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Newsweek's Jane Quinn on VAs

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May 26, 2007 6:22 pm

[quote=scrim67] [quote=anonymous]

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



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



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



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



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



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



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



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



scrim

[/quote]



So with your 1.4% wrap fee your clients are going to average around 5.5% with that allocation. Is that going to get them where they need to be? Probably not.
May 26, 2007 6:29 pm

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

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

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

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

May 26, 2007 6:44 pm

Annuities are right in a few isolated situations.

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

May 26, 2007 6:45 pm

[quote=anonymous]

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

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

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

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

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

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

scrim

May 26, 2007 6:49 pm

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

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

May 26, 2007 6:51 pm

[quote=farotech]

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

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

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

scrim

May 26, 2007 7:00 pm

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

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

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

May 26, 2007 7:03 pm

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

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

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

May 26, 2007 7:11 pm

[quote=anonymous]

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

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

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

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

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

scrim

May 26, 2007 7:23 pm

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

May 26, 2007 7:25 pm

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

scrim

May 26, 2007 10:36 pm

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

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

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

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

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

May 26, 2007 10:41 pm

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.     

I bet this instills a lot of confidence in you from your new prospects. 

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.

Ha ha haa.....oh ....you were serious. 

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

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

May 26, 2007 11:18 pm

I am serious.

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

I don't find that possible.

scrim

May 26, 2007 11:32 pm

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

30% loss in bonds

1% return in cash

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

scrim

May 27, 2007 1:25 am

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

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

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

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

May 27, 2007 2:27 am

[quote=scrim67]

I am serious.

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

I don't find that possible.

scrim

[/quote]

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

May 27, 2007 3:06 am

[quote=scrim67]

I am serious.

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

I don't find that possible.

scrim

[/quote]

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

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

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

May 27, 2007 3:31 pm

[quote=Dust Bunny][quote=scrim67]

I am serious.

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

I don't find that possible.

scrim

[/quote]

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

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

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

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

scrim

May 27, 2007 4:08 pm

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

I am serious.

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

I don't find that possible.

scrim

[/quote]

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

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

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

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

scrim

[/quote]

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