Scrim,

Sometimes they're not going to get it.  If it's right for them it's right for them, thats why they are coming to someone who does get it.  I have alot of clients who are on the fence thinking they can do things themselves, then they do something stupid, and call me and ask me how to fix it.   How do you fix lost money?  You don't. 

I'm sure that annuitization is ok in some circumstances (like protecting assets from creditors, maybe).  I still hold that insurance companies wouldn't be doing it if it were truly better than a client investing on their own.  I just don't believe that insurance companies are selling a magic no risk stock market returns vehicle.  Also, when interest rates were higher my illustration would have been just as valid, 'cause I was using recent interest rates.  In that case the 25 year bond would have had a better rate and therefore better numbers, still making annuitization look like the dogsh*t it is.  Insurance companies are buying a 25 year bond and keeping the differnce, it's that simple.  All ya' annuity guys out there can send me your clients with $100k and I'll pay you $5k, invest the difference in a 25-30 year bond, pay your clients a $6,000 annual income.  In the end, I'll pocket about $40k,(since avg mortality age will likely be 90 to 92) all for being "obviously not the smartest guy in the world" to quote Mr.MeNoTellName. 

Annuitization makes WAY more sense than buying a bond.  Great products, those annuities. 

Just face that you like the $cheese$, like an easy sell or don't really understand what you are doing to your clients.  I'm not trying to insult anyone here, I used to be a bank rep facing the temptation of those juicy fixed (and variable) annuity sales everyday.  believe me, I've wanted it to be true that I was doing good for my clients by recommending an annuity.  I've analyzed the product from every direction to see how I can make it make sense for a client.  In the end I decided that sleeping at night was more important. 

Also, for all of you selling those market indexed CD's (or annuties for that matter) to your unknowing victims, shame on you! These things are even more sleazy than plain vanilla annuities.  That crap is boiler room worthy crap.  I hope y'all understand why these things will perform worse than a bond of same maturity.  Same goes for almost all structured notes and derivative products that have multiple moving parts (sounds kinda like a fixed annuity huh?).  It's kinda interesting how in essence a derivative is insurance.  I'm not saying that all derivatives are crap, just the ones that are packaged into these god awful mechanations of confusion.  "market like" returns . 

"There's no free lunch"

Repeat it over and over again.  Tell it to your clients.  Spend less time convincing yourself that you are doing good for your clients by accepting their ignorance as wisdom and capitalizing on their desire to get a free lunch.  Tell 'em the truth (risk and return are related, inflation is risk), even though it's not what they want to hear and hold their hand through the discomfort, educating them along the way.  That's what we are paid our fees and commissions for.  Otherwise sell 'em a bond (or bond fund if you really like) and be done with it.

Peace

Bank Rep said:

Scrim,

Sometimes they're not going to get it.  If it's right for them it's right for them, thats why they are coming to someone who does get it.  I have alot of clients who are on the fence thinking they can do things themselves, then they do something stupid, and call me and ask me how to fix it.   How do you fix lost money?  You don't. 

Just 'cause they lost money doesn't mean a variable annuity is the remedy.  It might give them a false sense of security that they can get the magic risk free market returns they really want, but in the end they'll end up with about 5% (v.s. about 9% over the next 10 years 'cause of fees)or so annual returns and a nasty CDSC if they need the money before 7 years is up.  Yeah you could use C shares but now their expected annual return will be about 4%, taxed at income levels instead of long term cap gains and dividend rates.

Snake Oil.  Maybe it'll cure your prospects fear, they'll still end up financially sick like they were before. 

Dude,

What 25 year bonds are you recommending?  What happens if we enter another excessive inflationary period?  If your using corporates what happpens when the company fails or their credit rating drops substantially?

Annuitties, especially SPIA's offer something nothing else can when used right and at the right times.  By the way I only use annuties about 15% of the time, I just think alot of people knock them when they have very valid uses and the people who like them alot probably don't get them either, that is another post about the lack of requirements to become a financial advisor in the US.  I disagree strongly that someone in a VA is going to earn 5%, just like anything there are good and bad products we can look at expense ratios in mutual funds from .2% to 4% doesn't mean one is better than the other.  Of course keeping expenses in check increases the odds you will be successful, what about a low cost annuity, I favor one by Integrity Life M& E 1.0% w/ ETF's,  total cost 1.4% -1.7% includes my comp...

Annuity payments locked in @ X$'s every year: great inflationary hedge. 

Look, 25 year bonds paying 5% is pretty general, could be a diversified portfolio, Muni's, whatever.  Right now 30yr Gov's are at 4.7.  you'd still be better owning those than to annuitize. 

Integrity Life @ 1% M&E, this must be without any riders or extra goodies.

I have a few questions.

Why would you put a tax efficient investment which has virtually no capital gains distributions (ETF's) and could really benefit the client in a taxable account since they most likely will only pay capital gains when selling (unlike mutual funds which pay out yearly) and wrap 'em up in a VA?  Much better to hold ETF's in a taxable account 

What's the surrender period/charge on this annuity? (how about commishions ?)

If there are no goodies (riders) on this VA (if that's the case), what's the attraction?

Definitely a cheap VA from what I'm hearing you say.  Still sucks compared to owning them in a taxable account and paying a 1% wrap fee on it. 

I'm sure this next comment will be controversial and/or thought provoking.

Let's live in a vacuum for the next minute or two.

Let's assume every financial product paid the same exact compensation to the seller.

Where would annuites then fall on our list as we build are clients portfolios?

The answer to this question probably says alot.

scrim

Scrim, my practice would look very much like it does since I do less than 10% in VAs.  If comp was my first priority, I'd do a lot more of them.

Annuities have a place in teh investment world bec

stupid keyboard...wouldn't let me finish

...because they provide equity exposure (VAs at least) that some folks would be too afraid to have in their portfolios...

Well said Indyone, I agree my biz would not change if I only cared about comp I would do 100% of my biz in EIA's and Life Insurance as an investment.

You are assuming everyone wants to accept the risks associated with the market.  They are not.  Look at the billions in Money market funds, that cash is there because some people will not do anything without guarantees. 

Explain to me how putting $ in a VA with annual expenses of 2.5% (that is with a living benefit and MAV death benefit) is going to net 5%.  Say the subaccounts return 10% -2.5% = 7.5

Not to much difference here:

American Legacy III

Returns on american fund subaccounts & funds

Growth Fund 11.8 (10yr)  13.1 (since 84')  / Fund 12.25% 10yr.

Growth and Income 9.1 (10yr) 11.3 (since 84') /  Fund 10.19 10yr.

International 9.0 (10 yr) 8.3 (since 90') / fund 9.92 10 yr.

Small Cap 11.9 (since 98') / fund 10yr. 8.54

As a matter of fact, sometimes the performance of the subaccounts will be higher in a flat or bull market because of the lower levels of cash present in the VA. In a bear the opposite can happen. That’s one of the reasons AF has held up in bear mkts so well, i.e. higher levels of cash…

[quote=Greenbacks]

I just got done looking at an article in a trade magazine. They put the numbers up on 50 of what they consider valuable players in our profession. Several of them caught my attention  but one really stood out. 

Production 2004  $1.7 million

Projected Production 2005 $1.4 million

AUM $ 23 million

Clients (Victims) 153

Product mix 95% annuities 4% securities 1% mutual funds!

Can you believe this clown  

But yet our profession looks upon this guy as a Valuable player

Not to stereo type but this guy is in a Bank and his BD is INGClones start!

This sounds like the practice Doug "3" Mil Hill ran out of the back of his car training newbie IR's...............OH, excuse me "3" Mil hates Life Insurance Companies and Annuities, he prefers to churn and burn Stocks, Bonds, & Mutual Funds...............

OK, Before you Drones & Clones start slamming me, I am just kidding, this posting was just too boring............................ I just jad to shake things up.............

I think most of you have lost the jist of the post, how can someone justify a volicity of 6%, I know mine is approx .85%.  What is everyone else’s??

[quote=forestjw]I think most of you have lost the jist of the post, how can someone justify a volicity of 6%, I know mine is approx .85%.  What is everyone else's??[/quote]

Have you ever sold an annuity?

Do you even know what an annuity is?

If you answered "yes" to both of the previous questions, do you understand annuity compensation?

Then figure the standard annuity compensation times .95.  Also factor in 25 bps in trails from previous business.  Then you can see how it is possible to achieve a "velocity" of 6%.

Or you could simply find another line of business where it is not necessary to understand numbers.

[quote=forestjw]I think most of you have lost the jist of the post, how can someone justify a volicity of 6%, I know mine is approx .85%.  What is everyone else's??[/quote]

.88% YTP (Yield To Pocket). And yes, annuities are part of the mix. I can see how someone could have 6% ROA. If an advisor specializes in annuities and focuses their business solely on pursuing clients who fit the product, need the product and want the product, then 6% is easily achievable. Well, at least for the first year or two. Seeking clients who fit the product, rather than finding products or strategies that fit the client is nothing more than another way to approach our business. Muni Bond Brokers use this method to build their books, if for a lot less commission. I've used this same method for years, utilizing Tax Free Bonds, to gain a seat at the table. Nothing wrong with it that I can see. Wish Tax Frees paid 6%!

[quote=menotellname][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.  [/quote]

They're willing to pay, and pay heavily for a "guarantee" that everyone here knows they don't need. There will always be a tiny percentage that even after the best faith attempt of the rep involve to explain why that expensive guarantee isn’t needed, will still want the VA. That’s there problem. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The insurance industry’s problem, and the problem with most of the “bang ‘em into an annuity” types here is they don’t even make that good faith attempt to explain to the customer why the guarantee is meaningless. In fact, they go in the opposite direction and try to base their basic marketing strategy on getting the unsuspecting customer to believe that need that guarantee IS NEEDED.

It’s one thing to be a car salesman and tell people they don’t really need the rustproofing, but you’ll sell it to them if they can’t live without it. It’s another to bang on each car buyer that without the rustproofing their car will disappear in a couple of years.

[quote=scrim67]

I'm sure this next comment will be controversial and/or thought provoking.

Let's live in a vacuum for the next minute or two.

Let's assume every financial product paid the same exact compensation to the seller.

Where would annuites then fall on our list as we build are clients portfolios?

The answer to this question probably says alot.

scrim

[/quote]

Good point. Try looking at it this way, what if the client was a family member you cared about. Where would VAs fall then in your product mix?

I agree with most of Mike's points.

Let me put it this way.

When I sit down with a prospective client for the first time I'll usually say something to the effect:

"Unless you came in here and specifically asked for a CD or an annuity I won't present it because I do not believe in locking my client's money up"

I feel that most clients aren't sophisticated enough to understand why they shouldn't be buying fixed or variable annuities. They are drawn to all of these bells and whistles which they (and sometimes the seller sadly)  hardly understand either.    A perfect case is my own father.   A few years ago, before I got into my practice, my dad rolled my mom's 401k accont into an equity index annuity.  My dad is extremely intelligent, doesn't make rash decisions, and is very analytical.  That being said he was sold "fool's gold" in my humble opinion.   I'm sure the salesperson was happy though.   As soon as it's out of surrender I'll transfer the account to me.

Perhaps an immediate annuity for some clients might be suitable but I can't find a compelling case for FA's or VA's.

This is just my opinion  YMMV

scrim

Scrim, Mike

Bravo gentleman.  I appreciate your thoughts.

To all the fence sitters and interested parties:

Look even if you were to get 10% equity returns going forward (I think 10% is perhaps a little generous, given the shrinking equity risk premium) and you were to invest it all in equities (most "make you whole" and "make you whole plus 20%" guarantees I've seen require 80/20 or 60/40 mixes: I'm not going to give any respect to the annuitization dogsh*t guarantees) and the total cost were to come to only 2.5% (seems cheap to me)including all underlying fund expenses, M&E and frivolous fat (whew), your return would be 7.5%, not that much better than a straight bond portfolio over the last ten years and I'm being generous on the return assumptions.  eg: 10 year trailing returns on the muni funds I've been looking at: 5.2% tax free (about 7.88% TEY in my state for those in the 28% bracket or 7.625% for those in the 25% bracket in my state) Plus the client would have remained liquid (no withdrawal penalties), which definitely has a value.  In addition they would have gotten bond like returns for taking bond like risk, just like you'd get if you bought equities in a VA with guarantees (bond like returns, bond like risk, got it? no magic stock JuJu in those VA's ladies and gentlemen). 

In a VA you'd have converted all your cap gains and dividends to income, paid income taxes on those returns (just like bonds) and received a 7.5% return over the last ten years, if you owned 100% equities, or got lucky and had stellar funds, which I could then up my numbers for the bond returns if I sought out the top 10% muni bond funds over the last 10 years.  Problem is, is that if these clients are bond like risk takers and the market does tank over the next ten years, they get 120% of their principal for an amazing 1.825% annual compounding return!!!  Sign me up for some of that stock market like return baby!!! Point is, if they are bond buyers, give 'em bonds at least they'll understand why they got their 5% at the end of 10 years instead of losing money at 1.17% a year(inflation @ 3% minus 1.825%). 

I know that some of y'all are thinking about those fancy I 'EN' G (among others) thingamajiggers that pay 5% or 7% a year GUARANTEED to the principal if you annutize after 10 years.  Well kiddies, I done did the math on those winners and came to the realization that the return a client would have to get on their own outside the annuity to replicate the ending income level after the 5% or 7% was credited to the principal coupounding after 10 years was equal to about 2% to 3% annually over the period (until client dies).  How's that for inflation protection?! 

Goooooood Stuff man, what is it?  

Labrador.

Labrador?  What's that man?

Dog Sh*t, my dog ate my stash and I had to follow him around for a week with a baggy maaaan. 

Damn' I love bein' dum.

Hugs 'n Kisses

[quote=scrim67]

A perfect case is my own father.   A few years ago, before I got into my practice, my dad rolled my mom's 401k accont into an equity index annuity.  My dad is extremely intelligent, doesn't make rash decisions, and is very analytical.  [/quote]

So if I understand you correctly your father understood the benefits of a contract that could only go up and would never go down and that product was well within his risk tolerance.  Further, it offered a good enough return that buying power of his funds would not be eroded by inflation.  On the other hand, he did not invest in a portfolio that had no guarantees even though there was a greater upside potential.

Sounds like the individual that sold him the annuity is a criminal.  He should have pressured him into something with a greater potential with no tax benefits that is well beyond his risk tolerance.