]

1) The 6-7.5% broker kickback has to be recovered.

Expense #1 adds zero value to the client,

That huge commision is like a black hole that bends the ethics of anything that comes near it, and sucks many people in.

AR, you know I respect your opinions.  However, if you really want to have a "fair and balanced" discussion on this topic, you should stop using inflammatory language like "broker kickback" and "black hole" to refer to the commissions paid on the product.  After all, we all get paid in one manner, and all you're doing is giving Bobby Hull ammo to scurry around talking about how he can turn off the "broker fee meter".

Commissions affect client expenses and as such they are relevant.  They must be reasonable for the value returned to the client.  One could make the same argument about fees charged against a portfolio of low cost ETF's.

For what it's worth, one of the more successful investments I've recommended to groups of clients in the last decade(and purchased myself) was a managed futures fund in the late 90's.  Compared to a mutual fund or UIT(my primary focus at the time) it was hideously expensive and paid a pretty hefty vig to me as well.  But after much thought I decided it was a good diversifier.  Short version of the story is while internet stocks were melting down my clients doubled their money in the fund.  Guess what....nobody complained about the expenses or my compensation.

Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

If Nancy Pelosi gets her way, you will no longer find tax deferral of questionable value.  Consider the full scope of history.  Our current tax rates(including capital gains rates) are abnormally low right now, and if you didn't notice Democrats LOVE higher tax rates.

Annuities often have a embedded put options in the form of guarantee minimum values. The acturaial gang at the insurco makes sure that these are overpriced relative to the real option value. The risk of being down in the market after 10 years isn't very high.

Joe, it’s not AR’s language that gives me ammo about the broker meter. It’s the knowledge that I have yet to see a broker meter client make as much money as mine have in this particular VA that I use that gives me the ammo. NONE of you schlepps have had the guts to admit that YOU make more over time than I do. That’s all the ammo I need. You can posture and bloviate all you want about the broker meter. I don’t care. All I KNOW is that when I suggest that we not charge the perpetual fee and I show them how much my clients have made, the incumbent is dead in the water.

[quote=Bobby Hull]Joe, it's not AR's language that gives me ammo about the broker meter. It's the knowledge that I have yet to see a broker meter client make as much money as mine have in this particular VA that I use that gives me the ammo. NONE of you schlepps have had the guts to admit that YOU make more over time than I do. That's all the ammo I need. You can posture and bloviate all you want about the broker meter. I don't care. All I KNOW is that when I suggest that we not charge the perpetual fee and I show them how much my clients have made, the incumbent is dead in the water. [/quote] I'll be the first to admit that if I'm charging a 1.4% wrap fee that this account will be more profitable over the long term to me compared to a VA.  Most of my practice is fee based in mutual fund wraps because they are easy to understand, tax treatment at withdrawal is preferential, and money is never tied up.   To the last point, I have never been thru a bear market in my practice that begain in 2004.   When this bear market does arrive I am very curious to see what percentage of my AUM walks out the door.   I try and give the best customer service I can during the good times in preparation for the inevitable.  I figure good customer service and honesty will keep most of my assets but only time will tell.

scrim

[quote=scrim67]

[quote=Bobby Hull]Joe, it's not AR's language that gives me ammo about the broker meter. It's the knowledge that I have yet to see a broker meter client make as much money as mine have in this particular VA that I use that gives me the ammo. NONE of you schlepps have had the guts to admit that YOU make more over time than I do. That's all the ammo I need. You can posture and bloviate all you want about the broker meter. I don't care. All I KNOW is that when I suggest that we not charge the perpetual fee and I show them how much my clients have made, the incumbent is dead in the water. [/quote] I'll be the first to admit that if I'm charging a 1.4% wrap fee that this account will be more profitable over the long term to me compared to a VA.  Most of my practice is fee based in mutual fund wraps because they are easy to understand, tax treatment at withdrawal is preferential, and money is never tied up.   To the last point, I have never been thru a bear market in my practice that begain in 2004.   When this bear market does arrive I am very curious to see what percentage of my AUM walks out the door.   I try and give the best customer service I can during the good times in preparation for the inevitable.  I figure good customer service and honesty will keep most of my assets but only time will tell.

scrim

[/quote]

I admire your honesty. Noone else will admit it because to do so would negate everything that they've said about the annuity guys. It's funny...they criticize annuities, buy they are compensated in annuity fashion. Go figure.

You deserved to be paid for your services, I cannot figure out when this became a crime. I don’t here anyone complaining about the non-liquid reits being sold with similar commissions. They are even worse because the client cannot get out if they want to in many cases.

Scrim, the problem in a bear market, or any downturn, is not the AUM walking out the door.  Well, that is a problem, but it's your problem and not the client's problem.  The problem, as I see it, is that people constantly buy high and sell low.

We have a tendency to put clients into good investments with good track records.  We buy high.  The client is happy as the investment does well.  The investment starts to underperform.  The client panics and wants out.  They sell low.  This process happens over and over again.  This is why there is such a huge difference between investment returns and investor returns.   The guarantees in the annuity allows the client to get returns that are closer to the investment returns.   If a client invests $300,000 and the market tanks and goes down to $200,000, why would the client leave the investment if they are guaranteed for their investment to go up to $300,000? 

We can't turn returns into a math equation.  Investor behavior is an imperative part of the coversation.

[quote=anonymous]

Scrim, the problem in a bear market, or any downturn, is not the AUM walking out the door.  Well, that is a problem, but it's your problem and not the client's problem.  The problem, as I see it, is that people constantly buy high and sell low.

We have a tendency to put clients into good investments with good track records.  We buy high.  The client is happy as the investment does well.  The investment starts to underperform.  The client panics and wants out.  They sell low.  This process happens over and over again.  This is why there is such a huge difference between investment returns and investor returns.   The guarantees in the annuity allows the client to get returns that are closer to the investment returns.   If a client invests $300,000 and the market tanks and goes down to $200,000, why would the client leave the investment if they are guaranteed for their investment to go up to $300,000? 

We can't turn returns into a math equation.  Investor behavior is an imperative part of the coversation.

[/quote] Great points but that's why I always make sure to gauge a client's risk tolerance as carefully as I can.   Part of the "interview" is to ask a client if they gave me $300,000 to manage what is the lowest you are willing for that to go without either bailing out or finding a new advisor.   The answer could be $200k, 250K, 275k, 290k, 300k, or even 310k.    

My average client has around one third between stocks bonds and cash.

For this "average" client it would be very very very unlikely (if not zero percent chance)  that a 300k investment could ever fall to 200k.

Again, I've never seen a bear market in my practice so only time will tell.

When doing asset allocation the "guarantees" can be that we will limit your downside.   I realize in a VA you can guarantee never to lose with only upside but there are just too many negatives for VA's to be appropriate in my opinion.

scrim

[quote=scrim67] [quote=anonymous]

Scrim, the problem in a bear market, or any downturn, is not the AUM walking out the door. Well, that is a problem, but it’s your problem and not the client’s problem. The problem, as I see it, is that people constantly buy high and sell low.

We have a tendency to put clients into good investments with good track records. We buy high. The client is happy as the investment does well. The investment starts to underperform. The client panics and wants out. They sell low. This process happens over and over again. This is why there is such a huge difference between investment returns and investor returns. The guarantees in the annuity allows the client to get returns that are closer to the investment returns. If a client invests $300,000 and the market tanks and goes down to $200,000, why would the client leave the investment if they are guaranteed for their investment to go up to $300,000?

We can’t turn returns into a math equation. Investor behavior is an imperative part of the coversation.

[/quote] Great points but that’s why I always make sure to gauge a client’s risk tolerance as carefully as I can. Part of the “interview” is to ask a client if they gave me $300,000 to manage what is the lowest you are willing for that to go without either bailing out or finding a new advisor. The answer could be $200k, 250K, 275k, 290k, 300k, or even 310k.     

My average client has around one third between stocks bonds and cash.

For this “average” client it would be very very very unlikely (if not zero percent chance) that a 300k investment could ever fall to 200k.

Again, I’ve never seen a bear market in my practice so only time will tell.

When doing asset allocation the “guarantees” can be that we will limit your downside. I realize in a VA you can guarantee never to lose with only upside but there are just too many negatives for VA’s to be appropriate in my opinion.

scrim

Scrim, I don't get it.  If your average client has 1/3 split equally between cash, bonds, and stocks, over a ten year period of time, your client has close to a 0% chance of losing money.   Your client also has close to a 100% chance of underperforming an all equity VA.  The all equity VA also has a 100% chance of not losing money.

Can you name any 10 year period will 1/3, 1/3, 1/3 would outperform 100% in equities?  I can't.

Scrim, the VA allows the client to invest above their risk tolerance, thus increasing their chance for higher returns.

Please tell me what are all the negatives of qualified variable annuities?

Annuities are right in a few isolated situations.

However, if you feel you need to justify why you are selling something, it's the wrong thing to sell! 

[quote=anonymous]

Scrim, I don't get it.  If your average client has 1/3 split equally between cash, bonds, and stocks, over a ten year period of time, your client has close to a 0% chance of losing money.   Your client also has close to a 100% chance of underperforming an all equity VA.  The all equity VA also has a 100% chance of not losing money.

Can you name any 10 year period will 1/3, 1/3, 1/3 would outperform 100% in equities?  I can't.

Scrim, the VA allows the client to invest above their risk tolerance, thus increasing their chance for higher returns.

Please tell me what are all the negatives of qualified variable annuities?

[/quote] The only negatives of Qualified VA's I believe are the costs, complexity, and they are oversold.

My 1/3, 1/3, 1/3 is my entire practice which includes a large chunk of short term cash in money market funds.   If you back the cash out my clients with long term goals are around a 50/50 mix in stock/bonds

scrim

Complex and costly. That is the definition of an annuity.

From what I've seen, mom and pop don't understand what they've signed most of the time. Brokers oversell annuities and don't disclose terms and conditions.

[quote=farotech]

Complex and costly. That is the definition of an annuity.

From what I've seen, mom and pop don't understand what they've signed most of the time. Brokers oversell annuities and don't disclose terms and conditions.

[/quote] It's almost hard to blame advisor that they don't disclose ALL terms and conditions.   There are only so many hours in a day!

scrim

Scrim, a 100% equity VA will outperform your 50/50 mix and it will do it with less risk.  The cost is not significantly different once you add in your 1.4% wrap fee.  Things are only complex when we don't understand them.  A VA is not complex to me and it's not complex to my clients.  I have NEVER had a client get rid of a VA.

I'm in complete agreement that they are oversold.  That's not a negative of the product.  That's a negative of the person selling the product.

VA's are a phenomenal product when used properly.  They suck when not used properly.  Isn't this the same with most products?

Scrim, what terms and conditions are you talking about?  I see very little difference between a qualified VA and a qualified "B" share mutual fund in terms of complexity.

The only difference is that I have to explain the GMAB.

"Mr. Client, if on May 27th 2017, your account has less than the $300,000 that you are investing today, the insurance company will add the difference to your account."

[quote=anonymous]

Scrim, what terms and conditions are you talking about?  I see very little difference between a qualified VA and a qualified "B" share mutual fund in terms of complexity.

The only difference is that I have to explain the GMAB.

"Mr. Client, if on May 27th 2017, your account has less than the $300,000 that you are investing today, the insurance company will add the difference to your account."

[/quote] Personally, I never use "B" shares either as they are complex and hardly ever make sense.   

For full disclosure, I only charge a 1% fee for qualifed assets.   So when comparing qualified assets the difference in fees is quite signifcant.

scrim

Yes, if a “B” share is too complex, you won’t be able to understand an annuity.  What is the average cost of the underlying investmens that you use?

[quote=anonymous]Yes, if a "B" share is too complex, you won't be able to understand an annuity.  What is the average cost of the underlying investmens that you use?[/quote] Varies; but I would guesstimate the average is 60 basis points.

scrim

The risk of being down in the market after 10 years isn't very high.

There also isn't much risk that my house will burn down or I will be t-boned by a loaded logging truck, nevertheless I carry insurance. 

Risk is risk even if it is minimal.  Some people don't want to take even the minimal risk.  It seems to me that if you want to be an effective and honest advisor, you will advise your client's of ALL the risks and also disclose the various ways to protect against that risk.

One of these wyas to manage risk is to use annuities.

I don't give a rip if you sell them, but your clients might wonder why you didn't at least explain them before somebody else.....like....oh Bobby does.  I don't sell many annuities but when I do they are for a specific purpose to a certain type of client.  You are shortchanging yourself and your clients by refusing to be educated and refusing to educate them.

Part of the “interview” is to ask a client if they gave me $300,000 to manage what is the lowest you are willing for that to go without either bailing out or finding a new advisor.   The answer could be $200k, 250K, 275k, 290k, 300k, or even 310k.     

My average client has around one third between stocks bonds and cash.

For this "average" client it would be very very very unlikely (if not zero percent chance)  that a 300k investment could ever fall to 200k.

Again, I've never seen a bear market in my practice so only time will tell.

Well, I have seen several bear markets and so have others on this forum who have tried to give you guys some advice.  Take it or leave it, but you are right TIME WILL TELL.  And when the hammer falls on the market, it weeds out the "sunshine advisors".  It's easy to be a hero and look good when any monkey can pick a mutual fund and make money.

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

I figured a worst case would be a 60% loss in stocks

30% loss in bonds

1% return in cash

even that dreadful scenario isn't a 33% cumulative loss!

scrim

Just to get everyone's panties in an uproar...

Scrim, if your client is in relatively decent health and your client has the desire to leave money behind at death, your clients would do much better by moving money into good old fashioned whole life insurance.

Instead of 33%, 33%, 33%, take half of the cash and move it into life insurance and half of the bonds into life insurance.  This would leave a portfolio of 33% stocks, 33% life insurance, 17% cash, and 17% bonds.  Long Term Results:

1)The client will have more after tax spendable dollars.
2)The client's family will have more money at death
3)The client won't have to buy term insurance which will give him more to invest
4)If the client has any type of pension, they will be able to get a bigger monthly payment since they won't need the survivor option
5)This is all without any additional risk
6)You'll make more money

[quote=scrim67]

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

[/quote]

I agree with you, but I don't understand the point that you're trying to make.

[quote=scrim67]

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

[/quote]

Yeah. Give me the hypothetical ideal client who will adhere to your  1/3 1/3 1/3 strategy in a down market.. sounds good in theory.  Let's try it in real life.

You know....it isn't theory to our clients.  When they lose $$ they could give a rip about modern portfolio theory or any thing else.  It doesn't matter if you "find it possible". 

Again, I'm not advocating annuities for everyone. I think that they have a limited usage, but still useful  I am advocating that if you have a closed mind as an advisor.....I don't want YOU being my advisor.  You need to become a better, more educated and open minded person.

[quote=Dust Bunny][quote=scrim67]

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

[/quote]

Yeah. Give me the hypothetical ideal client who will adhere to your  1/3 1/3 1/3 strategy in a down market.. sounds good in theory.  Let's try it in real life.

You know....it isn't theory to our clients.  When they lose $$ they could give a rip about modern portfolio theory or any thing else.  It doesn't matter if you "find it possible". 

Again, I'm not advocating annuities for everyone. I think that they have a limited usage, but still useful  I am advocating that if you have a closed mind as an advisor.....I don't want YOU being my advisor.  You need to become a better, more educated and open minded person.

[/quote] My ideal client will stick with me as stock and bonds rise and fall.   If I set their expectations from the beginning of the relationship they realize they are going to lose money on paper some years.  That's perfectly normal and even healthy.   When stocks and bonds drop precipitiously that's when I will really earn my keep.

scrim

[quote=scrim67][quote=Dust Bunny][quote=scrim67]

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

[/quote]

Yeah. Give me the hypothetical ideal client who will adhere to your  1/3 1/3 1/3 strategy in a down market.. sounds good in theory.  Let's try it in real life.

You know....it isn't theory to our clients.  When they lose $$ they could give a rip about modern portfolio theory or any thing else.  It doesn't matter if you "find it possible". 

Again, I'm not advocating annuities for everyone. I think that they have a limited usage, but still useful  I am advocating that if you have a closed mind as an advisor.....I don't want YOU being my advisor.  You need to become a better, more educated and open minded person.

[/quote] My ideal client will stick with me as stock and bonds rise and fall.   If I set their expectations from the beginning of the relationship they realize they are going to lose money on paper some years.  That's perfectly normal and even healthy.   When stocks and bonds drop precipitiously that's when I will really earn my keep.

scrim

[/quote]

Scrim, would it be fair to say that you are convinced that your methodology is the best and that you stick to it, no matter what?

[quote=Bobby Hull][quote=scrim67][quote=Dust Bunny][quote=scrim67]

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

[/quote]

Yeah. Give me the hypothetical ideal client who will adhere to your  1/3 1/3 1/3 strategy in a down market.. sounds good in theory.  Let's try it in real life.

You know....it isn't theory to our clients.  When they lose $$ they could give a rip about modern portfolio theory or any thing else.  It doesn't matter if you "find it possible". 

Again, I'm not advocating annuities for everyone. I think that they have a limited usage, but still useful  I am advocating that if you have a closed mind as an advisor.....I don't want YOU being my advisor.  You need to become a better, more educated and open minded person.

[/quote] My ideal client will stick with me as stock and bonds rise and fall.   If I set their expectations from the beginning of the relationship they realize they are going to lose money on paper some years.  That's perfectly normal and even healthy.   When stocks and bonds drop precipitiously that's when I will really earn my keep.

scrim

[/quote]

Scrim, would it be fair to say that you are convinced that your methodology is the best and that you stick to it, no matter what?

[/quote] Yes,  my thoughts are that we all offer similar, if not the same products.     My differentiator is my customer service in combination with honed communication and sales skills.

Is it working as I'm in the early years of my practice?   That's up for debate.  However, my clients, my firm and I are all comfortable at this point in this marathon.

scrim

[quote=scrim67][quote=Bobby Hull][quote=scrim67][quote=Dust Bunny][quote=scrim67]

I am serious.

Give me a real life scenario where a diverse portfolio 33% stocks 33% bonds and 33% cash could have a loss of 33%.

I don't find that possible.

scrim

[/quote]

Yeah. Give me the hypothetical ideal client who will adhere to your  1/3 1/3 1/3 strategy in a down market.. sounds good in theory.  Let's try it in real life.

You know....it isn't theory to our clients.  When they lose $$ they could give a rip about modern portfolio theory or any thing else.  It doesn't matter if you "find it possible". 

Again, I'm not advocating annuities for everyone. I think that they have a limited usage, but still useful  I am advocating that if you have a closed mind as an advisor.....I don't want YOU being my advisor.  You need to become a better, more educated and open minded person.

[/quote] My ideal client will stick with me as stock and bonds rise and fall.   If I set their expectations from the beginning of the relationship they realize they are going to lose money on paper some years.  That's perfectly normal and even healthy.   When stocks and bonds drop precipitiously that's when I will really earn my keep.

scrim

[/quote]

Scrim, would it be fair to say that you are convinced that your methodology is the best and that you stick to it, no matter what?

[/quote] Yes,  my thoughts are that we all offer similar, if not the same products.     My differentiator is my customer service in combination with honed communication and sales skills.

Is it working as I'm in the early years of my practice?   That's up for debate.  However, my clients, my firm and I are all comfortable at this point in this marathon.

scrim

[/quote]

It will work if you stick to your strategy and don't change it. What you're doing is of no interest to me, but there will be plenty of people who want what you do because you believe in it.

The biggest problem I see with your strategy is for some of your clients they have 0% chance of meeting their goals. When I run plannning scenarios most people neeed at least a 7% return on their money because they simple do not have enough. With that allocation 5.5% is likely.   JUst curious in this Bull run what have averaged?

[quote=bankrep1]The biggest problem I see with your strategy is for some of your clients they have 0% chance of meeting their goals. When I run plannning scenarios most people neeed at least a 7% return on their money because they simple do not have enough. With that allocation 5.5% is likely.   JUst curious in this Bull run what have averaged?[/quote]

What are his clients goals?

[quote=joedabrkr]

That huge commision is like a black hole that bends the ethics of anything that comes near it, and sucks many people in.

AR, you know I respect your opinions.  However, if you really want to have a "fair and balanced" discussion on this topic, you should stop using inflammatory language like "broker kickback" and "black hole" to refer to the commissions paid on the product.  After all, we all get paid in one manner, and all you're doing is giving Bobby Hull ammo to scurry around talking about how he can turn off the "broker fee meter". [/quote]

Bobby is going to talk about turning the broker meter off, but is for sure not going to talk about turning the annuity meter on.

My comment about the black hole still stands, I do think that the 6% payout on annuities does indeed "bends the ethics of anything that comes near it, and sucks many people in"

[quote]For what it's worth, one of the more successful investments I've recommended to groups of clients in the last decade(and purchased myself) was a managed futures fund in the late 90's.  Compared to a mutual fund or UIT(my primary focus at the time) it was hideously expensive and paid a pretty hefty vig to me as well.  But after much thought I decided it was a good diversifier.  Short version of the story is while internet stocks were melting down my clients doubled their money in the fund.  Guess what....nobody complained about the expenses or my compensation. [/quote]

Joe the problem with that line of thinking, is that a priori you had no clue about how the managed futures fund would perform after you bought it. Also, the managed futures fund is something unique.

In the case of an VA/EIA it is not unique. You can easly replicate the investment performance part of the total VA package.

When you break up a VA into its components, you see that most of it
doesn't add value. The insurance package may add psycological value.

1. 6% Dealer concession
2. Investment wrap services.
3. Insurance package
4. SPIA option

[quote]Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

If Nancy Pelosi gets her way, you will no longer find tax deferral of questionable value.  Consider the full scope of history.  Our current tax rates(including capital gains rates) are abnormally low right now, and if you didn't notice Democrats LOVE higher tax rates. [/quote]

The dems could just as easly close the annuity loophole and require people to be taxed on the phantom income of annuity accretions, under existing rules relating to passive income from investments.

IMHO raising taxes on investment income is unlikely b/c doing so would discourage savings/investments and harm retiree's who rely on investments for income.

[quote]Annuities often have a embedded put options in the form of guarantee minimum values. The acturaial gang at the insurco makes sure that these are overpriced relative to the real option value. The risk of being down in the market after 10 years isn't very high.

[QUOTE]

Too,
as others have mentioned the guarantees provide an additional benefit
of encouraging more rational investor behavior; they lessen the chance
that a client will hit the “eject button” at the bottom of a major
correction.  Like the credit card commercial says, for some
nervous nellies that can be “priceless”.

[/quote]



But like a VISA credit card, it can be much more expensive than paying cash/debit.



Again, if the client wants an annuity after having a full understanding
of the features, benefits, and costs, then it is fine by me. But most annuities are sold without that understanding and using deceptive/high preasure sales tactics.

[QUOTE]

There
are plenty of widows who collected some nice death benefits in
2001-02-03 who would vehemently argue your point about the “put
feature” being overpriced.

[/quote]

[QUOTE]

The end result of a VA is conversion to the SPIA or taking withdrawals from it, the main decision is the path that gets you to that point.



Choose wisely.

I do agree that I sometimes find the annuitization process to be somewhat of a “black box” subject to unfair manipulation.

[/quote]



The process of annuitisation of a given amount of money is easy to do based on actuarial tables. If you can create confusion about it, the customer is more likely to make a bad decision. Just like when you play poker.



The insurance company would like for you to choose the single life, no
remainder annuitisation since that helps to balance their book of
mortality risk. This is why life insurance companies sell annuities,
while marine insurance companies do not.



The best insurance agent is one who can sell a $500K WL policy and a $500K SPIA on the same day to the same person.

[quote=anonymous]

Scrim, I don’t get it.  If your average
client has 1/3 split equally between cash, bonds, and stocks, over a
ten year period of time, your client has close to a 0% chance of losing
money.   Your client also has close to a 100% chance of
underperforming an all equity VA.  The all equity VA also has a
100% chance of not losing money.

[QUOTE]

That really depends on the exact distribution of equity returns. If we start the 10 years on Jan 01,2001, The equity VA is going to be hard pressed to beat a 66% Fixed income 33% Equities portfolio.

The main question is risk adjusted performance, performance vs inflation, and the distribution of performance outcomes.

It's hard to say over all, but typical result will be worse in the VA by a decent amount, vs the limited risk of a really bad outcome. But a good risk managed balanced portfolio has a very low risk of a really bad outcome as well, while having a much better chance of good outcomes.

[quote] Can you name any 10 year period will 1/3, 1/3, 1/3 would outperform 100% in equities?  I can't.[/quote]

Oct 01 1929 - Oct 01 1939.

Oct 01 1929 - Oct 01 1939.

What were the returns?

[quote=AllREIT] [quote=joedabrkr]

That huge commision is like a black hole that bends the ethics of anything that comes near it, and sucks many people in.

AR, you know I respect your opinions.  However, if you really want to have a "fair and balanced" discussion on this topic, you should stop using inflammatory language like "broker kickback" and "black hole" to refer to the commissions paid on the product.  After all, we all get paid in one manner, and all you're doing is giving Bobby Hull ammo to scurry around talking about how he can turn off the "broker fee meter". [/quote]

Bobby is going to talk about turning the broker meter off, but is for sure not going to talk about turning the annuity meter on.

My comment about the black hole still stands, I do think that the 6% payout on annuities does indeed "bends the ethics of anything that comes near it, and sucks many people in"

[quote]For what it's worth, one of the more successful investments I've recommended to groups of clients in the last decade(and purchased myself) was a managed futures fund in the late 90's.  Compared to a mutual fund or UIT(my primary focus at the time) it was hideously expensive and paid a pretty hefty vig to me as well.  But after much thought I decided it was a good diversifier.  Short version of the story is while internet stocks were melting down my clients doubled their money in the fund.  Guess what....nobody complained about the expenses or my compensation. [/quote]

Joe the problem with that line of thinking, is that a priori you had no clue about how the managed futures fund would perform after you bought it. Also, the managed futures fund is something unique.

In the case of an VA/EIA it is not unique. You can easly replicate the investment performance part of the total VA package.

When you break up a VA into its components, you see that most of it
doesn't add value. The insurance package may add psycological value.

1. 6% Dealer concession
2. Investment wrap services.
3. Insurance package
4. SPIA option

[quote]Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

If Nancy Pelosi gets her way, you will no longer find tax deferral of questionable value.  Consider the full scope of history.  Our current tax rates(including capital gains rates) are abnormally low right now, and if you didn't notice Democrats LOVE higher tax rates. [/quote]

The dems could just as easly close the annuity loophole and require people to be taxed on the phantom income of annuity accretions, under existing rules relating to passive income from investments.

IMHO raising taxes on investment income is unlikely b/c doing so would discourage savings/investments and harm retiree's who rely on investments for income.

[quote]Annuities often have a embedded put options in the form of guarantee minimum values. The acturaial gang at the insurco makes sure that these are overpriced relative to the real option value. The risk of being down in the market after 10 years isn't very high.

Last time I checked, most insurance companies were in business to make a profit.  That doesn't make the protection options they sell over priced.  [/quote]

Joe, if the insurance company is to have an underwriting profit, then the insurance must be sold above its actuarial cost. The exact same thing goes on in VA's.

Since the company isn't playing with a fully deck (having given up 6% to the broker) they make their profits on the CoI and investment management fee's. Thus they tend to be much higher than alternative products.

[QUOTE]
Too, as others have mentioned the guarantees provide an additional benefit of encouraging more rational investor behavior; they lessen the chance that a client will hit the "eject button" at the bottom of a major correction.  Like the credit card commercial says, for some nervous nellies that can be "priceless".
[/quote]

But like a VISA credit card, it can be much more expensive than paying cash/debit.

Again, if the client wants an annuity after having a full understanding of the features, benefits, and costs, then it is fine by me. But most annuities are sold without that understanding and using deceptive/high preasure sales tactics.

[QUOTE]
There are plenty of widows who collected some nice death benefits in 2001-02-03 who would vehemently argue your point about the "put feature" being overpriced. [/quote]

Life insurance is always worth it when you collect the death benefit.

That doesn't mean you that you didn't pay too much for the protection.

[QUOTE]
The end result of a VA is conversion to the SPIA or taking withdrawals from it, the main decision is the path that gets you to that point.

Choose wisely.

I do agree that I sometimes find the annuitization process to be somewhat of a "black box" subject to unfair manipulation.
[/quote]

The process of annuitisation of a given amount of money is easy to do based on actuarial tables. If you can create confusion about it, the customer is more likely to make a bad decision. Just like when you play poker.

The insurance company would like for you to choose the single life, no remainder annuitisation since that helps to balance their book of mortality risk. This is why life insurance companies sell annuities, while marine insurance companies do not.

The best insurance agent is one who can sell a $500K WL policy and a $500K SPIA on the same day to the same person.

[/quote]

I was Pro-Life until I read the first few lines of this malarkey.

[quote=AllREIT] 

My comment about the black hole still stands, I do think that the 6% payout on annuities does indeed "bends the ethics of anything that comes near it, and sucks many people in"

Then perhaps you are a little too cynical about the ethics of the better advisors in our industry.  I’m not saying, btw, that we couldn’t use some improvement on this front.

FWIW I use annuities from time to time, and I’ve never felt like my ethics were being ‘bent’, nor my inner child being bruised.

[quote]For what it's worth, one of the more successful investments I've recommended to groups of clients in the last decade(and purchased myself) was a managed futures fund in the late 90's.  Compared to a mutual fund or UIT(my primary focus at the time) it was hideously expensive and paid a pretty hefty vig to me as well.  But after much thought I decided it was a good diversifier.  Short version of the story is while internet stocks were melting down my clients doubled their money in the fund.  Guess what....nobody complained about the expenses or my compensation. [/quote]

Joe the problem with that line of thinking, is that a priori you had no clue about how the managed futures fund would perform after you bought it. Also, the managed futures fund is something unique.

After more than a year of due diligence and contemplation, I did in fact have certain expectations about how the managed futures fund would perform.

I would argue, too, that annuities are unique when you consider the death benefits and living guarantees, and their ability to mitigate the tendency of some clients to panic, or to invest far too conservatively.  You cannot "replicate" those features cheaply, to my knowledge.

In the case of an VA/EIA it is not unique. You can easly replicate the investment performance part of the total VA package.

[quote]Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

If Nancy Pelosi gets her way, you will no longer find tax deferral of questionable value.  Consider the full scope of history.  Our current tax rates(including capital gains rates) are abnormally low right now, and if you didn't notice Democrats LOVE higher tax rates. [/quote]

The dems could just as easly close the annuity loophole and require people to be taxed on the phantom income of annuity accretions, under existing rules relating to passive income from investments.

IMHO raising taxes on investment income is unlikely b/c doing so would discourage savings/investments and harm retiree's who rely on investments for income.

Be careful about underestimating how greedy and economically unsophisticated politicians can be, especially the Democrats.

Having said that, it is unlikely that they would change tax deferral on annuities, since they are traditionally so closely tied to pension arrangements, and it has been accepted practice that insurance 'cash values' of any sort are not taxed as long as they are within the product.  Between the strength of the insurance company lobbies and the political uproar it would create as folks faced potentially enormous tax liabilities, I just don't see how it could happen.

[quote=joedabrkr]

Joe the problem with that line of thinking, is that a priori you had
no clue about how the managed futures fund would perform after you
bought it. Also, the managed futures fund is something unique.

After
more than a year of due diligence and contemplation, I did in fact have
certain expectations about how the managed futures fund would perform.
[/quote]

We all have expections, but if you ask what the value of the fund will be on date X, you can't know. So its not like a bond or annuitity in that respect.

However the futures fund is special and thus worth paying for. Same thing with certain externally managed finance companies. The external fee's would be excessive for a typical investment. But for a complete financial platform they are very much worth it.

IMHO the underlying investments of most annuities aren't worth paying the 6% commision and high ongoing expenses for.

What would be very interesting is if some company offered an equity linked term life policy. E.g the worse the equity markets performance the better the death benefit.

[QUOTE]I would argue, too, that annuities are unique when you consider the death benefits and living guarantees, and their ability to mitigate the tendency of some clients to panic, or to invest far too conservatively.  You cannot "replicate" those features cheaply, to my knowledge.[/quote]

Right, although IMHO client education goes a long way. I and other   insurco shareholders will tend to think that the economic cost of the protection exceeds its value. However it could be very psychologically valuable.

Your annuity, my dividends.

Be careful about underestimating how greedy and economically unsophisticated politicians can be, especially the Democrats.

Having said that, it is unlikely that they would change tax deferral on annuities, since they are traditionally so closely tied to pension arrangements, and it has been accepted practice that insurance 'cash values' of any sort are not taxed as long as they are within the product.  Between the strength of the insurance company lobbies and the political uproar it would create as folks faced potentially enormous tax liabilities, I just don't see how it could happen.

[/quote]

Thus I have the exact same thinking about QDI and LTCG being taxed at 15% vs annuities at ordinary income. It's too important to retiree's, and the shareholder/ICI lobby is huge.

The total tax drag inside/outside the annuitisation wrapper isn't as much as is commonly thought. In fact clients/advisors often fail to do tax arbitrage. Annuities should be full of investments in tax-disadvantaged things like junk bonds/REITs/BDCs/Preferred stock etc and not straight up equities.

A 50% increase in the value of an equity investment gets taxed at full income rates upon exit in an annuity, but only 15% in a taxable account.

IMHO the underlying investments of most annuities aren't worth paying the 6% commision and high ongoing expenses for.

Be anti-annuity if you choose, but please get your facts straight.  The client is not paying both a 6% commission and high expenses.  Feel free to make an argument that the 6% commission leads to higher expenses.  If a paraticular annuity pays one broker 7%, but another broker only 4% and the annual expenses are 1.8%, the client is paying 1.8% regardless of the commission earned by the broker.

Right, although IMHO client education goes a long way.

This is one of those things that is much more true in a bull market than a bear market.  Clients classify themselves as being much more aggressive during bull markets.  When the market goes up for a few years in a row, everyone thinks that they can stomach volatility.  The perception often changes once the market declines.  I agree that client education goes a long way, but just not far enough for many clients during bull markets.

I agree with your tax comments.  This is why I'm a much bigger fan of qualified annuities.

[quote=AllREIT] [quote=joedabrkr]

Joe the problem with that line of thinking, is that a priori you had no clue about how the managed futures fund would perform after you bought it. Also, the managed futures fund is something unique.

After more than a year of due diligence and contemplation, I did in fact have certain expectations about how the managed futures fund would perform. [/quote]

We all have expections, but if you ask what the value of the fund will be on date X, you can't know. So its not like a bond or annuitity in that respect.

However the futures fund is special and thus worth paying for. Same thing with certain externally managed finance companies. The external fee's would be excessive for a typical investment. But for a complete financial platform they are very much worth it.

IMHO the underlying investments of most annuities aren't worth paying the 6% commision and high ongoing expenses for.

What would be very interesting is if some company offered an equity linked term life policy. E.g the worse the equity markets performance the better the death benefit.

[QUOTE]I would argue, too, that annuities are unique when you consider the death benefits and living guarantees, and their ability to mitigate the tendency of some clients to panic, or to invest far too conservatively.  You cannot "replicate" those features cheaply, to my knowledge.[/quote]

Right, although IMHO client education goes a long way. I and other   insurco shareholders will tend to think that the economic cost of the protection exceeds its value. However it could be very psychologically valuable.

Your annuity, my dividends.

Be careful about underestimating how greedy and economically unsophisticated politicians can be, especially the Democrats.

Having said that, it is unlikely that they would change tax deferral on annuities, since they are traditionally so closely tied to pension arrangements, and it has been accepted practice that insurance 'cash values' of any sort are not taxed as long as they are within the product.  Between the strength of the insurance company lobbies and the political uproar it would create as folks faced potentially enormous tax liabilities, I just don't see how it could happen.

[/quote]

Thus I have the exact same thinking about QDI and LTCG being taxed at 15% vs annuities at ordinary income. It's too important to retiree's, and the shareholder/ICI lobby is huge.

The total tax drag inside/outside the annuitisation wrapper isn't as much as is commonly thought. In fact clients/advisors often fail to do tax arbitrage. Annuities should be full of investments in tax-disadvantaged things like junk bonds/REITs/BDCs/Preferred stock etc and not straight up equities.

A 50% increase in the value of an equity investment gets taxed at full income rates upon exit in an annuity, but only 15% in a taxable account.

[/quote]

Hey Big Boy, you can hate annuities all you want. Just remember...your clients and prospects like them and there's NOTHING you can do about it. I'm an expert at presenting them and I'm an expert at coming between brokers and their clients. And there's lots and lots and lots of guys just like me. You wouldn't know about this but when you've earned people in excess of 24% avg annual over the course of 4 years, all you have to do is tape a note to the back of a dog and it sells itself.

Sleep well. I know I will.

[quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

Maybe your eyes are closed.

[quote=hoopfan][quote=EDJ to RIA]

I've never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...

[/quote]

Maybe your eyes are closed.

[quote=AllREIT]

[quote=hoopfan][quote=EDJ to RIA]

I’ve never seen a situation where a VA works well.

Ok, let’s hear it from the annuity gang…

[/quote]

Maybe your eyes are closed.

[quote=AllREIT]

[quote=hoopfan][quote=EDJ to RIA]

I’ve never seen a situation where a VA works well.

Ok, let’s hear it from the annuity gang…

[/quote]

Maybe your eyes are closed.

[quote=AllREIT] [quote=hoopfan][quote=EDJ to RIA]I’ve never seen a situation where a VA works well.

Ok, let's hear it from the annuity gang...[/quote]

Maybe your eyes are closed.[/quote]

Maybe no one has ever showed that VA's work well in the real world, for most real investors?[/quote]

Wow.  Now I'm really curious...I think you have pretty good book intelligence...but how long have you been paid to manage money for other people?  I'm genuinely curious...care to divulge?

[quote=AllREIT] [quote=joedabrkr]

That huge commision is like a black hole that bends the ethics of anything that comes near it, and sucks many people in.

AR, you know I respect your opinions.  However, if you really want to have a "fair and balanced" discussion on this topic, you should stop using inflammatory language like "broker kickback" and "black hole" to refer to the commissions paid on the product.  After all, we all get paid in one manner, and all you're doing is giving Bobby Hull ammo to scurry around talking about how he can turn off the "broker fee meter". [/quote]

Bobby is going to talk about turning the broker meter off, but is for sure not going to talk about turning the annuity meter on.

My comment about the black hole still stands, I do think that the 6% payout on annuities does indeed "bends the ethics of anything that comes near it, and sucks many people in"

[quote]For what it's worth, one of the more successful investments I've recommended to groups of clients in the last decade(and purchased myself) was a managed futures fund in the late 90's.  Compared to a mutual fund or UIT(my primary focus at the time) it was hideously expensive and paid a pretty hefty vig to me as well.  But after much thought I decided it was a good diversifier.  Short version of the story is while internet stocks were melting down my clients doubled their money in the fund.  Guess what....nobody complained about the expenses or my compensation. [/quote]

Joe the problem with that line of thinking, is that a priori you had no clue about how the managed futures fund would perform after you bought it. Also, the managed futures fund is something unique.

In the case of an VA/EIA it is not unique. You can easly replicate the investment performance part of the total VA package.

When you break up a VA into its components, you see that most of it
doesn't add value. The insurance package may add psycological value.

1. 6% Dealer concession
2. Investment wrap services.
3. Insurance package
4. SPIA option

[quote]Annuities exploit a few holes in the tax code that predate modern IRA accounts. However given the very low tax rates on long term investments (15% QDI/15% LTCG) vs (Ordinary income rate for annuity withdrawals) this remains of questionable value.

If Nancy Pelosi gets her way, you will no longer find tax deferral of questionable value.  Consider the full scope of history.  Our current tax rates(including capital gains rates) are abnormally low right now, and if you didn't notice Democrats LOVE higher tax rates. [/quote]

The dems could just as easly close the annuity loophole and require people to be taxed on the phantom income of annuity accretions, under existing rules relating to passive income from investments.

IMHO raising taxes on investment income is unlikely b/c doing so would discourage savings/investments and harm retiree's who rely on investments for income.

[quote]Annuities often have a embedded put options in the form of guarantee minimum values. The acturaial gang at the insurco makes sure that these are overpriced relative to the real option value. The risk of being down in the market after 10 years isn't very high.

Last time I checked, most insurance companies were in business to make a profit.  That doesn't make the protection options they sell over priced.  [/quote]

Joe, if the insurance company is to have an underwriting profit, then the insurance must be sold above its actuarial cost. The exact same thing goes on in VA's.

Since the company isn't playing with a fully deck (having given up 6% to the broker) they make their profits on the CoI and investment management fee's. Thus they tend to be much higher than alternative products.

[QUOTE]
Too, as others have mentioned the guarantees provide an additional benefit of encouraging more rational investor behavior; they lessen the chance that a client will hit the "eject button" at the bottom of a major correction.  Like the credit card commercial says, for some nervous nellies that can be "priceless".
[/quote]

But like a VISA credit card, it can be much more expensive than paying cash/debit.

Again, if the client wants an annuity after having a full understanding of the features, benefits, and costs, then it is fine by me. But most annuities are sold without that understanding and using deceptive/high preasure sales tactics.

[QUOTE]
There are plenty of widows who collected some nice death benefits in 2001-02-03 who would vehemently argue your point about the "put feature" being overpriced. [/quote]

Life insurance is always worth it when you collect the death benefit.

That doesn't mean you that you didn't pay too much for the protection.

[QUOTE]
The end result of a VA is conversion to the SPIA or taking withdrawals from it, the main decision is the path that gets you to that point.

Choose wisely.

I do agree that I sometimes find the annuitization process to be somewhat of a "black box" subject to unfair manipulation.
[/quote]

The process of annuitisation of a given amount of money is easy to do based on actuarial tables. If you can create confusion about it, the customer is more likely to make a bad decision. Just like when you play poker.

The insurance company would like for you to choose the single life, no remainder annuitisation since that helps to balance their book of mortality risk. This is why life insurance companies sell annuities, while marine insurance companies do not.

The best insurance agent is one who can sell a $500K WL policy and a $500K SPIA on the same day to the same person.

[/quote]

Nothing to add really, aside from the blue font, which I think the exchange lacked.