VA wholesaler was just here

Jan 31, 2007 9:38 pm

I just had a VA wholesaler in my office.     

He was telling me his product can guarantee 6% income for life no matter what the market does and no matter how much is withdrawn from the account.

I asked him what the downside was on his product but his answer was a bit convoluted.

For this unbiased out there please enlighten me what the downsides are to his product.

Thanks in advance.

Scrim

Jan 31, 2007 9:55 pm

No matter what the "true" answer, this is the big problem with the products. Complicated for everyone. Annuity companies need to get smarter about the products they manufacture.

When I hear "convoluted", I see handcuffs.

So what is the downside?

Jan 31, 2007 10:10 pm

The downside probably being huge M&E fees to insure that puppy.  Is that 6% BEFORE or AFTER expenses?

Jan 31, 2007 10:40 pm

Those types of guarantees are becoming pretty common in VAs.  All of our vendors have something like that.  It's expensive.  50 bps avg.   On a typical annuity that puts the M&E up around 1.75 to 2%.    Hartford was the first to offer this at Jones.  The wholesalers like to talk about it, but I don't hear a lot of brokers using it for retirement income. 

The downsides are numerous.  Usually only available Point of Sale.  Not as tax efficient as annuitization since they normally take it out LIFO.  Sometimes they have to use the feature for 5+ years before they can stop it, if they can stop it.  Limited to what they can take out (capped at whatever the guaranteed amount is).  Death benefit decreases with every dollar taken out.  There are probably more I'm not thinking of.

The only time I have thought about using it is when a client wants the safety of a fixed annuity, but really needs the equity exposure for the future.  That feature hasn't sold any annuities in my office yet.

With that said, I have heard of some brokers using those features for estate planning purposes.  They take the guaranteed amount and use it as premiums for a life insurance policy.  Kind of like using an immediate annuity but still retaining control of the assets.  Guaranteed, predictable income, but no worries about the client dying next week.    

Jan 31, 2007 11:38 pm

Axa?

Jan 31, 2007 11:47 pm

The AXA Account must be annuitized in order to get the 6% of course you can drawn down the account first and then annuitize the benefit base, but try explaining that to the client

Feb 1, 2007 12:22 am

Try explaning that to the client?

Try explaining that to me!

scrim

Feb 1, 2007 2:42 am

A reasonable person can understand that because of the time value of money the annuitized benefit base does not really = a 6% return but they still advertise it as such

Feb 1, 2007 2:51 am

Yeah, the annuitzing the benefit base case is not something you want to

get to (since it means the contract is outta $). However, ins companies

don’t figure that will happen or they wouldn’t offer the guarantee.



I’ve been through this struggle Scrim, and with the newest generation of

income benefits I have become a reluctant fan of using some VAs.

Upsides are easier to understand and vary by product…in fact, I’ve

started using the best parts of 2 or 3 benefits/contracts that complement

each other (ex: one with principal guarantee and one w/an income

guarantee).



The downsides (as I explain them to clients): more drag from expenses

(1-2%/yr more than similar funds) and reudced liquidity (4 or 7 years on

most products). You can make up a good bit or all of the expense diff by

raming up the equity allocation vs. what you would have otherwise. I use

a “laddered” approach if I can–add portions of an acct over time so that

the early $ is free of CDSC before tying up too much. I prefer to use the

VAs in IRAs, so the cap gains becoming income tax isn’t an issue–but

that’s a downside obviously in a non-qual acct. However, if the client

understands the above, I think these things beat the heck out of

individual bonds if the client is on edge of an acceptable withdrawal rate

(say around 6%).

Feb 1, 2007 3:39 pm

[quote=Cowboy93] I prefer to use the VAs in IRAs, so the cap gains becoming income tax isn't an issue--but that's a downside obviously in a non-qual acct.  
[/quote]

OK, I'm confused.  Qualified or non-qualified, if there are gains that build up in the VA, they aren't taxed until you pull them out.  Then they are both taxed at ordinary income rates.  So, why put the preference for the VA in the IRA?  Only for the income bene?  Are you pulling the income guarantee off and then leaving it in the IRA? 

Feb 1, 2007 4:04 pm

Cowboy93,

Which firm you riding for partner?

Feb 1, 2007 4:20 pm

Forget the annuity.  You can put $100k in a can in the backyard.  You can draw out 5% for 20 years.  No risk of loss.

I have yet to see an annuity that can perform like a solid group of funds well allocated among asset classes.

American funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE.

In the very worst 10 year period 1996 to 2005, you can take a 5% annual withdrawal and still have about $103,000 in your account at the end of the 10 year period. (the can is empty then)

No need to annuitize, no CDSC.  Oh, and if you die, your kids get the step up WHICH THEY DON'T GET WITH ANNUITIES.

The sales guys are slick and they can help you close any sale.  You have to decide if you want to build your business making alot of money and not doing your best for people. 

I have found very few cases where annuities fit.

Feb 1, 2007 4:34 pm

[quote=vbrainy]

Forget the annuity.  You can put $100k in a can in the backyard.  You can draw out 5% for 20 years.  No risk of loss.

[/quote]

  I am not sure that I agree completely, but that is a pretty funny analogy!
Feb 1, 2007 4:59 pm

100k @6% gives you 16.66 years of principle to take out. The insurance company is betting that it will go up or you will 1035 it out before then. There is nothing free in life. I do not like annuities but you better at least show them to clients because someone else will.You can make a case to use them when someone take his pension payout in a lump sum. at least you can tell them the income will last.

Feb 1, 2007 5:37 pm

[quote=aldo63]

100k @6% gives you 16.66 years of principle to take out. The insurance company is betting that it will go up or you will 1035 it out before then. There is nothing free in life. I do not like annuities but you better at least show them to clients because someone else will.You can make a case to use them when someone take his pension payout in a lump sum. at least you can tell them the income will last.

[/quote] I would rather take a small part of the lump sum and buy an immediate annuity for "income they cannot outlive" and take the rest and do a conservative 40/60 allocation.   We also need to keep the withdrawal rate reasonable (4-5%) to start and increase for inflation every year.

Does this make sense?

scrim

Feb 1, 2007 5:49 pm

While I haven't used the 6% for life feature (most annuity companies only give you 6% for life if you're over a certain age, ING is 76), I have used the 5% for life feature.  Basically, the client gets 5% of what they put in to the contract, or, with ING for instance, 5% of the highest QUARTERLY value it achieved before the income started. 

I would never put 100% of a client's money into this product, but I have figured out the clients "needs" money and put enough in the annuity to generate that amount for life.  At 5%, there's a good chance that the underlying principal can grow, and every year the client has the ability to lock in 5% of that higher number (if the account value has risen) for life.

As for the downside.  Once you start taking the income, any withdrawals, above the 5% amount, will affect the 5 or 6% gaurantee proportionally (sp?).  The worst case is that the underlying value of the annuity goes to 0. In that case, the client will still get 5% for life until they die, but the kids won't get anything.

This is better than annuitizing because the client can change their minds down the road and get more or less than what they put in.  Think of it as buying a pension that can be busted in case of an emergency.

I realize mutual funds can "make" more money than annuities. But, sometime our job as advisor is not simply to make more money for your client, it's to help them have a stable, rising, income throughout retirement.

Feb 1, 2007 6:49 pm

A"merican funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE."

Not exactly. Look at the internal transaction costs- the ones that dont show up in expense ratios, and arent required by the SEC to be disclosed. So that 0.7% figure is more than that.

Feb 1, 2007 6:52 pm

[quote=now_indy]

While I haven't used the 6% for life feature (most annuity companies only give you 6% for life if you're over a certain age, ING is 76), I have used the 5% for life feature.  Basically, the client gets 5% of what they put in to the contract, or, with ING for instance, 5% of the highest QUARTERLY value it achieved before the income started. 

I would never put 100% of a client's money into this product, but I have figured out the clients "needs" money and put enough in the annuity to generate that amount for life.  At 5%, there's a good chance that the underlying principal can grow, and every year the client has the ability to lock in 5% of that higher number (if the account value has risen) for life.

As for the downside.  Once you start taking the income, any withdrawals, above the 5% amount, will affect the 5 or 6% gaurantee proportionally (sp?).  The worst case is that the underlying value of the annuity goes to 0. In that case, the client will still get 5% for life until they die, but the kids won't get anything.

This is better than annuitizing because the client can change their minds down the road and get more or less than what they put in.  Think of it as buying a pension that can be busted in case of an emergency.

I realize mutual funds can "make" more money than annuities. But, sometime our job as advisor is not simply to make more money for your client, it's to help them have a stable, rising, income throughout retirement.

[/quote]

Well, what are you?  a Financial Advisor or an insurance salesman?  Can't you explain to clients the value of the stock market? 

Hey, if your first priority was not to GET PAID THE HUGE ANNUITY COMISSION, you could sell them a AAA bond with a coupon, put the rest in the stock market and call it a day.

There is one reason for the explosion in the annuity market and the hype and BS they spend millions of dollars on to sell this junk, IT IS BECAUSE THEY ARE MAKING A TON OF MONEY off the backs of hard working people who have retired.

That is NOT the way I prefer to make my money.

Feb 1, 2007 10:06 pm

[quote=blarmston]American funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE."

Not exactly. Look at the internal transaction costs- the ones that dont show up in expense ratios, and arent required by the SEC to be disclosed. So that 0.7% figure is more than that.[/quote]

...and there's that pesky thing called a "load"...

Feb 1, 2007 10:09 pm

It depends on what the meaning of the word "is" is.

The annuity offers you something that you cannot offer otherwise in the world of equity investing, that something is "IS".  'This contract compounds at 6% per year or the rate that you get on your investments, whichever is higher. If you buy $1MM of this contract and the market goes to zero over the next 12 years, your income IS based off of a $2,000,000 value. You will be able to take a Life with 10 year certain annuitization which will give you at least $12,000 per year.' (Actually I'm not 100% on what the annuitization deal is and it dependes on the age of the client at the time of annuitization at the time a male over 75 would have an annuitization rate of about 7.4%).

You can not say that with a portfolio of Mutual funds, even if it monte carlo's out at 99% of the time. Not honestly, anyway.

Meanwhile, over the last two years I kicked the market's azz net of all fees and commissions inside an American Skandia annuity where they were jiggering around my cash position (I sold them out when I netted people at least 20% profit, and I do it in IRAs so don't gimme crap about taxes or stepped up cost basae). I kicked the market's azz in Hartford's annuity too, up over 50% in one year. I'm outperforming the market in the John Hancock, and I'm working on a $1MM case for AXA.

Could I have done better without the Annuity wrapper? Yeah. I'd have made more money too in B shares. But would I have been as aggressive without the wrapper? NO!  As a result, I would NOT have done as well, even thought I could have done better. The fact that I can shift the risk off to the annuity company for x basis points is absolutely worth it for me and for the client (and the annuity company got those fees and didn't have to pay out a claim against them so they're happy too.) Not to mention... Would the client have bought without the assurance? NO!

Annuities have come a long long way over the past five years. What they offer you now is a way to assure investors with an IS. That's important, because every investor IS not certain that nobody IS going to Hijack a Jetliner into the Indian Point Nuclear Power plant, making NYC dark and unliveable for a thousand years (I know that the plant can take a direct 747 hit without imploding, exploding or melting down) The fact is you don't KNOW what IS in the future and the annuity gives you that "suspenders and a belt" of IS.

I don't do a huge number of them but I do use them and the AXA product is one of the ones that have my name on some contracts.

Mr A

Feb 1, 2007 10:31 pm

Mr. A makes good points.  With the underlying guarantees you can invest a client who might not otherwise be as aggressive as they need to be.

I have a client that we just did a 6 month review on his VA.  Compounds at 7% annually, 10 year commitment.  He is willing to set this money aside and ignore it for 10 years when he will be approaching retirement... doesn't need it at all. If the contract does worse than 7% the client can annuitize the amount at the end of the 10 years or wait to set up an income stream later.  If the contract does better than 7% the income stream can be from the higher amount.  Death benefit and income benefit is ratcheted quarterly.   We put in $63,000 in August at the end of January it was worth almost $75,000.  We just beat the pants off of 7% and the client is a happy camper.  

Could I have gotten an even better return using those same funds in a wrap account? Yes. However, without the safety net, my client would not have been so willing to let me go heavily international and small/mid cap.  

This strategy wont work for people who need to take income from the contract during the surrender period.  In that case set up another source of immediate or liquid income.   Like Mr. A ....I don't do very many annuities.  When I do, the client is fully informed and aware of the pros and cons.

Feb 1, 2007 10:45 pm

I would rather take a small part of the lump sum and buy an immediate annuity for “income they cannot outlive” and take the rest and do a conservative 40/60 allocation.   We also need to keep the withdrawal rate reasonable (4-5%) to start and increase for inflation every year.

Does this make sense?

For myself, I think this is stone cold cool.

Boomers in trouble, most annuity contracts way to complicated and looking like a future blinking yellow light, maybe handcuffs.

Immediate annuitization can happen at the last moment, or when interest rates are relatively high. Maybe 1/3 of principle.

This is not the sweeping, bells and whistles guaranteed income strategy.

I have been thinking about this a lot. I'll take the middle road and hedge bets with you any time. Wanna be my planner?

Feb 1, 2007 10:47 pm

“principal, Joe.”

Feb 2, 2007 12:05 am

Well, Scrim, hopefully you have found a few downsides. …for some reason

these things arouse relatively strong emotions. I am hopeful that the

marketplace will continue to get more competitive and the cost, liquidity,

and other downsides will continue to be less bad.

Feb 2, 2007 12:30 am

When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.

By the time I'm finished reading the contract (or even the slick brochures for that matter) I feel like Tom Hanks in BIG (1988) when he's in the meeting and raises his hand and says "I don't get it"

scrim

Feb 2, 2007 2:19 am

When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.

Obviously annuity products are evolving. It just seems when you look at the risk management features of this insurance product, you hit a wall of diminishing returns. I mean, the idea of betting that I will live longer or less longer than a person my age, and transfering that risk, this is a basic concept.

The idea of bringing market risk down to the individual contract level feels gimmicky, with floors and ceilings and so on. That's when you have to start reading the fine print about fees and fiddle.

And since these are insurance products, to what extent are the performance guarantees tied to the success of the group of insureds (or is it just tied to the general fund of the insurance company since it is not life or health insurance?)

It seems the idea of an individual advisor manipulating the subaccounts as to outperform some kind of baseline return, if that is what we are talking about, well, that kind of goes against the whole risk transfer idea, and seems like individual superior performance would be arbitraged out by the whole market over time.

In other words, either just accept the risk outside an insurance contract, or transfer the risk. I know this is a hybrid, but do we run the risk of mediocrity? Why insure a big up or downside? What do we have here, a baby hedge fund?

I guess I'm too dull to get it.

I rather delegate the investment activity inside the contract to an institutional investment manager, and focus on the highest possible fixed rate of return off the general account.

Or do something else with the money.

Feb 2, 2007 3:19 am

[quote=vbrainy]

There is one reason for the explosion in the annuity
market and the hype and BS they spend millions of dollars on to sell
this junk, IT IS BECAUSE THEY ARE MAKING A TON OF MONEY off the backs
of hard working people who have retired.

That is NOT the way I prefer to make my money.

[/quote]

Exactly, set the clients up with a decent bond fund, a decent TIPS fund, some REITs and one of the equity ETF's that is based on companies that increase dividends.

Buying an annuity is like siting down in a tough 40/80 Hold'em at the Bellagio. You don't make any money from gambling against professionals. The insurance companies do not intend to lose money on the annuity.
Feb 2, 2007 3:48 pm

[quote=scrim67]

When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.

By the time I'm finished reading the contract (or even the slick brochures for that matter) I feel like Tom Hanks in BIG (1988) when he's in the meeting and raises his hand and says "I don't get it"

scrim

[/quote]

Glad I am not the only one.  I spent 20 minutes on the phone with John Hancock trying to get them to explain to me ALL of the expenses of the Venture III.  With the grpIII it turns out it was about 3.60%.  But, that was after 20 minutes and transfers to several people.  That just stinks.  Scrim is right.

Feb 2, 2007 4:18 pm

 Babbling Looney wrote: "Compounds at 7% annually"

Sorry, Babs, but when you say this, it shows that you don't really understand the contract.  I hope that you never say that to a client. 

The 7% is not real!  I don't simply mean that you have to annuitize the money.  It's fake because the insurance companies lower the annuitization rates and/or have an age setback. 

Ex. Over a ten year period, the contract returns an average of 4% a year.  The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 

The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!

This post is written by someone who is a big fan of qualified VA's in the right situation.

 

Feb 2, 2007 4:30 pm

The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 

The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!

Interesting analysis. Less than CDs packaged in a tax deferred wrapper.

Well, insurance company product designer, what do you have to say about this?

Feb 2, 2007 4:54 pm

Interesting analysis. Less than CDs packaged in a tax deferred wrapper.

This better not be an "interesting analysis".  If someone sells VA's with GMIB benefits, they better understand this or they don't have a right to be talking to clients.   It's also not less than CDs because the 3% is only what they are going to get as a worst case scenario.  

I find the "tax deferred wrapper" to be a negative.  Thus, almost all of my VA's are qualified.

Feb 2, 2007 5:14 pm

[quote=anonymous]

 Babbling Looney wrote: "Compounds at 7% annually"

Sorry, Babs, but when you say this, it shows that you don't really understand the contract.  I hope that you never say that to a client. 

The 7% is not real!  I don't simply mean that you have to annuitize the money.  It's fake because the insurance companies lower the annuitization rates and/or have an age setback. 

Ex. Over a ten year period, the contract returns an average of 4% a year.  The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 

The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!

This post is written by someone who is a big fan of qualified VA's in the right situation.

 

[/quote] I think this is probably the most important part of the VA contract that is misunderstood by advisors in general.   If many advisors don't understand how can we ever expect the average investor to?  

That is why I am very reluctant to introduce VA's to my practice.

I will never present something to my client they cannot understand.

scrim

Feb 2, 2007 6:07 pm

[quote=planrcoach]“principal, Joe.”[/quote]

eh?

Feb 2, 2007 6:33 pm

 If many advisors don't understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Explanation for a 58 year old client of a 5% 10 year GMIB

Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)

Explanation of a 10% GMAB

Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.

Feb 2, 2007 6:40 pm

eh?

You trained me to look harder for my own typos. Famous and you don't even know it.

Feb 2, 2007 7:11 pm

If many advisors don’t understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Good points. I am standing here with my pile of cash. If I sign the contract, we both make long term commitments (aside from the type of contractual commitment described by an immediate annuity, a pension).

We contractually manage the potential risks and rewards of future unknown market activity.

With my pile of cash, I am thinking, if I wait, maybe I can get a better deal down the road, a better time, a better product, a more efficient product.

In the dim recesses of my mind, I remember CFP studies talking about risk and reward. The "baseline" would be U. S. government treasury returns, and risk would be, how much return can you get about that level, compared to the security of owning treasuries.

In other words, take expenses and fancy packaging completely out of the picture.

I think if product manufacturers could do some work to clarify the risk/reward in terms of some objective baselines, while packaging the immediate annuity pension concept, these products could take off. I guess they are already.

The product needs to be simplified to accord the instincts of the experienced analytical.

Feb 2, 2007 7:11 pm

[quote=anonymous]

 If many advisors don't understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Explanation for a 58 year old client of a 5% 10 year GMIB

Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)

Explanation of a 10% GMAB

Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.

[/quote] What are the time frames for this feature usually?   We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

scrim

Feb 2, 2007 7:13 pm

Would I be accurate in saying this GMAB feature is akin to buying flight insurance?

No one even buys that anymore since the risk of being in a fatal airplane crash has to be less than 1%.  I'm not an actuary but i'm surmising it's way less than 1%.

scrim

Feb 2, 2007 7:42 pm

We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.

The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  

If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 

Perception beats reality everytime.

Feb 2, 2007 7:50 pm

[quote=babbling looney]

We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.

The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  

If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 

Perception beats reality everytime.

[/quote] I haven't run the numbers but I would hazard to guess that if someone started investing in 1992 they were still ahead when the market bottomoed out ten years later.   Can anyone verify this info as I'm not 100% sure.

scrim

Feb 2, 2007 7:54 pm

Yes, waaaaay ahead.  However, as abnormally bad as 2000-02 was, 1995-99 was just as abnormally good.  Probably not a coincidence that those periods were together--a little thing known as "reversion to the mean."

Your point--although it was question and not really a point--doesn't change babbling looney's logic from being dead on...and she has done this a lot longer than you.

Feb 2, 2007 8:06 pm

[quote=babbling looney]

We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.

Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.

The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  

If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 

Perception beats reality everytime.

[/quote] I appreciate all the healthy constructive feedback.   I guess a "big downturn" is relative.   I wasn't in my practice back during this big downturn but I have looked at actual performance during the period from 3/2000 until 10/2002.

Most of my retirees and near retirees are in a 40/60 allocation.

Had I been in my practice during that time my clients would've have lost a total of 5.89% during this bad period of 31 months.    This figure includes my fee.    If I didn't charge for my services it would've been down a cumulative 2.50% during this time period.

Now maybe to a few clients a loss of 6% or so during a very bad period would've made them fire me.   I'm thinking most would've thanked me for paring their losses.

Since I haven't lived thru a bad period in my practice I can only pray I won't be fired by a majority of my clients when we get the next bear market.

scrim

Feb 2, 2007 8:36 pm

Since I haven't lived thru a bad period in my practice I can only pray I won't be fired by a majority of my clients when we get the next bear market

The last few years have been pretty nice.  Almost anyone could have made money without halfway trying. When the bad times come, and they will, you will need to have prepared your clients that there can and will be downturns. It really helps to have a good personal relationship with them so they can see that you are concerned and suffering along with them.   "I feeeel your pain!"

The worst thing to do and the thing we all want to do when the bottom starts falling out is to hide from your clients.   Believe me there is nothing more stomach churning than calling clients in to tell them they are down in funds and try to do damage control.  The clients don't care that they are up from the start. All they see is that their statements are less than last month and the month before and the month before that.   AND it is going to be your fault.

Trying to decide if it is NOW that we should cut our losses and drastically reposition while we see the continual erosion in a lot of client's portfolios. Not just one client but dozens and dozens of people losing money.  Should we hang on and hope it will turn around?  What if we cut and run too soon and it comes back?  What if it doesn't come back and we keep going down in all asset classes 5% 10%, 15%, 30%!! .....help me Mommy!!!  I want to barf or get drunk....maybe both.

This is why for some clients I like the guarantees provided in the variable annuities.  True.. we don't get the full performance that we would get outside the contract. But if/when the contract value is down, there is still a guaranteed amount of income that would not be there without the riders on the contract.  VA's are not for everyone.

Your certainty and belief that asset allocation will save you is nice.  Reality is slightly different.  I believe in asset allocation too, but I also believe that it isn't a silver bullet.

Feb 2, 2007 8:49 pm

--doesn't change babbling looney's logic from being dead on...and she has done this a lot longer than you.

Good market history discussion.

I have a question.

Can any annuity product absolutely guarantee a (partially) equity return based payout, if things totally fall apart?

If an insurance company fails, another takes over. If enough of the products are sold (% of insurance company general fund) - at enough companies - where is the risk transfer?

Feb 2, 2007 8:52 pm

[quote=babbling looney]

Since I haven't lived thru a bad period in my practice I can only pray I won't be fired by a majority of my clients when we get the next bear market

The last few years have been pretty nice.  Almost anyone could have made money without halfway trying. When the bad times come, and they will, you will need to have prepared your clients that there can and will be downturns. It really helps to have a good personal relationship with them so they can see that you are concerned and suffering along with them.   "I feeeel your pain!"

The worst thing to do and the thing we all want to do when the bottom starts falling out is to hide from your clients.   Believe me there is nothing more stomach churning than calling clients in to tell them they are down in funds and try to do damage control.  The clients don't care that they are up from the start. All they see is that their statements are less than last month and the month before and the month before that.   AND it is going to be your fault.

Trying to decide if it is NOW that we should cut our losses and drastically reposition while we see the continual erosion in a lot of client's portfolios. Not just one client but dozens and dozens of people losing money.  Should we hang on and hope it will turn around?  What if we cut and run too soon and it comes back?  What if it doesn't come back and we keep going down in all asset classes 5% 10%, 15%, 30%!! .....help me Mommy!!!  I want to barf or get drunk....maybe both.

This is why for some clients I like the guarantees provided in the variable annuities.  True.. we don't get the full performance that we would get outside the contract. But if/when the contract value is down, there is still a guaranteed amount of income that would not be there without the riders on the contract.  VA's are not for everyone.

Your certainty and belief that asset allocation will save you is nice.  Reality is slightly different.  I believe in asset allocation too, but I also believe that it isn't a silver bullet.

[/quote] I've prepared them for losses.  In matter of fact, I tell new clients the day they sign up that if I'm doing my job right, not only can they lose money some years they WILL lose money some years.

scrim

Feb 2, 2007 8:57 pm

Not to mention... If you weren't in the right stocks during the tech boom, you were SOL and more likely you were getting fired for underperformance.

"$8 a trade my man!" "Technically, it's a country!" Money Magazine headline "Everybody's Getting RICH!!!"

Asset Allocation didn't work on the way up (either you were in Large Cap Growth and by that I mean MSFT, INTC, GE, CSCO or you were losing money) and it didn't work on the way down!

Point is, you do NOT know! As such you ought not be so strident in your belief.

Mr A

Feb 2, 2007 8:58 pm

Scrim,

Don't confuse investment returns with investor returns.  These are vastly different things. 

Ex. Imagine that the next 3 years, the S & P 500 loses 20%, 9% and 18%.  It then gains 30%, 15%, and 25% the following three years.  The investment return over that time period is 1.8%.  A $100,000 investment would be worth $111,000.

What might happen to a typical investor during that same time period? Year 1 Neg 20%, Year 2 Neg 9% Year 3 Neg 18% Year 4, Year 5, and Year 6 5% (Why?  Pulled money out of market and put in 3 year CD.)  A $100,000 investment would be worth $69,606.

A Variable annuity client with a GMAB would not need to start investing conservatively.  A typical risk adverse mutual fund client would.

Your clients near retirement are in a 40-60 mix.  My clients are in a 100-0 mix (if we have enough time).  In 10 years which clients are going to have more money?  My conservative clients that were put into VA's typically got about 15% last year net of all fees.  What about yours?

I do not use VA's for aggressive clients who have the stomach to handle downturns in the market.

Feb 2, 2007 9:13 pm

If an insurance company fails, another takes over. If enough of the products are sold (% of insurance company general fund) - at enough companies - where is the risk transfer?

This brings up some good points.  The guarantee is only as good as the claims paying ability of the company.  Insurance company strength matters for all insurance products.  If an insurance company becomes insolvent, the investments are safe, the guarantees are not. 

That being said, I think that the chance is low that the insurance company will have to make good on these guarantees and even so, the exposure has to be pretty low.  Don't forget that the insurance company is charging for the risk that they are taking.  The risk is much smaller now that most of these living benefits force clients to purchase a model portfolio.

The client invests $100,000.  In order for the insurance company to lose money on a 10 year GMAB, the value of the account has to worth less than $100,000 10 years from now.  Even if it is, the loss to the insurance company should still be insignificant.  Let's face it, if equity investments are way down over a 10 year period, we are all in trouble.

Feb 2, 2007 9:27 pm

I've prepared them for losses.  In matter of fact, I tell new clients the day they sign up that if I'm doing my job right, not only can they lose money some years they WILL lose money some years.

Not all clients can handle risk.  They can all handle it when the market goes up, but not when it goes down.   Your conservative clients CAN'T be invested in a manner that can cause them to lose money some years because they'll want out of their investments causing them to have "real losses" instead of "paper losses".  They'll also lose sleep.

Scrim, if you are doing your job, your conservative clients won't lose money.  This means invest very conservatively to fit their risk tolerance, not yours.  Or invest more aggressively, but with a guarantee.

We can't let our own biases get in the way of our advising.  I can't imagine ever putting any of my own money in a VA, yet, I have the vast majority of my parents' money in them. 

Feb 2, 2007 10:05 pm

[quote=anonymous]

I've prepared them for losses.  In matter of fact, I tell new clients the day they sign up that if I'm doing my job right, not only can they lose money some years they WILL lose money some years.

Not all clients can handle risk.  They can all handle it when the market goes up, but not when it goes down.   Your conservative clients CAN'T be invested in a manner that can cause them to lose money some years because they'll want out of their investments causing them to have "real losses" instead of "paper losses".  They'll also lose sleep.

Scrim, if you are doing your job, your conservative clients won't lose money.  This means invest very conservatively to fit their risk tolerance, not yours.  Or invest more aggressively, but with a guarantee.

We can't let our own biases get in the way of our advising.  I can't imagine ever putting any of my own money in a VA, yet, I have the vast majority of my parents' money in them. 

[/quote] I don't understand.   When going over their risk profile I ask them if you gave me X amount today what's lowest you are willing to see that drop to in a year.   Their answer tells me alot about their risk tolerance.

I don't agree that conservative clients won't lose money any years.  They certainly will if i'm doing the right things for them.   I would guesstimate one or two years out of ten will be down years in a 40/60 mixture.

scrim

Feb 2, 2007 10:07 pm

[quote=anonymous]In a 40/60 mix the chances of $100,000 ever dropping even close to $70,000 has to be under 1%.  I don't worry about it.  If that ever happens many of us would be out of business.

scrim

Scrim,

Don't confuse investment returns with investor returns.  These are vastly different things. 

Ex. Imagine that the next 3 years, the S & P 500 loses 20%, 9% and 18%.  It then gains 30%, 15%, and 25% the following three years.  The investment return over that time period is 1.8%.  A $100,000 investment would be worth $111,000.

What might happen to a typical investor during that same time period? Year 1 Neg 20%, Year 2 Neg 9% Year 3 Neg 18% Year 4, Year 5, and Year 6 5% (Why?  Pulled money out of market and put in 3 year CD.)  A $100,000 investment would be worth $69,606.

A Variable annuity client with a GMAB would not need to start investing conservatively.  A typical risk adverse mutual fund client would.

Your clients near retirement are in a 40-60 mix.  My clients are in a 100-0 mix (if we have enough time).  In 10 years which clients are going to have more money?  My conservative clients that were put into VA's typically got about 15% last year net of all fees.  What about yours?

I do not use VA's for aggressive clients who have the stomach to handle downturns in the market.

[/quote]
Feb 2, 2007 10:11 pm

[quote=anonymous] Scrim,

Don't confuse investment returns with investor returns.  These are vastly different things. 

Ex. Imagine that the next 3 years, the S & P 500 loses 20%, 9% and 18%.  It then gains 30%, 15%, and 25% the following three years.  The investment return over that time period is 1.8%.  A $100,000 investment would be worth $111,000.

What might happen to a typical investor during that same time period? Year 1 Neg 20%, Year 2 Neg 9% Year 3 Neg 18% Year 4, Year 5, and Year 6 5% (Why?  Pulled money out of market and put in 3 year CD.)  A $100,000 investment would be worth $69,606.

A Variable annuity client with a GMAB would not need to start investing conservatively.  A typical risk adverse mutual fund client would.

Your clients near retirement are in a 40-60 mix.  My clients are in a 100-0 mix (if we have enough time).  In 10 years which clients are going to have more money?  My conservative clients that were put into VA's typically got about 15% last year net of all fees.  What about yours?

I do not use VA's for aggressive clients who have the stomach to handle downturns in the market.

[/quote] The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.   If that ever happened many of us would be out of the business anyway.

scrim

Feb 2, 2007 10:31 pm

I'll take my chances

Let me be the first to say "I told you so"    

Feb 2, 2007 10:37 pm

Well, I hope it never happens in my lifetime.

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

scrim

Feb 2, 2007 10:53 pm

[quote=scrim67]

[quote=anonymous] Scrim,

Don't confuse investment returns with investor returns.  These are vastly different things. 

Ex. Imagine that the next 3 years, the S & P 500 loses 20%, 9% and 18%.  It then gains 30%, 15%, and 25% the following three years.  The investment return over that time period is 1.8%.  A $100,000 investment would be worth $111,000.

What might happen to a typical investor during that same time period? Year 1 Neg 20%, Year 2 Neg 9% Year 3 Neg 18% Year 4, Year 5, and Year 6 5% (Why?  Pulled money out of market and put in 3 year CD.)  A $100,000 investment would be worth $69,606.

A Variable annuity client with a GMAB would not need to start investing conservatively.  A typical risk adverse mutual fund client would.

Your clients near retirement are in a 40-60 mix.  My clients are in a 100-0 mix (if we have enough time).  In 10 years which clients are going to have more money?  My conservative clients that were put into VA's typically got about 15% last year net of all fees.  What about yours?

I do not use VA's for aggressive clients who have the stomach to handle downturns in the market.

[/quote] The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.   If that ever happened many of us would be out of the business anyway.

scrim

[/quote] After figuring in taxation the amounts after ten years might be closer than we think.

I'm not sure exactly.

scrim

Feb 2, 2007 11:15 pm

That being said, I think that the chance is low that the insurance company will have to make good on these guarantees and even so, the exposure has to be pretty low.  Don't forget that the insurance company is charging for the risk that they are taking.  The risk is much smaller now that most of these living benefits force clients to purchase a model portfolio.

The client invests $100,000.  In order for the insurance company to lose money on a 10 year GMAB, the value of the account has to worth less than $100,000 10 years from now.  Even if it is, the loss to the insurance company should still be insignificant.  Let's face it, if equity investments are way down over a 10 year period, we are all in trouble.

Good point - yes we are all in trouble, big time, in many ways. But you are paying big bucks now for a guarantee later on. I have to think that the insurance company is betting on some kind of historical return pattern. More aggressive than a pension fund?

Alternatively, I can pull back on stocks and bonds if I see deterioration.

I'm thinking about opportunity costs and time frames, and being on hook forever.

We now have: six billion people, exponential growth in global interdependency, bird flu, terrorism, global warming, increasing expectations from have-nots aka the internet.

When we are talking "guarantees", do we take a step back. I think I understand the part about the insurance companies willing to "take" a risk. I understand real estate and cash, and I feel okay about the markets right now. Not being (too) paranoid, just thinking about insurance company promises in the context of choice.

Feb 3, 2007 2:40 am

The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.  

This is about as arrogant of a statement that I've ever heard an advisor make.  What chances are you taking?   You have the client in your 1% wrap program.  The GDC drops from $1000 to $700.  So what happens?  You lose $200 of income.  Yeah, that's some big chances that you're taking. 

Never forget that it is your clients' money.   They are the people taking the risk, not you.   It doesn't matter if the loss stops the clients from having the retirement that they imagined.  Scrim still gets paid and will be able to report that his AUM is now 200 million. 

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

You just don't get it.  The answer is probably close to zero, but that is completely irrelevant.   They don't have to kick in because VA investors with living benefits don't get out of the market when the market goes down.  They stay invested, thus allowing them to ride the market back up.

After figuring in taxation the amounts after ten years might be closer than we think.

I'm not sure exactly.

Not only are you not sure exactly, you don't have a clue.   As long as we're talking about qualified VA's, the taxation is identical. 

For a conservative 40/60 type of investor for qualified money who has a 10 year + time frame, let's look at the pluses and minuses comparing your wrap account to a VA with a 0% GMAB?

1)Upside potential: The VA wins easily since it can be invested 100% aggressively.  (My typical conservative VA investor has averaged close to 15% over the last 3 years.)

2)Downside risk: The VA wins easily since it is impossible to lose money.

3)Mind over Heart: The VA wins easily because if client suffers a loss, they will stay invested.

The bottom line is that if the money is qualified, the time horizon is long enough, and the client is conservative, nothing beats a VA.  On the other hand, if those 3 things aren't in allignment, a VA is probably not the best choice. 

Feb 3, 2007 3:10 am

Met with a  potential client recently , lost half is 401k ( 250k ) in his company stock and poor fund choices. Yes I explained the whole diversification story but all he could focus on was the negatives.Presented  F.T founding funds portfolio …Loved the returns ,loved the brochure,loved the concept.Was not interested without the guarantee …In comes a VA with the ability to purchase those funds and give a principle return guarantee. Now we all know over the next 10-20 years he will pay extra for the riders he will probably never use but in the end ,the rider is the only reason the client is invested.

Feb 3, 2007 3:42 am

he will pay extra for the riders he will probably never use

Yes and no.  It will be very unlikely that the insurance company will have to make good on the guarantee.  However, I would argue that he's still using the guarantee because it's allowing him to invest in a way that he otherwise could not do comfortably.

This is probably a perfect example of the VA hurting investment performance because of the fees, but helping investor performance because he'll stay invested. 

Our clients are investors and not investments.   As an industry, we really need to start focus on the investors and not the investments.

Feb 3, 2007 4:44 am

[quote=anonymous]

The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.  

This is about as arrogant of a statement that I've ever heard an advisor make.  What chances are you taking?   You have the client in your 1% wrap program.  The GDC drops from $1000 to $700.  So what happens?  You lose $200 of income.  Yeah, that's some big chances that you're taking. 

I apologize if I came off as arrogant, my statement didn't come out right 

Never forget that it is your clients' money.   They are the people taking the risk, not you.   It doesn't matter if the loss stops the clients from having the retirement that they imagined.  Scrim still gets paid and will be able to report that his AUM is now 200 million. 

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

You just don't get it.  The answer is probably close to zero, but that is completely irrelevant.   They don't have to kick in because VA investors with living benefits don't get out of the market when the market goes down.  They stay invested, thus allowing them to ride the market back up.

Maybe true, remember I have not gone thru a bad market yet.  I am curious to see how many clients I retain when this happens.

After figuring in taxation the amounts after ten years might be closer than we think.

I'm not sure exactly.

Not only are you not sure exactly, you don't have a clue.   As long as we're talking about qualified VA's, the taxation is identical. 

I didn't realize we were only talking about Qualified Accounts

For a conservative 40/60 type of investor for qualified money who has a 10 year + time frame, let's look at the pluses and minuses comparing your wrap account to a VA with a 0% GMAB?

1)Upside potential: The VA wins easily since it can be invested 100% aggressively.  (My typical conservative VA investor has averaged close to 15% over the last 3 years.)

2)Downside risk: The VA wins easily since it is impossible to lose money.

3)Mind over Heart: The VA wins easily because if client suffers a loss, they will stay invested.

The bottom line is that if the money is qualified, the time horizon is long enough, and the client is conservative, nothing beats a VA.  On the other hand, if those 3 things aren't in allignment, a VA is probably not the best choice. 

[/quote]
Feb 3, 2007 5:10 am

[quote=anonymous]

he will pay extra for the riders he will probably never use

Yes and no.  It will be very unlikely that the insurance company will have to make good on the guarantee.  However, I would argue that he's still using the guarantee because it's allowing him to invest in a way that he otherwise could not do comfortably.

This is probably a perfect example of the VA hurting investment performance because of the fees, but helping investor performance because he'll stay invested. 

Our clients are investors and not investments.   As an industry, we really need to start focus on the investors and not the investments.

[/quote]

Well here's an interesting question then.....as the popularity of VA's and the use of living benefits grows for qualified money, is it possible tht it could have such a profound impact on investor behavior that it could actually have a distortive impact on market valuations?

IN other words, if more people are investing in the equity markets because of the security blanket they gain from the living benefits........
Feb 3, 2007 5:52 am

Here’s a metaphor:



People riding in cars occasionally get thrown from them and suffer major

and sometimes fatal injuries. The % of people this happens to per mile

driven is exceedingly low (we could look it up somewhere I’m sure).

However, I’m sure there are people who would prefer not to ride in cars at

some point in their history to due the "danger."



Now cars have seatbelts, airbags, child safety seats, mirrors, computers, etc.

Point is, they are more likely to protect you in the small chance you are in a

very bad collission. Almost no one (say 99.9% of people) ever has their life

saved by these features. However, they are still good features and worth the

few hundred or thousand they may tack on the cost of the vehicle.

Feb 3, 2007 7:22 am

[quote=scrim67]

Would I be accurate in saying this GMAB feature is akin to buying flight insurance?

No one even buys that anymore since the risk of being in a fatal airplane crash has to be less than 1%.  I'm not an actuary but i'm surmising it's way less than 1%.

scrim

[/quote]

Yes, it is exactly like flight insurance.

The insurance companies are not this game to lose money. They make a handsome profit even after paying you 6% upfront.
Feb 3, 2007 7:29 am

[quote=babbling looney]

We all know the chances of an investment
of well diversified funds being less that what is put in ten years
later is basically nil.

Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.

The reality is that many people refuse to be properly diverisifed against our best nagging and advice.[/quote]

If you place people into a 60/40 Asset allocation fund, what are the odds of them not being diversified and rebalanced?

[quote]In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.[/quote]

This is why target date and defined portfolio funds are so useful.

[quote]If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 

Perception beats reality everytime.

[/quote]

If they retired in 2001 with a good retirement portfolio of 50% bonds, 50% large cap value/utilities/REITs they would have avoided the tech mess and done quite well as bonds rallied sharply once the fed lowered rates.

The odds of a losing 10 year period for a 60/40 portfolio of investment grade bonds and a conservative stock protfolio are very low, and any losses are likely to be livable.

The insurance company knows this, which is exactly why they offer this insurance with VA riders. They do what clients are afraid to do, and make a handsome profit for thier troubles.
Feb 3, 2007 7:41 am

[quote=scrim67]

Well, I hope it never happens in my lifetime.

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

scrim

[/quote]

Very rarely, and the insurance company further structures their investments to minimise their exposure. I.e they  "delta hedge" their annuity liabilities, such that changes in the index values don't affect thier net position.

The science of insurance company asset liability management is a well developed art.
Feb 3, 2007 4:14 pm

[quote=anonymous]

I’ve prepared them for losses. In matter of fact, I

tell new clients the day they sign up that if I’m doing my job right, not only

can they lose money some years they WILL lose money some years.
[/

QUOTE]



Following this reasoning then: Its the right thing for clients to lose money? If

I were a client listening to this, I’d get right up and leave. This is a job done

right?   

Feb 3, 2007 4:56 pm

[quote=AllREIT]



The odds of a losing 10 year period for a 60/40 portfolio of investment
grade bonds and a conservative stock protfolio are very low, and any
losses are likely to be livable.



The insurance company knows this, which is exactly why they offer this
insurance with VA riders. They do what clients are afraid to do, and
make a handsome profit for thier troubles.

[/quote]

Feb 3, 2007 5:58 pm

With less than three years experience and no VA sales as of yet I've read this thread with interest. 

My question is; Why would you not separate the assets classes between annuity companies and just pay for the guarantees in the areas with the largest chance of loss?

And yes I know most companies require set portfolios, but I'm with EDJ and know at least one wholesaler has told me you can invest in any allocation you like.  Therefore there must be enough high rated companies out there to choose from (when you have more options than I) to make this a feasible possibility.

i.e.  Client portfolio looks something like this

50% - Fixed income, outside of VA since guarantees against loss are essentially worthless for bonds.  (assuming defferal not needed)

25% - Large Cap (however you like, personally I think the guarantees unecessary, but who really knows)

12.5% Small cap in XYZ annuity company VA

12.5% International equities in ABC annuity company VA

Go ahead now, tell me the problems with my theory.

Feb 3, 2007 6:04 pm

Yes, it is exactly like flight insurance.

It's nothing like flight insurance.  Flight insurance doesn't allow people who are afraid of flying to get on a plane.   If a plane crashes, the passenger is still dead.  VA living benefits change investor behavior.  Flight insurance has no effect on traveler behavior.

The insurance companies are not this game to lose money

That's true, but the cost of the riders is not a profit center for the companies.  In fact, there is concern that the riders are underpriced.    The rider is the hook that gets people to invest their money.  The insurance company makes money because they are taking a cut off of the top of the investment.  The riders are designed to be relatively profit neutral. 

The odds of a losing 10 year period for a 60/40 portfolio of investment grade bonds and a conservative stock protfolio are very low, and any losses are likely to be livable.

Again, this is talking about investment performance instead of investor performance.  It has virtually no meaning.  A conservative investor has a very real possibility of removing their money after just 1 negative year.    

I.e they  "delta hedge" their annuity liabilities, such that changes in the index values don't affect thier net position.

What are you talking about?  The change in the value of an index has no bearing whatsoever on a VA. 

Feb 3, 2007 6:30 pm

[quote=anonymous]

Yes, it is exactly like flight insurance.

It's nothing like flight insurance.  Flight insurance doesn't allow people who are afraid of flying to get on a plane.   If a plane crashes, the passenger is still dead.  VA living benefits change investor behavior.  Flight insurance has no effect on traveler behavior.

The insurance companies are not this game to lose money

That's true, but the cost of the riders is not a profit center for the companies.  In fact, there is concern that the riders are underpriced.    The rider is the hook that gets people to invest their money.  The insurance company makes money because they are taking a cut off of the top of the investment.  The riders are designed to be relatively profit neutral. 

The odds of a losing 10 year period for a 60/40 portfolio of investment grade bonds and a conservative stock protfolio are very low, and any losses are likely to be livable.

Again, this is talking about investment performance instead of investor performance.  It has virtually no meaning.  A conservative investor has a very real possibility of removing their money after just 1 negative year.    

I.e they  "delta hedge" their annuity liabilities, such that changes in the index values don't affect thier net position.

What are you talking about?  The change in the value of an index has no bearing whatsoever on a VA. 

[/quote] Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

scrim

Feb 3, 2007 6:52 pm

[quote=scrim67]

Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

scrim

[/quote]

Yes believe it or not, some will.  IT sounds like you're doing a good job of managing expectations, so you'll probably do better than some on this count.  But some clients just hear what they want to hear.

Don't sweat it.  Keep your head down and keep working.  You're doing fine.
Feb 3, 2007 7:32 pm

Scrim,

As long as you have some positive years in the account, it's unlikely that one bad year will cause mass defections, unless that one year wipes out all your gains and eats into the original client principal...that's when you really earn your pay...

Feb 3, 2007 8:26 pm

Well here's an interesting question then.....as the popularity of VA's and the use of living benefits grows for qualified money, is it possible tht it could have such a profound impact on investor behavior that it could actually have a distortive impact on market valuations?

IN other words, if more people are investing in the equity markets because of the security blanket they gain from the living benefits........

Joe, I share your concern, if it is too good to be true...

Someone said, it is (not) like flight insurance, because now people who are afraid to fly will get on the airplane.

It just seems like layers and layers of embellishment of market reality, smoke and mirrors.

The assets classes are cash, fixed, equity, real estate, commodity.

Pensions, making an immediate annuity, might be a sort of class.

Anything else is basically just packaging.

If we are talking about the greatest new thing since sliced bread here, the market will find it (hedge funds) out.

The nail that sticks up gets hammered down.

Feb 3, 2007 8:47 pm

Gad 12, stop listening to wholesalers.  You can listen to them, but your info itself in this area really needs to come from the contract and the prospectus.  

My question is; Why would you not separate the assets classes between annuity companies 

What's the advantage of using multiple contracts? 

 

50% - Fixed income, outside of VA since guarantees against loss are essentially worthless for bonds.  (assuming defferal not needed)

 Since when can't bonds lose value?  They lose value everytime that interest rates go up.  Tax deferral is not a legitimate reason to buy annuities in the vast majority of cases.  This is why my VAs are almost always qualified.   The VA will allow someone to be invested 100% equities thus the 50% fixed income is not needed.

25% - Large Cap (however you like, personally I think the guarantees unecessary, but who really knows) 

Are you joking?  Large cap can take huge hits.  How can a conservative investor take the huge losses.  If large cap drops 20% a conservative investor is not staying put.

 Go ahead now, tell me the problems with my theory.

It doesn't make much sense to have a theory on a product that you've never sold and your info comes from message boards and wholesalers.

Feb 3, 2007 8:59 pm

Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

Scrim, it sounds, to some extent, that you are not treating your clients as individuals.  You are correct that most clients will expect down years and will handle them just fine when they happen.  I promise many of my clients that we will have years where I help them to lose money.

However, there are many clients that can't stomach losses and their money must be invested in a way that stops losses from happening.  This means the money must be invested very conservatively or there must be a guarantee. 

The fact is that there is a large population of people who need market rate returns, but can't emotionally take risks.

Feb 3, 2007 9:02 pm

[quote=joedabrkr] [quote=scrim67]

Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

scrim

[/quote]

Yes believe it or not, some will.  IT sounds like you're doing a good job of managing expectations, so you'll probably do better than some on this count.  But some clients just hear what they want to hear.

Don't sweat it.  Keep your head down and keep working.  You're doing fine.
[/quote]

When it happens, you need to make sure you are the one talking to your clients. Because whoever is talking to the ones who want to act on emotion will be their advisor.

This is a great example of why there are a lot of different strategies you can pursue with clients, and as long as you are consistent, you will help them to be successful.

After you make it through your first severe down market with your clients - and like Joe says, you will - then you will be a "real" financial advisor. Managing expectations is a key concept that comes out of experience, it is a lot more important than doing market outlook forecasts, and so on.

You will be amazed at how the vast majority of your clients just stick with the plan, and say, "that's why I hired you." In fact, if you were holding the right portfolio mix, your clients will do better than their friends, and that is when you will get a lot of referrals from your clients. That will be a great time to do even more client-bring-a-friend appreciation events, and show people who you are and what you do.

Unfortunately, for the clients who want to act on emotion, they will be tempted to switch strategies. I don't mean to knock people who like to sell annuities in any way - they have their own strategy. But some of those clients who were invested in fourty, fifty or sixty percent stocks are going to be asked to move the portfolio over to an annuity at precisely the wrong time, in terms of strategy for allowing the stock and bond portfolio to recover from the normal market correction.

If you are running "cleaner, classic" investment portfolios (not using hybrid products like some of the guaranteed annuities) you are pulling together a lot of different, complex strategies (capital gains, lower taxation rate of stock dividends, blending after tax dollar income in retirement with pre-tax retirement income) - this is a terrific opportunity to teach your clients how to be "real" investors that get to partner with you.

The more they understand everything, and the more years they spend with you, the more loyal they become. But you still have to provide a lot of touch, personal contact.

When you are taking on a lot of new clients, it takes a lot of time. Face to face office meetings, preparation, paperwork. Later on, your familiar client "old friends" can be serviced very efficiently - often just over the phone.

But there is a temptation to let things work with less contact, and that will really come back to bite us in a down market.

Now is the time to be having a lot of contact with all of our clients, in preparation for the inevitable down market. If last year was a good year, we should be calling them and trimming five or ten percent of the portolio from equities to fixed.

Maybe saying, " I see we got ten and a half percent total return on the stock and bond portfolio last year, and the guaranteed certificates did pretty well too, especially the laddered stock market certificates. You managed to capture much of the total return of the stock market, with a lot less risk - only fifty percent of your money is in stocks."

Last year was a great year, and the analysts are saying, this year, maybe stocks could go up eight percent. How much risk do you want to take to get eight percent. Let's move fifty thousand back from stocks to bonds in your IRA, there won't be any taxes, nor any cost to you, since we're just doing an exchange.

Do you think  you will be able to sleep at night if we do that? By the way, the market will probably go up fourty percent, and then you'll be mad at me, because we did exactly the "wrong" thing. But I don't know, if them market goes up fourty percent, it will probably go down. Anyway, we already have enough money to sustain your portfolio rate of four percent, and that is the big thing.

You know, when you talk to your friends about money, or whatever, we all like to talk about this stuff, just keep in mind, you are invested in about fourty percent bonds, and we need that, because inflation is another kind of real risk, and the stock represent ownership, which can help with inflation over the long run. And just keep thinking about those dividends piling up from the bonds and the cash and the certificates, in case the market goes sideways.

Really, I think that is the most likely scenario, the market could just go sideways this year, and then we'll at least get something from all of those dividends. Of course, even those bonds can go down, so then we'll just think about or draw money from your certificates if that happens, or the cash.

By the way, we're doing a client appreciation lunch in a few weeks, in the little private room in that really nice restaurant. I really just want to say thanks to you and everyone, some informal discussion, but if you want to bring a friend, maybe someone is interested in what I do, that's a great low-key way for them to check me out.  But if you just want to come by yourself, it is really going to be laid back and fun, I'll probably just talk for a few minutes, but there are some really nice clients coming.

Feb 3, 2007 9:06 pm

you are invested in about fourty percent bonds

stocks

Feb 3, 2007 9:15 pm

When we get into a bear market what would be a reasonable expectation of clients who will "fire" me?

I'm thinking 10-15% would be reasonable.

For those who have been thru it what should one expect?

Thanks in advance for any constructive feedback.

Scrim

Feb 3, 2007 9:16 pm

 

Joe, I share your concern, if it is too good to be true...

Someone said, it is (not) like flight insurance, because now people who are afraid to fly will get on the airplane.

It just seems like layers and layers of embellishment of market reality, smoke and mirrors.

The assets classes are cash, fixed, equity, real estate, commodity.

Pensions, making an immediate annuity, might be a sort of class.

Anything else is basically just packaging.

If we are talking about the greatest new thing since sliced bread here, the market will find it (hedge funds) out.

The nail that sticks up gets hammered down.

These guarantees are not too good to be true.  In fact, they are inappropriate for most investors.  They are a serious drag on performance, thus there is nothing to hedge.  They don't increase investment returns of a specific investment.  They decrease the investment return.

However, they do increase the investment return of some investors simply because they allow conservative investors to invest above their risk tolerance,  and, probably more importantly, they allow the investor to stay invested instead of chasing returns. 

For some people the VA living guarantees are simply the security blanket that they need to get over their fears.  This security blanket comes with a price.  It's just that the price of this security blanket is less than the price of not having it.  ie. a conservative investor will have more money in the future by investing aggressively in a VA with a guarantee than they would have by investing conservatively outside of a VA.

VA's are not good or bad.  They, like other products, are appropriate or inappropriate. 


Feb 3, 2007 9:27 pm

When we get into a bear market what would be a reasonable expectation of clients who will "fire" me?

I'm thinking 10-15% would be reasonable.

For those who have been thru it what should one expect?

Thanks in advance for any constructive feedback.

If they are treated like individuals and you are giving great service, the answer may be 0%.  I tell my clients that they'll call me when the market goes down to make changes and instead, I'll ask them to invest more.  As someone else said, managing expectations is very important and you do sound like you do that.

On the other hand, if one is charging a fee and their practice is simply about investment return, it seems like it would be hard for a client to keep paying a fee knowing they would have been better off putting their money in a CD.

Feb 3, 2007 9:31 pm

ALL investment is about returns. Anything else is just talk.

Feb 3, 2007 9:41 pm

For some people the VA living guarantees are simply the security blanket that they need to get over their fears.  This security blanket comes with a price.  It's just that the price of this security blanket is less than the price of not having it.  ie. a conservative investor will have more money in the future by investing aggressively in a VA with a guarantee than they would have by investing conservatively outside of a VA.

VA's are not good or bad.  They, like other products, are appropriate or inappropriate. 

It seems we could just about all agree, another tool in the toolbox. In  moderation.

Feb 3, 2007 9:46 pm

ALL investment is about returns. Anything else is just talk.

It seems like when you are first getting started in the business, it is all about return.

Then, you want to educate your clients about being a good investor and sucking up the bad parts of the market cycle. We'll get there on the roller coaster.

(And this is generally true.)

A little farther down the career road, you realize it is all about return.

Loss of principal sucks.

Feb 3, 2007 9:58 pm

ALL investment is about returns. Anything else is just talk.

Investments are not about returns. Investments are about helping people to acheive their goals.  This means that for many people return of their principal is much more important than return on their prinicpal. 

Feb 3, 2007 10:17 pm

[quote=anonymous]

Gad 12, stop listening to wholesalers.  You can listen to them, but your info itself in this area really needs to come from the contract and the prospectus.    ANON, being newer to the forum and not having seen a lot of your posts I'm not sure if your responses are mean spirited or you just think I'm an idiot and really think my questions are that stupid.  (Or both)  But I'll assume that latter and try to give my best response.  I think we are sort of talking about different things as you'll see.

My question is; Why would you not separate the assets classes between annuity companies 

What's the advantage of using multiple contracts? 

Two obvious ones come to mind.  First regardless of improbability there is always a chance of default of an insurance company.  Second let's say you follow my advice split it.  Small caps go up 40% over the 10 years international go down 40%.  You can then take the guarantee on the international without having to annuitize the money in the small caps. 

 

50% - Fixed income, outside of VA since guarantees against loss are essentially worthless for bonds.  (assuming defferal not needed)

 Since when can't bonds lose value?  They lose value everytime that interest rates go up.  Tax deferral is not a legitimate reason to buy annuities in the vast majority of cases.  This is why my VAs are almost always qualified.   The VA will allow someone to be invested 100% equities thus the 50% fixed income is not needed.

I'm talking about the value of the expensive guarantees.  10 yr losses in a bond fund that then lead to annuitization to "get your principal back"?  C'mon when would that ever happen? 

25% - Large Cap (however you like, personally I think the guarantees unecessary, but who really knows) 

Are you joking?  Large cap can take huge hits.  How can a conservative investor take the huge losses.  If large cap drops 20% a conservative investor is not staying put.

Again I was talking about the value of the guaratee that come with annuitization vs their costs.  If I'm not mistaken there is no ten year period the S&P 500 has lost value.  I see your point on how the guarantee affects investors' actions and am neither agreeing nor disagreeing but essentially you are bashing my post from your point of view vs what I was actually refering to. 

 Go ahead now, tell me the problems with my theory.

It doesn't make much sense to have a theory on a product that you've never sold and your info comes from message boards and wholesalers.  So I should sell the product before I come up with a theory?   Sounds brilliant.

[/quote]
Feb 3, 2007 10:48 pm

[quote]The insurance companies are not this game to lose money

That's true, but the cost of the riders is not a profit center for the companies.  In fact, there is concern that the riders are underpriced.   The rider is the hook that gets people to invest their money.  The insurance company makes money because they are taking a cut off of the top of the investment.  The riders are designed to be relatively profit neutral.[/quote]

Umm no. The Insurance company is profitable in everything they do. Not for one minute would they intentionally expose themselves to underpriced risk.

[quote]The odds of a losing 10 year period for a 60/40 portfolio of investment grade bonds and a conservative stock protfolio are very low, and any losses are likely to be livable.

Again, this is talking about investment performance instead of investor performance.  It has virtually no meaning.  A conservative investor has a very real possibility of removing their money after just 1 negative year.[/quote]

If you are dealing with people who can't be helped, then you can't help them. My clients are very aware of market risks and basic investment strategy.

[/quote] I.e they  "delta hedge" their annuity liabilities, such that changes in the index values don't affect thier net position.

What are you talking about?  The change in the value of an index has no bearing whatsoever on a VA. [/quote]

My point is that the insurance company isn't taking any risk since they hedge out their exposure to the market.

Internally, the insurance company takes a variable liability (the annuity) and converts it to a fixed liability whose total cost is less than the portfolio returns on the general account.



[/quote]
Feb 3, 2007 11:05 pm

[quote=anonymous]

ALL investment is about returns. Anything else is just talk.

Investments are not about returns. Investments are about helping people to acheive their goals.  This means that for many people return of their principal is much more important than return on their prinicpal. 

[/quote]

And just how do you propose to help people achieve their goals without returns?  Do you expect them to thank you after you've held their money for 15 years or so, then give the same amount back to them? 

CDs are for the risk averse.  These people are savers, not investors.  If you have a client that tells you that return of his/her principal is more important than returns on their principal, you're an arbitration waiting to happen if you don't a)put them in a CD or b)(the better choice) send them packing.

Feb 4, 2007 12:18 am

"Good afternoon ladies and gentlemen, this your captain speaking. Before

we bother with the flight pre-check and locking the main cabin door, I’d like

to call your attention to the certainty of a rough flight today.



I sure hope those of you with dentures have applied extra Poly-Grip this

morning, because you can, no in fact I’m sure you will, be loosing your teeth

on this flight. I can’t tell you if it will happen in the beginning, middle or at

the end of our flight, but it will happen. But remember, as always, flying is

still the safest way to travel to YOUR DESTINATION.“



Thank you for chosing us and we look forward to seein’ ya’ll real soon!”

Feb 4, 2007 5:36 am

Holy Moley what a collection of Twits!

Anonymous is right on in almost everything he has said and if you are "just barely 3 years into the business" then maybe you ought to just STFU and listen to someone who knows what the hell he's talking about!

Scrim,

You're a moron! Sorry, but a fact is a fact! There is NO way that you have prepared ANYBODY for ANYTHING given that you don't have the faintest notion of what the 5417 looks like when it's flying! "Oh don't you worry Mr Jones, my magical 40/60 blend will make everything ok in the end." What do you have twelve clients? Each with a 12 IQ? Either your clients aren't smart enough to question your judgement or they're smart enough to have a lot of money someplace else. If they're dumb enough to buy into your little speech about "markets go down" they're dumb enough to pick up the phone when James Sokolov the Lawyer ramps up his "If you've lost money in the stock market..." ads.

You have no idea what it will be like when everything you have done is wrong. Don't forget, somebody is going have been the client you just bought for when the market starts going down (like the next day). That client will not have had the three years of the magic 40/60 elixir to fall back on! You'll be pooping your pants!

The point of this business is that there are billions of ways to get blown up and it is the advisor's job to to try not to be blown up the same way twice. Can I tell you what's wrong with your 40/60 mix? You've been told at least three times already but you won't listen (BTW, one day you might understand that cocksuredness is about the the first million ways to be blown up).

Planr,

You might just as well change your handle to Planet Roach, cause you are OUT THERE! You haven't even the slightest understanding of what the Veteran's Administration is doing running these investments in the first place for! Your "observations" make Emily Latilla look like William F. Buckley! I never say this to people, but I really thought it must be time for you to up the meds, you tried to fly off a cliff in this thread.

Starka,

Save the Business Prevention Unit speech for someone who gives a crapola! Don't try to judge my clients, who you've never spoken to. Leave the long distance diagnosing to professionals like Dr. Frist!

I have a client with a multi million dollar bond portfolio that I put together over the years. ONLY AAA Non AMT Munis! Will his bonds pay for his retirement? I worked out the spread sheet, it depends on what assumptions you want to make. What inflation rate do you want to have? What rate do you want to put on the Munis being reinvested? (How can you come up with a number when Gov't long bonds are trading beneath the rate of inflation?) This client has had bad experiences in the stock market (you want to know why? Because he only wants to invest in the markets AFTER they have been up a number of years and he always wants out when he has a loss!) He has enough money to retire (using the numbers he's comfortable with) so long as he dies at 82.

So what am I supposed to do? Let him run out of money because Starka diagnosed this client as a saver and an "arbitration, waiting to happen"?

The Kid with the "Get An Annuity Per Asset Class" idea

It's not either a bad idea nor a new one. The problem is that you will run afoul of regulators for all of the contract fees.

I forget which company it was where the wholesaler was telling us of how a rep had just signed up a Fortune 500 company's upper management into this idea (it was right after the world remembered that it was a bad thing to have all your 401K in the company stock, and no, they didn't offer this option to all of the rank and file employees) shortly thereafter there was big trouble in the annuity company (I'm sorry, I don't recall the details) and lets just say that this idea was discouraged by the wholesaler from that point on (meaning the next and last time we ever saw him).

You'd die with it in NY and just forget rebalancing; 1035 ville with a uber layer of Reg 60! It's murder!

Well, if you're a poster here and I haven't insulted you, I'm sorry. Lack of attribution should neither be taken as evidence of twit status nor the contrapositive. In general if we agree, you are a genius, and if we disagree you're dumber than dirt.

And if you've been in the business barely three years and think you've got it figured out... We disagree.

Mr. A

Feb 4, 2007 8:31 am

[quote=mranonymous2u]

It depends on what the meaning of the word "is" is.

The annuity offers you something that you cannot offer otherwise in the world of equity investing, that something is "IS"... (Actually I'm not 100% on what the annuitization deal is and it dependes on the age of the client at the time of annuitization at the time a male over 75 would have an annuitization rate of about 7.4%)...

 ... Meanwhile, over the last two years I kicked the market's azz net of all fees and commissions inside an American Skandia annuity where they were jiggering around my cash position (I sold them out when I netted people at least 20% profit, and I do it in IRAs so don't gimme crap about taxes or stepped up cost basae)... I'm outperforming the market in the John Hancock, and I'm working on a $1MM case for AXA...and the annuity company got those fees and didn't have to pay out a claim against them so they're happy too... Not to mention... Would the client have bought without the assurance? NO!...what they offer you now is a way to assure investors with an IS. That's important, because every investor IS not certain that nobody IS going to Hijack a Jetliner into the Indian Point Nuclear Power plant, making NYC dark and unliveable for a thousand years (I know that the plant can take a direct 747 hit without imploding, exploding or melting down) The fact is you don't KNOW what IS in the future and the annuity gives you that "suspenders and a belt" of IS.[/quote]

Okay, Gilda.

Feb 4, 2007 10:37 am

WOW! What an explosive topic ..

Well it is safe to say that you are all passionate about it..

I guess after reading the 9 pages or so on here I wanted to chime in of course with my take on this..

VA's expensive ..YUP! ..

VA's have restrictions for liquidity YOU BETCHA!

VA's have limits on what investment returns may look like FOR SURE.. but all that being aside the point here are some other factors you might want to consider...

IT IS an insuracne product

and

insurance products are designed to mitigate RISK period.

Boomers are going to live A LONG TIME!

They will NEED guaranteed life time incomes.. that are keeping pace with inflation.

Investment products are great in a magical world where they alway perform like their history paints them.. BUT that is not the case all the time

So what is a client to do if they are caught in the downwind ..are you going to tell them "Oh hey your 40/60 mix of whatever is down ..so now instead of eating where you have for the last 10 years you now have to go to McGrub! cause we have to either sell less of your shares or prepare you for your part time job"

I hate to spell it out for everyone BUT it is about lifestyle NOT YOURS but your clients... IT IS about expectations for your clients ..

I and every other advisor that can read IBBOTSON's or Morningstar can tell you investments ABC are better than DEF or blah blah ETF has done better over 10 years .. but that doesn't matter when you are the client sitting in the chair and your Fund DEF is down 10%-20%-40% (whcih happens in bear markets) and you are going to cut your income accordingly. 

But that won't happen to YOUR clients right??

'cause you are a super advisor/planner/broker that will always rebalance and reallocate for all of them all the time whenever anything wrong happens with 100% correct and efficient execution as if you had the ability to see in the future...(if you are a discretionary advisor that moves money without having to contact your clients then the above statement may not apply..incidently)

Bottom line VA's are here for a reason ..Don't abuse them .. Don't treat them like everyone gets one.. BUT also don't discount them as the scourge of the universe just because you don't get how they work.  READ and learn.. your clients will thank you in the end!

Also note the even with the expenses in a John Hancock VIII .. I have clients that are up about 10-12% and for them and me that is ok considering they have done that with TAX defferal on money (NQ btw) they are waiting to use as additonal retirement income.  (Now mind you all I do work in a very affluent market and so I know I use VA's more than some..but the ideals are still the same)

Feb 4, 2007 1:53 pm

Mr A, if I cared anything about you I’d probably be insulted.



But I don’t, so I’m not.



Good luck in the arbitration!

Feb 4, 2007 2:42 pm

[quote=mranonymous2u]

Holy Moley what a collection of Twits!

Anonymous is right on in almost everything he has said and if you are "just barely 3 years into the business" then maybe you ought to just STFU and listen to someone who knows what the hell he's talking about!

Scrim,

You're a moron! Sorry, but a fact is a fact! There is NO way that you have prepared ANYBODY for ANYTHING given that you don't have the faintest notion of what the 5417 looks like when it's flying! "Oh don't you worry Mr Jones, my magical 40/60 blend will make everything ok in the end." What do you have twelve clients? Each with a 12 IQ? Either your clients aren't smart enough to question your judgement or they're smart enough to have a lot of money someplace else. If they're dumb enough to buy into your little speech about "markets go down" they're dumb enough to pick up the phone when James Sokolov the Lawyer ramps up his "If you've lost money in the stock market..." ads.

You have no idea what it will be like when everything you have done is wrong. Don't forget, somebody is going have been the client you just bought for when the market starts going down (like the next day). That client will not have had the three years of the magic 40/60 elixir to fall back on! You'll be pooping your pants!

The point of this business is that there are billions of ways to get blown up and it is the advisor's job to to try not to be blown up the same way twice. Can I tell you what's wrong with your 40/60 mix? You've been told at least three times already but you won't listen (BTW, one day you might understand that cocksuredness is about the the first million ways to be blown up).

Planr,

You might just as well change your handle to Planet Roach, cause you are OUT THERE! You haven't even the slightest understanding of what the Veteran's Administration is doing running these investments in the first place for! Your "observations" make Emily Latilla look like William F. Buckley! I never say this to people, but I really thought it must be time for you to up the meds, you tried to fly off a cliff in this thread.

Starka,

Save the Business Prevention Unit speech for someone who gives a crapola! Don't try to judge my clients, who you've never spoken to. Leave the long distance diagnosing to professionals like Dr. Frist!

I have a client with a multi million dollar bond portfolio that I put together over the years. ONLY AAA Non AMT Munis! Will his bonds pay for his retirement? I worked out the spread sheet, it depends on what assumptions you want to make. What inflation rate do you want to have? What rate do you want to put on the Munis being reinvested? (How can you come up with a number when Gov't long bonds are trading beneath the rate of inflation?) This client has had bad experiences in the stock market (you want to know why? Because he only wants to invest in the markets AFTER they have been up a number of years and he always wants out when he has a loss!) He has enough money to retire (using the numbers he's comfortable with) so long as he dies at 82.

So what am I supposed to do? Let him run out of money because Starka diagnosed this client as a saver and an "arbitration, waiting to happen"?

The Kid with the "Get An Annuity Per Asset Class" idea

It's not either a bad idea nor a new one. The problem is that you will run afoul of regulators for all of the contract fees.

I forget which company it was where the wholesaler was telling us of how a rep had just signed up a Fortune 500 company's upper management into this idea (it was right after the world remembered that it was a bad thing to have all your 401K in the company stock, and no, they didn't offer this option to all of the rank and file employees) shortly thereafter there was big trouble in the annuity company (I'm sorry, I don't recall the details) and lets just say that this idea was discouraged by the wholesaler from that point on (meaning the next and last time we ever saw him).

You'd die with it in NY and just forget rebalancing; 1035 ville with a uber layer of Reg 60! It's murder!

Well, if you're a poster here and I haven't insulted you, I'm sorry. Lack of attribution should neither be taken as evidence of twit status nor the contrapositive. In general if we agree, you are a genius, and if we disagree you're dumber than dirt.

And if you've been in the business barely three years and think you've got it figured out... We disagree.

Mr. A

[/quote] You seem to be making this way more complicated than it needs to be.   When I interview my clients I always ask them two questions:  "When do you need to use the money?" and "How much of a loss are you willing to take year to year?"

Based on these answers I invest their funds.

Combined with great service this will keep my clients happy.

I think you have way too much free time.

Enjoy the game today

scrim

Feb 4, 2007 5:21 pm

Mr. Anon, Anon and Whitey and other voices of reason....we are wasting our time here.  These young guys know it all.  The magical 60/40 or 40/60 is the answer to everything. Markets won't go down and your clients are going to be bullet proof.

What the heck do we know. After all I've only been a registered advisor for 17 years now and a banker for 10 years before that.  I was dealing with finances when some of these guys were getting their diapers changed.

I bow the the invicible infallability of the young.

    

Feb 4, 2007 6:28 pm

we are wasting our time here.  These young guys know it all.  The magical 60/40 or 40/60 is the answer to everything. Markets won’t go down and your clients are going to be bullet proof.

What the heck do we know. After all I've only been a registered advisor for 17 years now and a banker for 10 years before that.

Don't take it personally. A lot of good points were brought up here.

A lot of us have been around as long as you and been through a few down markets with cash, and stocks and bonds. These securities are going to be around for a long, long time.

I feel the passion of 9/11 here and the worry about an exponentially interdependent world. No matter what happens, everyone is going to have to get up and go to work every day. The economy will not run without cash, equity ownership, and lending.

We all need to stay open-minded about helping individual boomers keep from spending their last dollar. Insurance companies will play a growing part to the extent that they can win the responsibility by being competitive - everyone here, young or old, has the intellectual firepower to recognize when that happens.

Feb 4, 2007 6:29 pm

[quote=babbling looney]

Mr. Anon, Anon and Whitey and other voices of reason....we are wasting our time here.  These young guys know it all.  The magical 60/40 or 40/60 is the answer to everything. Markets won't go down and your clients are going to be bullet proof.

What the heck do we know. After all I've only been a registered advisor for 17 years now and a banker for 10 years before that.  I was dealing with finances when some of these guys were getting their diapers changed.

I bow the the invicible infallability of the young.

    

[/quote] Markets always go down.  Markets always go up.  That's volatility.  It's part of our jobs to gauge how much volatility they are willing to accept.

Good post BB!

scrim

Feb 4, 2007 7:07 pm

You seem to be making this way more complicated than it needs to be.   When I interview my clients I always ask them two questions:  “When do you need to use the money?” and “How much of a loss are you willing to take year to year?”

Based on these answers I invest their funds.

Combined with great service this will keep my clients happy.

Scrim, Please tell us that this post is a joke or you're being sarcastic.    

My fear is that this post is for real.  You sound like a sincere guy who is really trying to help, but you simply don't know what you don't know and this lack of knowledge is coming at the expense of your clients.

You need to make a decision for yourself.  Are you going to be an asset gatherer or are you going to be a fincial advisor who makes a significant positive impact in the lives of your clients?

I believe that you have made the choice to be an asset gatherer.  Why do I say that?  We spoke about annuities over a year ago and I told you to read the actual contracts.  I'm willing to bet that you still haven't read a complete annuity contract. 

If your goal as a financial advisor is to do the very best for your clients, you have a responsibility to learn all that you can.  If your goal is to gather assets, you need to learn just enough to get the prospects to sign on the dotted line.

Your above questions will certainly allow you to put clients into predetermined portfolios, but by themselves, they are close to useless if your clients are to be treated as individuals.

Feb 4, 2007 7:17 pm

I definitely took your advice and read the contract.

Wow, lots of legaleeze and such!

I honesty feel I'm putting my clients first.    I am foregoing big annuity commissions just for this reason.

scrim

Feb 4, 2007 7:19 pm

I'm coming off as a guy who is an annuity pusher on this thread.  For the record, annuities are a relatively minor part of my practice.  Last year, about 4% of my revenues came from annuities.   This year, my guess is that it will be around the same and certainly under 10%.

VAs with guarantees are usually not the appropriate answer.   That being said, there are times that they are absolutely part of the best solution for the client's problem.  If an advisor is never using them, the client is paying the consequences. 

In case anyone I thinks that I sell them for the compensation, the reality is that I'd make more money not using the VA and putting the client into an advisory account with a 1% fee.

Feb 4, 2007 7:40 pm

[quote=anonymous]

 If many advisors don't understand how can we ever expect the average investor to?  

Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!

If the advisor understands the contract, it is easy to help the investor understand.

Explanation for a 58 year old client of a 5% 10 year GMIB

Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)

Explanation of a 10% GMAB

Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.

[/quote]

You provide specific analysis and are passionate, and apparently do good work for your clients.

This is an insurance product. The burden of proof to convince is on the manufacturer, and the representative.

Not being sold on the concept does not make a good or bad planner.

From a financial planning point of view, we are not just looking at the investmensts, or future income streams. For example, some planners are passionate about selling long term care, and will require the client to sign off on not taking coverage.

Many would say the verdict is still out on the overall cost effectiveness of long term care insurance. Especially if you sold policies a decade ago, and now your clients are getting notices for increasing premiums. Of course, everyone needs to consider risk transfer in this area.

My point is, when you look at a total planning strategy, buying a whole bunch of different insurance policies (like annuities) might be one course, and keeping it simple (ETFs in wrap at 1%), along with laddered guaranteed certificates - and self insuring - might be another, depends on the client.

Obviously we influence our clients, and our practices start to look like our philosophy.

Do you buy each and every individual product warranty on the new car, big screen, movie camera, and twenty other kinds of insurance? Since the American savings rate is negative, this kind of potential financial loss also matters.

At the vey least, not selling annuities, or even struggling through the contract language (when I see broker dealers use the same payout rate for annuity producers and non-producers, cut out the wasteful incentives, simplify the product) does not make you a good or bad advisor. If you want to school us in planning, you will need to try harder.

Feb 4, 2007 8:08 pm

If you want to school us in planning, you will need to try harder.

Who wants to school you in anything?  We are offering free information and observations of investor psychology from years of experience.  You are free to ignore all of this.  Your choice.

Disclaimer: I too have a very small portion of my book in VAs (probably less than 5%). So I have no vested interest in getting anyone to use the product. 

Not being sold on the concept does not make a good or bad planner.

But, refusing to view the concept with an open mind and being incredibly certain that you (generic you, not you specifically...although maybe it is you) have all the answers based on a 3 year run in this industry does make you a bad planner.  And it is setting you up for a very big fall when the next bear market correction occurs.

Again...your choice.  Read my signature line...it says it all.

Feb 4, 2007 8:39 pm

You bring up a lot of good points. We all need to be open-minded in order to be good planners.

You tailor the use of annuities to the individual. 5% of anything is a very small number. Very significant to that individual, especially in a down market.

But in terms of the total amount of money you run for clients, it is just a Swiss Army knife off to the side. It this is an important tool for boomers who are in trouble, the manufacturers need to do a better job.

I guess sometimes passion sounds feels like schooling.

Personally, I have used this tool at times, mainly to learn and address specific problems.

I feel like I have built "clean" portfolios at great personal comparative expense, in terms of the way this industry chooses to reward producers.

Every product manufacturers will have to earn the respect of me and my clients.

But, refusing to view the concept with an open mind and being incredibly certain that you (generic you, not you specifically...although maybe it is you) have all the answers based on a 3 year run in this industry does make you a bad planner.  And it is setting you up for a very big fall when the next bear market correction occurs.

Now we are talking. Thanks sharing a passionate viewpoint which is tempered by the fire.

 

Feb 4, 2007 9:18 pm

[quote=babbling looney]

If you want to school us in planning, you will need to try harder.

Who wants to school you in anything?  We are offering free information and observations of investor psychology from years of experience.  You are free to ignore all of this.  Your choice.

Disclaimer: I too have a very small portion of my book in VAs (probably less than 5%). So I have no vested interest in getting anyone to use the product. 

Not being sold on the concept does not make a good or bad planner.

But, refusing to view the concept with an open mind and being incredibly certain that you (generic you, not you specifically...although maybe it is you) have all the answers based on a 3 year run in this industry does make you a bad planner.  And it is setting you up for a very big fall when the next bear market correction occurs.

Again...your choice.  Read my signature line...it says it all.

[/quote] Amen BB.   That's is exactly why I feel pretty comfortable when the next bear market comes.  If you looked at all my clients in aggregate they are pretty much 1/3 equites..1/3 bonds...1/3 cash.

This should insulate me to some degree when stocks fall by 20-40% which we all now is not if but when.

Thanks for all the great feedback.

scrim

Feb 5, 2007 3:26 am

"I feel pretty comfortable when the next bear market comes."

"This should insulate me to some degree when stocks fall by 20-40%."

Scrim, I think that your arrogance is going directly over your head.  It's not up to you to be comfortable.  It's not your money.  It's not about insulating you.  It's not your money!

Just curious, are your clients getting charged 1% for the 1/3 cash that they have?

You mentioned that you are doing the right thing for your client as evidenced by staying away from big annuity commissions.  You do realize that you'll be earning more with your 1% wrap than an annuity, don't you? 

Let's use some logic.  Your client base is conservative based upon the fact that your clients have as much money in cash as they do in equities.   You know that the stock market will drop 20-40% at some point.  You (should) know that many of your clients will bale on their equity positions if the market tanks like you expect leading to performance worse than the market.   Over a 10 year period, you expect a 100% equity position to outperform a 33%/33%/33% equity/bond/cash position.  So, please explain how your conservative clients with a long enough time horizon are better off in their 33/33/33 portfolio instead of a VA in 100% equities?

Feb 5, 2007 4:45 am

[quote=anonymous]

"I feel pretty comfortable when the next bear market comes."

"This should insulate me to some degree when stocks fall by 20-40%."

Scrim, I think that your arrogance is going directly over your head.  It's not up to you to be comfortable.  It's not your money.  It's not about insulating you.  It's not your money!

Just curious, are your clients getting charged 1% for the 1/3 cash that they have?

You mentioned that you are doing the right thing for your client as evidenced by staying away from big annuity commissions.  You do realize that you'll be earning more with your 1% wrap than an annuity, don't you? 

Let's use some logic.  Your client base is conservative based upon the fact that your clients have as much money in cash as they do in equities.   You know that the stock market will drop 20-40% at some point.  You (should) know that many of your clients will bale on their equity positions if the market tanks like you expect leading to performance worse than the market.   Over a 10 year period, you expect a 100% equity position to outperform a 33%/33%/33% equity/bond/cash position.  So, please explain how your conservative clients with a long enough time horizon are better off in their 33/33/33 portfolio instead of a VA in 100% equities?

[/quote] I think to some degree I need to be comfortable with the way I run the business.

VA's make me uncomfortable.

Any clients involved in the wrap program are being charged the annual fee.  

My most conservative clients and/or assets they plan on using within a year or two are just in a plain vanilla money market funds where the total fees run around 70 bps.

The whole part of who will bail is the big wild card for me.  I have not been thru a bear market in my practice yet.   I'm praying that if I did the right things from the beginning and gave them the best servicing they've ever had I will keep the inevitable defections to 10-15%.

Time will tell.

Congrats to the Colts!

scrim

Feb 5, 2007 4:51 am

[quote=scrim67][quote=anonymous]

"I feel pretty comfortable when the next bear market comes."

"This should insulate me to some degree when stocks fall by 20-40%."

Scrim, I think that your arrogance is going directly over your head.  It's not up to you to be comfortable.  It's not your money.  It's not about insulating you.  It's not your money!

Just curious, are your clients getting charged 1% for the 1/3 cash that they have?

You mentioned that you are doing the right thing for your client as evidenced by staying away from big annuity commissions.  You do realize that you'll be earning more with your 1% wrap than an annuity, don't you? 

Let's use some logic.  Your client base is conservative based upon the fact that your clients have as much money in cash as they do in equities.   You know that the stock market will drop 20-40% at some point.  You (should) know that many of your clients will bale on their equity positions if the market tanks like you expect leading to performance worse than the market.   Over a 10 year period, you expect a 100% equity position to outperform a 33%/33%/33% equity/bond/cash position.  So, please explain how your conservative clients with a long enough time horizon are better off in their 33/33/33 portfolio instead of a VA in 100% equities?

[/quote] I think to some degree I need to be comfortable with the way I run the business.

VA's make me uncomfortable.

Any clients involved in the wrap program are being charged the annual fee.  

My most conservative clients and/or assets they plan on using within a year or two are just in a plain vanilla money market funds where the total fees run around 70 bps.

The whole part of who will bail is the big wild card for me.  I have not been thru a bear market in my practice yet.   I'm praying that if I did the right things from the beginning and gave them the best servicing they've ever had I will keep the inevitable defections to 10-15%.

Time will tell.

Congrats to the Colts!

scrim

[/quote] My most conservative clients who have ten or more years to retirement are usually in some kind of "moderate" allocation.  Around 50/50.

I have not compared how that would do against 100% equities in a VA wrapper.

Again, I will not present a product I'm not comfortable with so VA's are still not an option if you hire me.

scrim

Feb 5, 2007 4:52 am

"At the vey least, not selling annuities, or even struggling through the contract language (when I see broker dealers use the same payout rate for annuity producers and non-producers, cut out the wasteful incentives, simplify the product) does not make you a good or bad advisor. If you want to school us in planning, you will need to try harder." Planet Roached.

Ground control to Major Tom..

Ground control to Major Tom...

Take your protein pill and put your helmet on!

I just got back from my doctor. He told me that there was this new medicine that would help me through these psychotic episodes, but he wasn't going to give it to me because, well, it's too darned expensive, and also he's not sure how exactly it works! He's sure that attaching leeches to my temples when the voices start shouting will eventually start to work, and what with the blood letting and the tut tut there thereing he should be able to get me through the depression and back to my good old manic state.

Manic depression has captured my soul

I know what I want but I just don't know (how to go about gittin it!)

Bad news, planet, this job just is not simple. No matter how simple you want things to be, they're not. Some things are more complicated than other things, but that doesn't mean they're bad. Do you want your doctor to give you two good old asprin when you are in need of prozac? Is prozac more complicated than asprin? You want your doctor to prescribe the most effective cure for what ails you.

"Know what I mean, Doc?" (what's that from? we know the top ref is Space Oddity from Bowie, the middle is Jimi's Manic Depression, this one is not Bugs Bunny.)

Mr. A

Feb 5, 2007 5:05 am

"Again, I will not present a product I'm not comfortable with so VA's are still not an option if you hire me." Scrimp

Another word for comfort is bliss. You know what is blissful? Ignorance!

You don't know what you are talking about. You are ignorant of what you are talking about, but you have convinced yourself that hoping and praying will have been enough and that allows you to be blissed.

Mr. A

Feb 5, 2007 5:12 am

Are you saying if you are not comfortable with a product you will still present it to your clientele?

How is that a good thing?

scrim

Feb 5, 2007 5:23 am

[quote=scrim67]

Are you saying if you are not comfortable with a product you will still present it to your clientele?

How is that a good thing?

scrim

[/quote]

Scrim, you are right to feel wrong about annuities.

An annuity is gamble with someone much smarter than you and who has already taken a 6% handicap and still thinks they will win.

Not a good bet.
Feb 5, 2007 5:45 am

An annuity is gamble with someone much smarter than you and who has already taken a 6% handicap and still thinks they will win.

Not a good bet.

Nice mental picture.


Feb 5, 2007 11:14 am

[quote=planrcoach]

Nice mental picture.

[/quote]

Would you like to buy an annuity?
Feb 5, 2007 11:58 am

An annuity is gamble with someone much smarter than you and who has already taken a 6% handicap and still thinks they will win.

Not a good bet.

Nice rhetoric.  It has no basis in reality, but, hey, it sounds good.   Don't get me wrong.  The total expenses do matter, but what ends up in the salesperson pocket does not.  A 1% wrap will garner more total compensation than an annuity. 

The total expenses of a good annuity are typically going to be about 1% more than the total expenses in a wrap program.   If the money is going to be invested in an identical manner, I agree that the VA probably does not make sense and I would not use one.  However, if the VA allows the client to invest more aggressively, it makes sense.  For me, the decision to recommend a VA tends to be very easy.  "Will conservative client, Mr. Smith, invest more aggressively if we have a guarantee on the money and do I believe that  this will allow him achieve a long term return that is more than 1% higher?" 

Don't discount the value of the death benefit and the ability to annuitize.  These are both important factors that have value.  Many people die with losses in their portfolio.  With a standard death benefit this can't happen with a VA.   Annuitization can also be a huge benefit.  The risk of one outliving their money is very real for many people.   The annuity contract allows them to get payouts based upon today's mortality tables instead of future mortality tables.  This type of risk tolerance makes a lot of sense for many people for part of their portfolio.

You'll get no argument from me if you say that VA's are usually not appropriate.  That does not change the fact that sometimes they are and should be used in these instances.

Scrim, I'm in complete agreement that you should not be using VA's in your practice if you aren't comfortable.  That being said, get comfortable!  There is a segment of your book that would benefit greatly from these products.

Feb 5, 2007 2:01 pm

"An annuity is gamble with someone much smarter than you and who has already taken a 6% handicap and still thinks they will win."

This makes absolutely zero sense.

MAYBE, if you had said an annuity RIDER is a blah blah blah, it might make a little sense.

I think you are confusing annuities with derivative contracts. What is your risk in the annuity? That the market value drops. The insurance company makes money on this? The market drops, the insurance company loses, because they have guaranteed a growth rate.

Yes, there are M&E expenses. You are buying a benefit, it costs money. Are you not going to live in a house because you have to buy fire insurance on it? Are you cheesed off every year that your house didn't burn down? Are you not going to drive a car because you need to be insured?

There are fees for riders... as opposed to having a set contract that doesn't give you the choice of which bells you want and which whistles you don't.

And then there are fees for running the money. Annuity company funds often times cost less in total fees then the same funds outside the contract (there are lots of reasons for this and the top two reasons are the money is stickier in annuities and the annuity gives the money manager access to a large pool of capital, and they are willing to take less money for that access).

So where is this "gamble" you refer to? And how did the insurance company "Take a 6% handicap"? And if it is the Insurance company who "took the handicap" (as opposed to having weighed you down with a 6% handicap) (and where do you come up with 6% anyway? The commission? How is that a handicap? The guarantees are based on the premiums paid which are not net of commission. 6% in total fees is outside the realm of the AXA annuity which this thread is based upon.) wouldn't it make sense for that side of the bet to think they are going to win?

Your statement makes NO sense.

Further, the average investor has no idea, beyond the superficial, how a REIT works. How exactly does an ETF work? Do you know? How does a cell phone work? Do you know? How does GE work? Do You KNOW? Do your clients KNOW how a leveraged muni bond fund works? Do YOU? Do you know how MBIA transfers the risk of underwriting Munibonds? Are you comfortable with that whole process? And what about all those fees you're paying for all those insured Munis (not to mention that the market has discounted the importance of insurance on munis, as evidenced by the spread between insured and non)

Feb 5, 2007 2:59 pm

In truth, I’m surprised that Spitzer and his ilk never went after MBIA.  It’s an odd way to run a railroad, and I’ve never been able to get cozy with it…particularly in light of some of it’s failures.

Feb 5, 2007 3:32 pm

Thanks sharing a passionate viewpoint which is tempered by the fire.

?? What's up with this passionate stuff. 

I am merely pointing out some aspects of VAs that are appropriate and appeal to some clients.   If you don't want to consider them for logical and valid reasons, that's your prerogative.

I am also pointing out that the arrogant fallacy of people who have been in the business for a very short time and in an incredible bull market to boot, shouldn't be so sure that they have all the answers.

 The only reason I post here (besides liking to stir the pot a bit ) is to try to share some of my experiences and philosophy. Do what you want. I really don't care.

Feb 5, 2007 7:34 pm

Well, you argue your opinion with passion. That's just my opinion. I think you are logical and passionate.

And then there is pragmatism. Consider this quote from page 100 of February 2007 Money Magazine. I am not not quoting this as fact, merely to demonstrate that public perception is also relevant. Why? Because we work in an industry that (still) ties itself in knots over ethics questions, to the detriment of Americans who need our help:

... Jeffrey Brown of the Univesity of Illinois says that more retirees should consider an immediate annuity, which guarantees  a lifetime income. Be careful: many annuities salesmen will sell you expensive policies that have risky investment features. For more, see...

Feb 5, 2007 7:38 pm

Would you like to buy an annuity?

No thanks. I might need the immediate annuity, though. Had too many adventures in my youth.

I'll bet you could help me think of something smarter to do with the cash, though.

Feb 5, 2007 7:54 pm

Interestingly enough, I know of at least one VA contract that is lower cost than a great many vanilla G&I type mutual funds.  And that includes the M&E.

Feb 5, 2007 8:52 pm

[quote=mranonymous2u]

“An annuity is gamble with someone much smarter than you and who has already taken a 6% handicap and still thinks they will win.”

This makes absolutely zero sense.[/quote]

No wonder you are so good at hawking annuities.

The insurnace company takes $100,000 from the customer who is sold on the idea that he will get more than $100,000. They pay 6% to the salesman, leaving $94,000 for themselves. And the insurance company expects to payout less than $94,000 with a reasonable margin of safety.

There are alot of very smart people on the other side of the table, and you and your clients can pick better spots than to gamble with them on their chosen turf.

[quote]Further, the average investor has no idea, beyond the superficial, how a REIT works. How exactly does an ETF work? Do you know? How does a cell phone work? Do you know? How does GE work? Do You KNOW? Do your clients KNOW how a leveraged muni bond fund works? Do YOU? Do you know how MBIA transfers the risk of underwriting Munibonds? Are you comfortable with that whole process? And what about all those fees you're paying for all those insured Munis (not to mention that the market has discounted the importance of insurance on munis, as evidenced by the spread between insured and non)

[/quote]

I get paid the big bucks to know all of this, (except for the cell phone part.) And I thought we were talking about VA's not insured muni's. Don't cloud the argument just as you are losing.

Insured Muni's are a marketing scheme, as usful as flight insurance since the default rate on investment grade muni's is nil (or very close to it.

Feb 5, 2007 8:53 pm

[quote=planrcoach]

Would you like to buy an annuity?

No thanks. I might need the immediate annuity, though. Had too many adventures in my youth.

I'll bet you could help me think of something smarter to do with the cash, though.

[/quote]

Buy LSE.


Feb 5, 2007 9:17 pm

[quote=AllREIT]
The insurnace company takes $100,000 from the customer who is sold on the idea that he will get more than $100,000. They pay 6% to the salesman, leaving $94,000 for themselves. And the insurance company expects to payout less than $94,000 with a reasonable margin of safety.
[/quote]

Is this really what you meant to say?  Of course the insurance company expects to pay AT LEAST $100,000 back to the client. I would guess that the vast majority of VA's are sold with the death benefit rider which "forces" the insurance company to pay out the greater of amount invested ($100,000) or current account value (not to mention high water mark, etc.).  If the client chooses this rider, how could the insurance company NOT pay back $100,000 or more?

Feb 5, 2007 9:51 pm

There is this one potential client I've been trying to bring on board for a year.   Today I changed my approach and showed him both a VA with living benefit guarantees so he could never ever lose principal OR the same conservative asset allocation I've been showing him for a year outside the VA wrapper.

Coincidence or not,  he finally got off the fence today and signed up with me using the latter.

Perhaps actually showing him a VA got him to get off the fence even though he chose (what I think the smarter choice was) to invest outside the contract.

scrim

Feb 5, 2007 9:57 pm

The insurance company collects M & E + cost of riders + possibly a policy fee.  They then have to pay their expenses.  These expenses include salaries, commissions, mortality, miscellaneous expenses, payment on riders, etc.  The insurance company wants the client to make as much money as possible.  The more money that the client makes, the higher the annual expenses of the annuity.

This is no different than a wrap account from the point of view that the greater the dollars in the account, the greater the annual fee.

The insurance company does bear some risk and for this risk, they charge a fee.  In general, an annuity makes sense for people who like the idea of transferring this risk.  If the risk does not need to be transferred, an annuity is probably not appropriate.

Feb 5, 2007 10:03 pm

Scrim,

It is the client's money.  Lots of time, there are several good options for him.  Show him more than one good choice and let him decide. 

I never let a VA be the only choice that I give to a client.  I give several options and paint a realistic picture of all of the pluses and minuses of each option.  Clients need choices.  If you only give them one choice, they need to decide whether to work with you or not.  Give them several choices, and the decision becomes one of deciding on a particular solution.  Regardless of which choice they make in this scenario, you become their rep.

Feb 5, 2007 10:13 pm

[quote=anonymous]

Scrim,

It is the client's money.  Lots of time, there are several good options for him.  Show him more than one good choice and let him decide. 

I never let a VA be the only choice that I give to a client.  I give several options and paint a realistic picture of all of the pluses and minuses of each option.  Clients need choices.  If you only give them one choice, they need to decide whether to work with you or not.  Give them several choices, and the decision becomes one of deciding on a particular solution.  Regardless of which choice they make in this scenario, you become their rep.

[/quote] In my mind I was already giving them a choice since my wrap accounts have many different portfolios to choose from.   I have always left VA's out of the mix only because I'm not comfortable with the whole VA premise.

scrim

Feb 5, 2007 10:23 pm

[quote=AllREIT] [quote=mranonymous2u]

"An annuity is gamble with someone much smarter than you and who has already taken a 6% handicap and still thinks they will win."

This makes absolutely zero sense.[/quote]

No wonder you are so good at hawking annuities.


Wait a second, let me get my Planet Roached secret decoder ring so I can try to understand what in the blue blazes you are talking about! 

 
The insurnace company takes $100,000 from the customer who is sold on the idea that he will get more than $100,000. HORRORS! They've been "SOLD" on and IDEA that they are going to get back more money than they invested! They pay 6% to the salesman, leaving $94,000 for themselves."For themselves" What the figtree does that mean? Have you ever heard of B shares? When someone buys a B share, do they have less than the money they invested working for them as a result of the commission paid the rep? And the insurance company expects to payout less than $94,000 with a reasonable margin of safety.This decoder ring isn't working, there is no way to make that statement make sense. If the client keels over the next day, how much does the Annuity company have to pay the Bene? The full $100,000. The rub against the guarantees is that the market, let alone often grows over a 10 yr period at a rate greater than 6%(or whatever the guaranteed rate is with the AXA Accumulator, which it the subject of this thread, it's 6%). While that is undisputed here, the depths of your ignorance and Scrimp's arrogance have yet to be fully plumbed.

There are alot of very smart people on the other side of the table, and you and your clients can pick better spots than to gamble with them on their chosen turf. WTF? Are you only comfortable when the people on the other side of the table are stupider than you? Is that why GWB is in Washington? Because you feel comfortable that way? And given that there are smart people working at Annuity companies, doesn't it follow (in a free market) that they would face competition from each other and that that competition fuels market efficiency? Yeah, you still have a role in sussing out the best, but being afraid because there are smart people over there is juvenile!

[quote]Further, the average investor has no idea, beyond the superficial, how a REIT works. How exactly does an ETF work? Do you know? How does a cell phone work? Do you know? How does GE work? Do You KNOW? Do your clients KNOW how a leveraged muni bond fund works? Do YOU? Do you know how MBIA transfers the risk of underwriting Munibonds? Are you comfortable with that whole process? And what about all those fees you're paying for all those insured Munis (not to mention that the market has discounted the importance of insurance on munis, as evidenced by the spread between insured and non)

[/quote]

I get paid the big bucks to know all of this, (except for the cell phone part.)And yet you don't get paid the "big bucks" to understand the proper application of Variable Annuities? Queer, that! Meanwhile, how about you explain to the class how a mortagage reit decides which mortagages to write and which ones to pass over? How do they hedge themselves against sub prime borrowers and what rubric they use to determine the proper spread between the risk inherant in their portfolio versus the premium they'd need to pay to shift that risk to a speculator? Point is, you don't know! And I thought we were talking about VA's not insured muni's. Don't cloud the argument just as you are losing. Argumentation here is not about "winning" and "losing" it's about three or four experienced brokers offering to help some whelps find their way (some whelps are chronological, some and retarded in their understanding)

Insured Muni's are a marketing scheme, as usful as flight insurance since the default rate on investment grade muni's is nil (or very close to it. You know, when I used to go to the Mensa Meetings, one of the "funniest" lines that geeks used to yell at each other whenever someone said something dumb was "ReTest!" as in the IQ test must have been wrong. "Insured Muni's are a marketing scheme" is one of the stupider things I've ever heard! But don't worry, some of those Brainiacs at the Mensa meetings said some dumber stuff.

I'm not going to explain to you why it's a stupid thing to say in this thread. But let me say to you that from the statement, any reasonable person would assume that you have no appreciation of the concept of degrees of risk. If I was the geeky type I'd be all about yelling that you ought not be in the business of advising people about money. I'm not that sort of guy so I'll just pat you on the head gently and say "Go away kid, you stink of bubble gum and lollipops!"

Mr. A

[/quote]

Feb 5, 2007 10:37 pm

[quote=now_indy]

[quote=AllREIT]
The insurnace company takes $100,000 from the customer who is sold on the idea that he will get more than $100,000. They pay 6% to the salesman, leaving $94,000 for themselves. And the insurance company expects to payout less than $94,000 with a reasonable margin of safety.
[/quote]

Is this really what you meant to say?  Of course the insurance company expects to pay AT LEAST $100,000 back to the client. I would guess that the vast majority of VA's are sold with the death benefit rider which "forces" the insurance company to pay out the greater of amount invested ($100,000) or current account value (not to mention high water mark, etc.).  If the client chooses this rider, how could the insurance company NOT pay back $100,000 or more?

[/quote]

Does the insurance company expect to make a profit on the annuity? Yes or no? If they make a profit, then the client paid too much for the economic benefits of the annuity.

I'm really not going to teach a class on the pricing of embeded options inside of annuity contracts, annuity company ALM and the present value of cash flows.

Sufice it to say that:

PV of expected cash outflows to annuitant << PV of net cash inflow paid to insurance company.

And you do not understand that, then be thankful you are selling annuities and not writing them.
Feb 5, 2007 10:45 pm

Does the insurance company expect to make a profit on the annuity? Yes or no? If they make a profit, then the client paid too much for the economic benefits of the annuity.

How does your quote differ from:

Does the mutual fund company expect to make a profit on the mutual fund?  Yes or no?  If they make a profit, then the client paid too much for the economic benefits of the mutual fund.

Feb 5, 2007 10:48 pm

[quote=mranonymous2u]There are alot of very smart people on the other side of the table, and you and your clients can pick better spots than to gamble with them on their chosen turf. WTF? Are you only comfortable when the people on the other side of the table are stupider than you? [/quote]

Yes!!!

Of course. Gambling with people who are better than you is sure way to lose money. Conversely gambling with people who are dumber than you is a likely way to win money. That’s how value investing, poker, and annuity sales works.

[quote]And given that there are smart people working at Annuity companies, doesn’t it follow (in a free market) that they would face competition from each other and that that competition fuels market efficiency? Yeah, you still have a role in sussing out the best, but being afraid because there are smart people over there is juvenile! [/quote]

I can get you free air fare and cab fare to any good sized poker game in the country right now.

As for annuities being effeciently priced, an effecient market is only possible when all participants are equally informed. Otherwise the more informed (i.e the insurance company’s) take advantaged of the less informed (the annuitants)

Meanwhile, how about you explain to the class how a mortagage reit decides which mortagages to write and which ones to pass over? How do they hedge themselves against sub prime borrowers and what rubric they use to determine the proper spread between the risk inherant in their portfolio versus the premium they’d need to pay to shift that risk to a speculator? Point is, you don’t know!

I’m not going to teach you credit analysis and credit risk pricing untill you pass annuity pricing and embeded options pricing.

[quote] “Insured Muni’s are a marketing scheme” is one of the stupider things I’ve ever heard! [/quote]

So why are muni’s insured if not to make them more marketable?
Feb 5, 2007 10:54 pm

Your problem.... One of your problems, is that you are looking at this as immediate annuitization.

Nobody but you is talking about an immediate annuity. We're talking about annuities as an investment vehicle. We're talking about letting the annuity grow for a number of years, in the AXA case the company will "guarantee" the the lowest rate of growth you will have is 6%. However, in order for you to get that 6% rate, you will first have to take distributions that will reduce your contract value and then you will have to annuitize once your contract has been almost depleted.

The company does expect to make money on this transaction, yes. The Schweinhunds! Capitalist PIGDOGS!  How dare they?

Further, your simplistic emboldened type statement is wrong ALSO.  More correct would be a statement as such.

PV of expcted cash outflows to annuitant < PV of (Premium paid + earnings on premiums received) -Costs of doing business.

Mr A.

Feb 5, 2007 11:13 pm

let me get my Planet Roached secret decoder ring so I can try to understand what in the blue blazes you are talking about! 


After all those Mensa meetings, you won't need my ring. I admire your energy level.

Feb 5, 2007 11:17 pm

[quote=mranonymous2u]

Further, your simplistic emboldened type statement is wrong ALSO.  More correct would be a statement as such.

PV of expcted cash outflows to annuitant < PV of (Premium paid + earnings on premiums received) -Costs of doing business.

Mr A.

[/quote]

You missed the part of about net cashflows?

Would you like to buy an annuity?
Feb 5, 2007 11:29 pm

[quote=AllREIT] [quote=mranonymous2u]There are alot of very smart people on the other side of the table, and you and your clients can pick better spots than to gamble with them on their chosen turf. WTF? Are you only comfortable when the people on the other side of the table are stupider than you? [/quote]

Yes!!!!!!!!  Let me put this as gently as I know how... There are damn few tables you ought to feel comfortable at!

Of course. Gambling STOP RIGHT THERE! Investing is NOT gambling! these are two SEPARATE, definable activities. Gambling is a zero net sum activity and investing is not. It's bad enough when we have to deal with the public's misconception in this area without people like you, in the industry thinking the terms are interchangable. 

 

[quote]And given that there are smart people working at Annuity companies, doesn't it follow (in a free market) that they would face competition from each other and that that competition fuels market efficiency? Yeah, you still have a role in sussing out the best, but being afraid because there are smart people over there is juvenile! [/quote]

I can get you free air fare and cab fare to any good sized poker game in the country right now. OP CIT!

As for annuities being effeciently priced, an effecient market is only possible when all participants are equally informed. Otherwise the more informed (i.e the insurance company's) take advantaged of the less informed (the annuitants) If everything is so simplistic to you, does that mean that you are a simpleton? What is there, a conspiracy among annuity to rip off the unwitting public?

If someone comes into my office and says "Hey! I got this great annuity for your customers, and it has a ytb of 6%!"

I ask, "What's the CDSC?"

He says "15,14,13,12,11,10,10,10,99,10,10,8,7,6,5,4,3,2,1. I'll tell ya to look out for that 9th year, some other guys wouldn't tell you so, but that's the higher level of service you can expect from me!"

I ask "What are the total expenses?"

He says "Just the usual low low 6% per year"

I ask "Annual death bene step up?"

"Heck no!"

Me "Choice of sub advisors"

He "Just our's, we're great, did you know that one star morningstar rated funds outperformed five star funds in one, three and five years?"

Me "No, I didn't know that."

He "I don't know if it's true, but I heard it and it would be way cool for us cause all our funds are one stars so we're bound to hit it big one of these days!"

I "Got a GMIB?"

He, "No. We're plain and simple, the way it used to be in annuities before they got all complicated. We don't hire those smarty pants MBAs cause we know we can get people to buy our product anyway!"

I'm gonna say "Thank you very little, the door's over thata way!" 

Who needs to be informed before an efficient market can exist? The annuitant? That's the only way there's going to be market efficiency? Balderdash! (note the brown font)


So why are muni's insured if not to make them more marketable? It doesn't matter vis a vis your statement because you project that you think that all grades of "investment grade" paper carry the same amount of risk (given that they rarely default anyway).[/quote]

Feb 5, 2007 11:33 pm

"You missed the part of about net cashflows?"

The problem you got right there is that your statements leading to this flubbed joke of a statement said that the annuity company was looking to pay out less than $94,000 on a $100,000 annuity. This overrides your claim to have included earnings.

Mr A.

Feb 5, 2007 11:58 pm

[quote=AllREIT] [quote=now_indy]

[quote=AllREIT]
The insurnace company takes $100,000 from the customer who is sold on the idea that he will get more than $100,000. They pay 6% to the salesman, leaving $94,000 for themselves. And the insurance company expects to payout less than $94,000 with a reasonable margin of safety.
[/quote]

Is this really what you meant to say?  Of course the insurance company expects to pay AT LEAST $100,000 back to the client. I would guess that the vast majority of VA's are sold with the death benefit rider which "forces" the insurance company to pay out the greater of amount invested ($100,000) or current account value (not to mention high water mark, etc.).  If the client chooses this rider, how could the insurance company NOT pay back $100,000 or more?

[/quote]

Does the insurance company expect to make a profit on the annuity? Yes or no? If they make a profit, then the client paid too much for the economic benefits of the annuity.

I'm really not going to teach a class on the pricing of embeded options inside of annuity contracts, annuity company ALM and the present value of cash flows.

Sufice it to say that:

PV of expected cash outflows to annuitant << PV of net cash inflow paid to insurance company.

And you do not understand that, then be thankful you are selling annuities and not writing them.
[/quote]

You may want to stick with REITs. Oh Wait, those capitalist pigs who manage the buildings want to make a PROFIT!!! I guess you're screwed.  Maybe you can sell some Peace Corp Structured Notes.

Feb 6, 2007 2:29 am

[quote=mranonymous2u]

“You missed the part of about net cashflows?”

The problem you got right there is that your statements leading to this flubbed joke of a statement said that the annuity company was looking to pay out less than $94,000 on a $100,000 annuity. This overrides your claim to have included earnings.

Mr A.

[/quote]

Make the $94,000 a proxy for PV of the Annuities net cash flows.

===
And that is my last post in this thread. VA's aren't worth the time wasted on them in this thread.
Feb 6, 2007 2:39 am

'And that is my last post in this thread. VA's aren't worth the time wasted on them in this thread."

Nor is your intellectual virtue!

Mr A.

Feb 7, 2007 12:18 pm

WOW!

Feb 7, 2007 10:09 pm

Does anyone invest in individual stocks anymore?

Why not invest in 50 stocks that have increased dividends for 10+ years and put a limit order on them for say 8% less than the puchase price. Then add some amount into bonds or SPIA for "guarantees". You could up the limit order each year for growth.

That would provide "downside" protection with no surrender charges, no M&E and a likely rising income stream, tax-advantages...

Just another angle.

Feb 7, 2007 10:22 pm

no trail dumbsh!t !!

Feb 7, 2007 10:59 pm

"Why not invest in 50 stocks that have increased dividends for 10+ years and put a limit order on them for say 8% less than the puchase price. Then add some amount into bonds or SPIA for “guarantees”. You could up the limit order each year for growth.

That would provide "downside" protection with no surrender charges, no M&E and a likely rising income stream, tax-advantages..." EDJtoRIA

Edoria,

Stocks don't often go down the way you want them too. Sometimes (like in the case of colonial gas which had been paying rising dividends since Adam And Eve held the first BOD meeting!) the dividend is abruptly eliminated and the stock gaps down 50%! Where is you little limit order now? It's an executed market order that got you drilled and filled at the same time.

Is that likely to happen, to you? Yes. Given enough exposure to the market, you too will step on a landmine. What if, tonight, the BIG ONE hits California? "When California tumbles into the sea, that'll be the day I go back to Annandale!" notice he didn't say "IF"! What will the market look like tomorrow? Dow Down 5,000? Dow Closed till further notice? and each of your fifty limit orders will have been ticked off as market orders (or do you want them to be just out of the money by a 100%?).

What if Bird Flu makes the jump this weekend and half of Hong Kong is exposed by Monday (the half with the airport in it)?

What if a sea container in NJ has a massive dirty bomb ticking in it right NOW!?

There is risk in the market and for you (and the "just buy a mutual fund" crowd) to think you can pretend to take on that risk and manage it with your petty little tricks is a grevious error!

Understand risk and use it. Understand fear and protect against it. Just because you're paranoid doesn't mean there isn't plenty to be phobic of.

Mr. A

Feb 8, 2007 1:48 am

Understand risk and use it. Understand fear and protect against it. Just because you're paranoid doesn't mean there isn't plenty to be phobic of.

Sweet. Clients emotions are real, and you are the only thing standing between their emotions and irrational investor behaviour. These are the only clients worth having, in my book. 'Most everything else is just bells and whistles.

Feb 8, 2007 1:48 pm

Mr. A,

I guess I'm just a lot more optimistic than you.

If any of the above scenarios happened, wouldn't the insurance companies that have their assets invested in the markets also be in trouble? What if they had lots of policies in place in California? Can you say "bankruptcy"?

I don't offer my service based on doom and gloom. I try to show people a good value for the relationship and that I'm a nice person. That seems to work for me!

Feb 8, 2007 2:20 pm

Why not invest in 50 stocks that have increased dividends for 10+ years and put a limit order on them for say 8% less than the puchase price. Then add some amount into bonds or SPIA for "guarantees". You could up the limit order each year for growth.

EDJ to RIA, just curious, with this strategy, what's the total cost to the client.  How much money is the advisor making?  How much time does the advisor have to invest in this?  What's the advantage to the client?   Just give us ballpark #'s on a $200,000 investment.

Feb 8, 2007 3:54 pm

[quote=anonymous]

Why not invest in 50 stocks that have increased dividends for 10+ years and put a limit order on them for say 8% less than the puchase price. Then add some amount into bonds or SPIA for "guarantees". You could up the limit order each year for growth.

EDJ to RIA, just curious, with this strategy, what's the total cost to the client.  How much money is the advisor making?  How much time does the advisor have to invest in this?  What's the advantage to the client?   Just give us ballpark #'s on a $200,000 investment.

[/quote]

Plus this strategy doesn't provide the guarantees that are usually the reason the client is buying the VA in the first place.

I just did a 180K VA for clients who have inherited money. This is the first real money they have had and are nervous about losing and the wife especially about the market.  They are not very sophisticated investors. They don't need the money until retirement which is over 14 years away. The annuity has a guaranteed base growth rate, a worst case scenario if you will and a death benefit for their children...another worst case scenario.  

After ten years they can annuitize the contract if the base is greater than the actual contract value or they can continue to let the contract go on until the base is 2.5 times the initial deposit.  If the contract is worth more than the guaranteed base, there is no need to annuitize and they can take retirement income in any amount they like.  If they want to their free withdrawal amounts from the contract prior to 10 years it is taken pro rata from the contract and adjusted accordingly in the guaranteed base.  At this time, they see no need to take anything from the contract.

They know that this expensive and the guarantees are going to reduce the potential gains with the same funds outside of the annuity. They feel that the guarantees are more important to them.

The rest of the funds we have put into money market, bond ladder with the longest maturity being 15 years and a few mutual funds for growth and income and liquidity.

While your scenario of the 50 stocks is do-able because my clients have enough funds to build a portfolio, the fact that these are unsophisticated investors who are leery of the stock market would make it impossible for them.  Trying to explain stop loss and sell limit orders, zero cost collars, ticket charges etc would scare them.  The activity in the account as the stocks are stopped out and new stocks bought would also be scary. The end result would be that they give up and put the money back into CDs just like Dad did.

Feb 8, 2007 4:40 pm

[quote=EDJ to RIA]

Mr. A,

I guess I'm just a lot more optimistic than you.

If any of the above scenarios happened, wouldn't the insurance companies that have their assets invested in the markets also be in trouble? What if they had lots of policies in place in California? Can you say "bankruptcy"?

I don't offer my service based on doom and gloom. I try to show people a good value for the relationship and that I'm a nice person. That seems to work for me!

[/quote]

More optimistic is one way of looking at it. Some optimist might say you are half full of Sh1t and a pessimist might say I'm half empty of it!

Gloom and doom is when your client has to go back to work at Mc Donalds because the market ate their portfolio's earnings power.

I'm Sister Mary Sunshine when it comes to my ideas and I'm Darth Vader when it comes to anyone else's ideas (if it means more money to/for me). I invest/speculate in the markets naked every day. I buy stocks and sell them when I have a 20% gain. Why? Because I know that I don't know what can't be known and that is "What tomorrow will bring!"

I rarely buy VA's, but I don't delude myself or my clients that I can replicate the safety of annuities. I just don't have the capital backing me that can allow me to make a "Guarantee!". And neither do you!

Mr. A

Feb 8, 2007 6:17 pm

[quote=babbling looney][quote=anonymous]

Why not invest in 50 stocks that have increased dividends for 10+ years and put a limit order on them for say 8% less than the puchase price. Then add some amount into bonds or SPIA for "guarantees". You could up the limit order each year for growth.

EDJ to RIA, just curious, with this strategy, what's the total cost to the client.  How much money is the advisor making?  How much time does the advisor have to invest in this?  What's the advantage to the client?   Just give us ballpark #'s on a $200,000 investment.

[/quote]

Plus this strategy doesn't provide the guarantees that are usually the reason the client is buying the VA in the first place.

I just did a 180K VA for clients who have inherited money. This is the first real money they have had and are nervous about losing and the wife especially about the market.  They are not very sophisticated investors. They don't need the money until retirement which is over 14 years away. The annuity has a guaranteed base growth rate, a worst case scenario if you will and a death benefit for their children...another worst case scenario.  

After ten years they can annuitize the contract if the base is greater than the actual contract value or they can continue to let the contract go on until the base is 2.5 times the initial deposit.  If the contract is worth more than the guaranteed base, there is no need to annuitize and they can take retirement income in any amount they like.  If they want to their free withdrawal amounts from the contract prior to 10 years it is taken pro rata from the contract and adjusted accordingly in the guaranteed base.  At this time, they see no need to take anything from the contract.

They know that this expensive and the guarantees are going to reduce the potential gains with the same funds outside of the annuity. They feel that the guarantees are more important to them.

The rest of the funds we have put into money market, bond ladder with the longest maturity being 15 years and a few mutual funds for growth and income and liquidity.

While your scenario of the 50 stocks is do-able because my clients have enough funds to build a portfolio, the fact that these are unsophisticated investors who are leery of the stock market would make it impossible for them.  Trying to explain stop loss and sell limit orders, zero cost collars, ticket charges etc would scare them.  The activity in the account as the stocks are stopped out and new stocks bought would also be scary. The end result would be that they give up and put the money back into CDs just like Dad did.

[/quote]

Sounds like the ING ESII to me...

Feb 9, 2007 1:34 pm

The clients that I accept are somewhat sophisticated. Most wouldn't touch a VA with a 10-foot pole. Not that VA's aren't appropriate for some folks, they're just not my clients. If I don't think a prospective client will understand or appreciate my strategy and platform, I don't accept them. I'll charge them $150/hr to show them a detailed cost and diversification analysis, but then I'll send them on their way with a "call me again if you have any questions!"

That's just the way I'm set up.

On the cost front, the platform I use charges a flat 20bps for all trading, performance reporting and portfolio management software. I pass this on to the customer as the "expense ratio" and then tack on my tiered fee from 1% down to .55%. I'd gues my average fee is around 80bps + 20bps = somewhere around 1%.

Everyone have a great weekend!

Feb 9, 2007 2:39 pm

The clients that I accept are somewhat sophisticated. Most wouldn't touch a VA with a 10-foot pole.

I'll call B.S. on this.  I say that because a client's level of sophistication has nothing to do with this.  A sophositicated conservative client can absolutely find value in a VA.  In fact, I find the sale to be much easier with the sophisticated client because they understand the value in being able to invest in a way that is above their natural risk tolerance.

Feb 9, 2007 3:18 pm

"Somewhat sophisticated' means that they heard once that VA's were a bad way to go and they hold on to that kernel of "knowledge" with all their might.

I've had arguements with very sophisticated investors over the benefits of preferred stocks, over the disadvantages of closed end bond funds, over option strategies, over annuities, over the relative advantages of simple interest over amortized interest/principal payments and every other investing paradigm that has come down the pipe.

I argued in favor of preferreds before the New Issue Preferreds market came to the market, and then I had to argue against the preferreds to the self same people who were dead set against them before.

I don't buy new issue Preferreds, I don't buy new issue CEBF, I don't buy mortgages. I will buy discounted preferreds, I will buy discounted CEBFs, I don't buy mortgages.

I used to not buy VAs because they didn't offer anything beyond the death benefit. Now they offer much much more. I will buy them. But I expect to run into the same old "Sophistication" when I present them.

Mr. A

Feb 9, 2007 3:29 pm

[quote=EDJ to RIA]

The clients that I accept are somewhat
sophisticated. Most wouldn’t touch a VA with a 10-foot pole. Not that
VA’s aren’t appropriate for some folks, they’re just not my clients. If
I don’t think a prospective client will understand or appreciate my
strategy and platform, I don’t accept them. I’ll charge them $150/hr to
show them a detailed cost and diversification analysis, but then I’ll
send them on their way with a “call me again if you have any
questions!”

That's just the way I'm set up. [/quote]

You hit the nail on the head. I'm the same way. My customers just arent VA customers, and if they would accept the blandishments of annuity salesmen, they probably wouldn'tappreciate real investment management.


If you really want to sour clients on annuities, download a copy of AEL's investor presentation from the FBR conference.

It's extremely open/explicit that AEL's model is to pay annutant 250bp less than AEL's general account earns. It also explain's how AEL's annuities tend to have much larger and longer surrender charges than the industry averages.

So you show people  that on the one hand the industry tells annutants "You made the right choice" and to shareholders they say "Look at these suckers".

[quote]On the cost front, the platform I use charges a flat 20bps for all trading, performance reporting and portfolio management software. I pass this on to the customer as the "expense ratio" and then tack on my tiered fee from 1% down to .55%. I'd gues my average fee is around 80bps + 20bps = somewhere around 1%.

Everyone have a great weekend!

[/quote]

Which platform are you using?
Feb 9, 2007 3:55 pm

It's extremely open/explicit that AEL's model is to pay annutant 250bp less than AEL's general account earns.

I don't know this annuity, but why is it a shock to find out that the insurance companies are in it for the money?  This is actually why I hardly ever reommend SPIA's.  The client would be better investing the funds and creating their own annuity.  The reason that I feel VAs are appropriate for some people has been repeated over and over by others who don't have their eyes shut.  Guarantees not available in other investments and the ability to be more agressive than the client would otherwise be because of the guarantees.  Tax deferral is sometimes the reason, but most often not.

As to the "sophisitication" of customers, how do you determine this.  See if they crook their pinky finger when sipping tea?  Actually, I think of clients as sophisitacted if they are aware of and willing to use strategies that are more involved than the average investor and willing to be invested in other than your basic mutual fund, bond portfolios.  Unsophisticated (to me anyway)  means I have to start explaining the very basics...what is a stock, what is a bond, what is a mutual fund, how are these different than CDs, etc.

The type of "sophisticated" investor I won't do business with is the one who thinks they know more than I do and wants to second guess every recommendation I make.  Maybe they watched Suzie Orman or read Smart Money once.

Feb 9, 2007 4:37 pm

It's extremely open/explicit that AEL's model is to pay annutant 250bp less than AEL's general account earns. It also explain's how AEL's annuities tend to have much larger and longer surrender charges than the industry averages.

What does this have to do with VA's?  How the investments perform compare to the insurance company's general account has zero meaning in a VA.