[quote=bankrep1]Thanks for explaining Dust Bunny, again Allreit learn
about something before you choose to knock it. You make yourself look
stupid calling someone else stupid when your wrong!


To keep it simple, part of the 1.25% goes toward commissions costs.
Let me say agian the client pays 0, 0 upfront, 0 amortized. [/quote]



Jesu!



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

So you do beleive in the tooth fairy.

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

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

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

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

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



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



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



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

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

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

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

[quote=AllREIT] [quote=Bobby Hull]

Joe, let's talk about your YTB comment. If I sell an annuity for $100,000, I gross $7500. If you charge a fee on $100,000, how much do YOU gross in 7 years? What if you assume 10% compounded, annual growth? Tell the truth.

[/quote]

I can't believe I'm actually responding to this.

But here goes.

Final Value of $100,000 spent on an annuity assuming 7.5% load, and 1.5% expense ratio, assuming 10% CAGR.

92.5*(1.10-0.015)^7:163.738

Final value of $100,000 invested at a 1.25% expenses ratio.

100*(1.10-0.0125)^7:179.889

----
Net difference to client 179.889-163.738:16.151

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

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

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

Annuity

194.872-163.738:31.134

Managed Account

194.872-179.889:14.983

Relative cost: 31.134/14.983:2.078

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





[/quote]

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

[quote=Bobby Hull][quote=AllREIT] [quote=Bobby Hull]

Joe, let's talk about your YTB comment. If I sell an annuity for $100,000, I gross $7500. If you charge a fee on $100,000, how much do YOU gross in 7 years? What if you assume 10% compounded, annual growth? Tell the truth.

[/quote]

I can't believe I'm actually responding to this.

But here goes.

Final Value of $100,000 spent on an annuity assuming 7.5% load, and 1.5% expense ratio, assuming 10% CAGR.

92.5*(1.10-0.015)^7:163.738

Final value of $100,000 invested at a 1.25% expenses ratio.

100*(1.10-0.0125)^7:179.889

----
Net difference to client 179.889-163.738:16.151

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

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

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

Annuity

194.872-163.738:31.134

Managed Account

194.872-179.889:14.983

Relative cost: 31.134/14.983:2.078

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





[/quote]

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

[/quote]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

scrim

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

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

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

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

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

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

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

Scrim,

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

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

[quote=scrim67]

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

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

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

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

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

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

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

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

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

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

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

scrim

[quote=anonymous]

Scrim,

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

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

[/quote]

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

[quote=AllREIT] [quote=scrim67]

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

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

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

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

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

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

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

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

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

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

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

scrim

[/quote]

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

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

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

Choose wisely.

[/quote]

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

[quote=AllREIT]

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

Expense #1 adds zero value to the client,

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

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

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

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

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

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

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

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

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

scrim

[quote=scrim67]

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

scrim

[/quote]

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

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

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

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

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

[quote=anonymous]

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

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

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

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

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

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

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

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

scrim