[quote=bankrep1]When comparing maximization of returns or preservation of capital most people find the latter to be more important.  If your running rings around anyone your portfolio simply has more risk.  Show me any portfolios returns on a risk adjusted basis and if you have a higher return it’s likely you have more risk.

My clients care about meeting their goals.  What is the best vehicle to help them meet their goals, depends on the client.  Va's are not good or bad just another option.[/quote]

Most people want both...and assuming that higher returns automatically mean higher risk, assumes that all choices are on the efficient frontier.  Reality says that most are not.  If they are were, then all risk-adjusted returns would be equal. Higher returns can mean either more risk, and/or better management.

Yes, even though I use VAs in some instances, I can still say confidently that I can generally run rings around VA performance due to fewer choices in a given VA and higher expenses under the VA model.  You think guarantees come for free?  I'll agree on this...VAs are certainly another option, and are a good way to get equity exposure for the risk adverse.

This beats the heck out of debating the merits of a certain firm, doesn't it?!!

Va's are very expensive. 2.5% - 3.5% is probably the avg.  It is easy to put together a portfolio that will outperform a VA simply because of the high expenses.  I am not arguing that.

What I am arguing (an Indyone you seem to get this), is that for most people they would rather suffer a small % return, and protect themselves.  I just met with a prospect yesterday age 60, his entire 7 figure portfolio was 100% equities at AG Edwards, I asked him what his main concern was and he said losing his principal, I am just trying to understand what his advisor is thinking.  If that rep went to court and they called in an expert witness they would tear that rep to shreds and his career would be done.  It is my guess alot of reps focus on home runs instead of focusing on what their clients want.

I am a semi-VA convert…to echo others, it at least is a viable option for some of some people’s $.  The beauty of the guarantees in my view is that you can allocate a heckuva lot more of a portfolio to equities and likely make up the expense differences in returns–due to asset allocation, NOT manager or security selection.  We know the history of equity returns and theoretically will never flinch in a downturn, but as mentioned above, our clients don’t care about how WE feel.  They are liable to make a bad decision at the darkest times in the market, despite our handholding and reinforcing the logic behind staying put.

[quote=Help]

An independent company and you like annuities?

[/quote]

He sits in a bank lobby.....that's why he likes annuities so much.

Joe,

I wouldn't trade places with anyone. I am that happy, last time I checked my office had a door.  All four of them.  Did I mention I have never cold called, walked, mailed or any of that other BS, while your building your business, I am building my net worth... I spend 100% of my time meeting with clients or potential clients.  Don't knock it, there are some crappy bank programs out there, but it is the model of the future.

Bankrep,

If his only concern was loss of principal, why didn't you refer him to the bank CD dept???

[quote=exEJIR]

Bankrep,

If his only concern was loss of principal, why didn't you refer him to the bank CD dept???

[/quote]

Most folks want more growth than a bank CD will allow.

As a salesman and a financial professional one should be able to articulate the features and benefits of a VA.  Most bank clients won't just straight into a brokerage account with no guarantees.  However, a properly articulated VA that allows market participation with the guarantee of principal from a living benefit rider makes the VA a perfect fit for a risk aversed client seeking a greater return.  And, yes...people will pay a little bit more in fees for the VA but they see a value in paying for that guarantee.  Your HNW clients might not see that same value, but $200,000 isn't a large chunk of their net worth either.  A bank client with $400,000 in CDs (yes...they do exist) will move a decent portion into a C share VA that offers 100% liquidity, market participation, and guarantee of principal from a living benefit rider.  Now, you do the math putting 12 million a year into a VA that pays 1.75% upfront and a 1.00% trail starting in year 2.

The client is liquid, happy, has market participation, and guarantee of principal.

Just as stocks aren't suitable for everyone or bonds, or options, va's aren't for everyone either. However, they are most appropriate for the higher income/ net worth clients. Let's leave wrap accounts out of this because if anyone on this board thinks they are a good stock picker over the long term, they are mistaken, (2000- 2002).I've learned the hard way to just gather the assets, and let the pro's manage the money. I focus on clients who have maxed out their 401(k)'s, and IRA's. Put 500,000 in mutual funds and you put the client at risk for a potential capital gain risk, a portion which would be short term.Sheltered in a VA, there's no 1099 and you can move money all over the place without worry of tax consequences. Sure the new tax rates on dividends and cap gains are lower now, but who knows what they'll be in the future? Furthermore, the Va's I use avg. expenses are 1.9% , comparable to most wrap accounts and mutual funds.  Reps who "hate "Va's clearly don't understand them or are working with blue collar clients.

Stok

I forgot to mention the sarcasm dripping from my last post. 

I understand the benefits of VAs.  I fact I have sold them in the past.  Having said that, it only represented 10-15% of my biz, NOT 95%.

I refer people for CD’s all of the time, if that’s what they need.  This particular case the client did not need a CD or a VA.  He needed his portfolio reallocated to include some bonds and other asset classes.  I also do about 15-20% of my business in VA’s.

It seems to me that people who love VA's don't pay attention to what they are unconsiously doing.  Why would someone want a variable annuity laboring under 2.5% to 3.5% in expense, in addition to 1% for every 100% turnover in undisclosed, soft dollar costs of the underlying funds for a total potential cost of 3.5% to 4%.  Even if you only factor in the long term avg. annual equity market returns of, let's say 10% (which I do believe that the next 10 years have a high probability of less return, due to a shrinking equity premium) your net return (let's not forget that the net return will also be taxed at a higher income tax level) might be 5% for an allocated portfolio (stocks+bonds), about what you'd expect from bonds.  Problem is, now you're locked in for 7 years (I know CDSC's vary, I'm generalizing) or your hammered by a penalty.  In addition, Mr. Customer, in the rare case that the market is still below what you invested 10 years ago, since your in 100% equities (how many rolling periods in the last 100 years have had negative market returns, including reinvested dividends, not many I'd say), we'll give you back your pricipal and if you spend a little more on this insurance rider maybe another 20% for a total 10 year annual compounding return of 1.825%!!!!!  Let's not even get into the Income (annuitization) benefit options, which are complete dogsh*t, for anyone who truly understands the math.  Plain and simple, variable annuities are a marketing gimick, just like all the structured market indexed CD's designed to scam people into thinking they can get market "like" (love that double speak b.s.) returns without market "like" risk.  No free lunches.  There are a few occasions where Va's make sense, which I believe are related to the death benefit but the lions share of VA's I've seen are GROSSLY oversold.  Anyone who truly understands the math of these lipstick adorned pigs either has to face that they are looking out for their pocketbook or are too lazy (and/or afraid?) to educate their clients about what's in the clients best interests.  Those who don't truly understand the math or the economy/markets and what an extended 10 year negative total return for the stock market (not considering how a well diversified portfolio of bonds, stocks, reits etc... would do in a flat or negative stock market) really means, should go sell Kirby's door to door and stop giving our business a bad name. 

Look, kiddies; if a well diversified portfolio of let's say 60% stocks (across market cap and style, international, domestic and emerging markets),30% bonds and 10% alternative assets (REITS, Income MLP's, Managed Futures etc... based obviously on the clients means and qualification) or even an well diversified 80% stock 20% bond type portfolio is negative 10 years from now, we'll have more serious issues to worry about. 

I'm not the smartest guy in the world but, risk and return do have some relationship.  The cost of insurance is related to the amount of risk insured plus profit for the insurer.  Insurance is a profitable business.  Who's the winner with VA's, insurer's and brokers, indisputable when it comes down to math, history and my trusty ACME crystal ball  .  Thanks for listenin'

Dude

dude,

You are obviously not the smartest guy in the world.  You got it exactly wrong.

Returns are the least of concerns with a VA.  Risk management and the ability to invest in the market with guarantees are much more important to the VA consumer.  These individuals understand that they may sacrifice a percentage of their returns for a guarantee of their principal.  In fact, they will often times pay more for increase liquidity (C share product) as opposed to being locked up for 7 years.  This is where they see value.  Folks invest in a VA as a step up from a fixed annuity.   Very rarely will somebody with a brokerage account step down to a VA.

Further, the death benefit is also of little concern with a VA, that is why you buy life insurance...not a VA.  Although a consumer typically wants to ensure that any unused portion of the invested amount passes on to their beneficiary they are much more interested in the benefits of having an income stream for themselves. 

Annuitization isn't BS.  It is undersold and misunderstood.  Proper use of annuitization in an arbitrage situation with insurance products is much more beneficial than an equity account.

[quote=menotellname]

Returns are the least of concerns with a VA.  Risk management and the ability to invest in the market with guarantees are much more important to the VA consumer.  [/quote]

The only problem with your explanation is that annuities are by nature long-term investments and as everyone here knows the "guarantees" that VA soak VA buyers to the sink with are meaningless and unnecessary when you're talking about realistic long term time frames. If the client had had it explained to him by a financial professional what sort of risk/reward trade-off he was really making over that long term time horizon he’d know he doesn’t need to pay 2.5- 4% for it. Then he’d lose the worry that plays on him as a result of his nature focus on short term market moves.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Unfortunately few financial professionals take the time to explain why high priced “guarantees” are worthless to the true long term investor, and in fact they often play on that misplaced fear to sell the high fee, high payout product to the ill informed client. I’m not saying never sell a VA, I’m saying give the potential buyer a real understanding of risk/reward and the vast majority won’t buy a VA.

[quote=mikebutler222]

The only problem with your explanation is that annuities are by nature long-term investments and as everyone here knows the "guarantees" that VA soak VA buyers to the sink with are meaningless and unnecessary when you're talking about realistic long term time frames. If the client had had it explained to him by a financial professional what sort of risk/reward trade-off he was really making over that long term time horizon he’d know he doesn’t need to pay 2.5- 4% for it. Then he’d lose the worry that plays on him as a result of his nature focus on short term market moves.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Unfortunately few financial professionals take the time to explain why high priced “guarantees” are worthless to the true long term investor, and in fact they often play on that misplaced fear to sell the high fee, high payout product to the ill informed client. I’m not saying never sell a VA, I’m saying give the potential buyer a real understanding of risk/reward and the vast majority won’t buy a VA.

[/quote]

The only thing wrong with your explanation is that you fail to understand that the VA is a step-up for most VA investors.  As such, they are willing to pay extra for the guarantee.  Having the "best" performance is not paramount to them.  Having a "better" performance than a CD and/or fixed annuity with a guarantee of their principal is paramount.

Hopefully one of you ignorant "professionals" with understand that a VA is "best" thing for a client that WILL NOT purchase equities without guarantees.  Doing the best thing for the client means getting them the best rate of return within their risk tolerance, not putting them in the most aggressive investment or an investment that is beyond their risk tolerance.

The problem is that you keep talking overall ROR and fees.  VA buyers don't mind the fees and a slightly reduced ROR if there are guarantees of their principal.  This is where they see VALUE.  Value is something they don't see from your long drawn out diatribes over marginally better rates of return without a guarantee.

Does a fee based account typically have lower fees than a VA with the same investments?  Yes.

Will most people buy those investments without a guarantee of principal (especially if they are risk aversed)?  No.

What is a happy medium?  A variable annuity.

I agree with almost everything Dude said.    I'll add that VA's are also a terrible means to leave money to heirs as they are not taxed very favorably.

If a VA is used as a risk management tool I can see how they might be appropriate in a very small minority of situations.

However, I would rather see my clients invest in an asset allocation that matches their risk tolerance and forego the dressed up guarantees that VA's offer.

I work in a bank program and in my practice approximately 2% of my entire business is done in annuities.    Most of that 2% was unsolicited to boot.    Most of my colleagues have 50-80% of their practice in annuities.   Draw your own conclusions.

We could debate this until the frogs goto bed but that's what makes for good yet constructive conversations.

scrim

Yes, they are waaaaay overused--particularly before the latest living benefit guarantee bells and whistles came along.  When I've used one of those guarantees, I've tried to explain it thusly (if that's a word):

Look, here's a nice mix of investments that would probably do fine for you over any meaningful, long-term period--without any safety net...however, I know you, and I want to make sure you at least know that you can get a guarantee (if you want it) in case something goes horribly wrong at the time (or over a period of time) that you can least afford it...(or, "I know you're a wuss and might want a guarantee").  Now, this guarantee (explain bells and whistles of the thing) may sound too good to be true, so here's "the catch"--the insurance company doesn't ever plan to have to make good on it, and they charge you more to manage the $ than an equivalent mutual fund.  However, we should be able to make up some or all of that by investing more aggressively (since we have the guarantee now...I believe the insurance people call that a moral hazard--people with insurance are more likely to engage in risky behavior).

The demographic I think this option should be shown is similar to the people who may need to at least consider long term care insurance:  they have enough money that they don't want to lose it, but not enough to "self-insure" the portfolio...that is, they'd be taking 4% or less or their investments for income in retirement.  Luckily, with these 4 year surrenders they're coming out with, you can reevaluate within a reasonable amount of time, and perhaps get part or all of the $ out if you and the client decide you don't need/want the guarantee.  I don't know I'd ever use it for myself, but more and more I can see where I might for my mother--because it's a potential compromise  between what she wants (to feel safe) and what she needs (equity exposure to beat inflation and grow her future income).

By the way, with the comp structure on these things, I don't see how it really "makes" the advisor any more over the long term....all it can do is bring future years income forward--but on an L,C, or B share, it seems you earn about the same (over a 10 yr period) from an annuity as you do from a 1% fee based account.

 Mr. MeNoTellName said

dude,

You are obviously not the smartest guy in the world.  You got it exactly wrong.

Returns are the least of concerns with a VA.  Risk management and the ability to invest in the market with guarantees are much more important to the VA consumer.  These individuals understand that they may sacrifice a percentage of their returns for a guarantee of their principal. 

Mr.MeNotSoSmart Dude Replys:

I say the premise of your statement is cloudy.  Ability to invest in market with guarantees, without concern for returns?  Hmmmmm.  At the end of the day when the returns are likely to look like bond returns why not buy bonds, plus maintain better liquidity?  Well maybe 'cause a bond will pay me 100bps vs 500bps. 

Mr.MeNoTellName says:

Further, the death benefit is also of little concern with a VA, that is why you buy life insurance...not a VA.  Although a consumer typically wants to ensure that any unused portion of the invested amount passes on to their beneficiary they are much more interested in the benefits of having an income stream for themselves. 

Mr.DumbDude reply's:

Um, what about clients who are uninsurable?  I agree that life insurance is a better vehicle for those who qualify.  Again I note that it is in rare circumstances where it makes sense.

Mr.MeNoTellName says:

Annuitization isn't BS.  It is undersold and misunderstood.  Proper use of annuitization in an arbitrage situation with insurance products is much more beneficial than an equity account.

Mr.Dumb*ss replys:

Fine.  get out your calculator and riddle me this:

Client age 65

$100,000 deposit

5% interest bond over 25 years

level withdrawal rate at 6% a year ($6000 every year)

ending value:$48,886.55 (client age 90)

*If we took this same assumption all the way to 100 ending value would be $4,163

I use 6%, because I ran a bunch of SPIA quotes awhile ago and the average income paid came to about a 6% rate or so (for folks around 65).

Anyway, the client would have to live to at least 101 to justify insuring their income stream (the true purpose of an annuity) which is pretty unlikely (even though people are living older). 

Menotellname:

If you believe that the client truly ends up the winner in a bet between the insurance company and your client (which is exactly what insurance is) I can understand why you wouldn't want to tell us your name.  Sorry for the low blow, but you weren't very polite in addressing me.

The point is, is that insurance is profitable business for a reason. They are making money by employing very smart people (actuaries) who assess the real risks of a given outcome and exploiting the percieved risk of an outcome among those who are uneducated as to those risks.  Sure, insurance is needed for some things like protecting young working families, passing money through an ILIT etc... but insuring an income stream.  If it really was a better option for your client than buying a bond, insurance companies wouldn't be selling it.  I may not be that smart but I do understand that insurance companies wouldn't be able to guarantee those investments with their hordes of cash if the client wasn't giving away excess returns to those very institutions that you seem to evangelize for.

Peace 

Here is a great article articulating VA's :

http://www.fpanet.org/journal/articles/2003_Issues/jfp0103-a rt9.cfm

Dude says  "I use 6%, because I ran a bunch of SPIA quotes awhile ago and the average income paid came to about a 6% rate or so (for folks around 65)."

I say - SPIA rates were at an all time low.  I would recommend looking at them when interest rates on a 5 yr fixed annuity are around 6% you'll be blown away.  They were probably using 2%.  The time to use SPIA hasn't been in the past couple of years.

That article was very comprehensive and alot of info to absorb.

This only reinforces why I prefer not using VA's.   I want my clients to understand as much as possible what they are investing in.

VA's are so much more complicated than investing outside a VA.

I subscribe to the Keep It Simple Stupid mantra.

Is that always a good thing?    I'm not sure.

Scrim