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How good are the new annuities?

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Sep 10, 2010 12:08 am

Let's say you have a client age 65 with an income goal of $8,000 per year.

$300,000 portfolio:

$100k to fixed

$100k to GMWB annuity, immediate 5% payout, 50-50 allocation to stocks and bonds. 3% total expenses with rider. 10 year surrender.

$100k to 50-50 allocation.

Plusses and minusses?

I'm thinking, if client wants 1/3 in stocks, you get to take away half the "fear" of stocks, and a more aggressive portfolio withdrawal rate on the 100k. Client dies, subaccount value goes to beneficiaries.

In a perfect market ( take 100% withdrawals from cash in down years?), 50 stocks and 50 bonds does 6%, minus 3 expenses, equal 3% increase on the annivarsary date for potential cost of living increases on the " pension ".

Sep 10, 2010 4:59 am


To get 8k income on a 300k portfolio with someone willing to partly invest in the stock market, why turn to annuities at all?  Depending on the specifics,  I would go with a customized mix of muni's, preferreds and blue chip stocks, yielding as well as the annuity with superior flexibility, expenses and tax efficiency.

So how good are the new annuities?  As good as the old.  Not good, except for the insurance salesmen.

Ok, now I have (intentionally) opened the floodgates...If you have some constructive feedback from which I can learn about the benefits of annuities, awesome; if it works for my clients I will refer them to you (by "you" I mean the generic you; I have local insurance guys I trust and can refer business to in the occasional instance when it makes sense).  I'm on this forum to learn, not extol on how great I am.

Sep 10, 2010 6:45 am

Great. Have you studied some of these new contracts? I have not been using them, am taking a look. I like what I see for part of the portfolio.

Obviously pretty complicated product.

Bottom line observations:

You basically take an annuitized income stream, but retain control over the subaccounts remainder ( 0 surrender is an option.)

The heavy expense drag (3% for joint lifetime annuity benefit) is mitigated by the guarantees: lifetime income at a higher portfolio withdrawal rate ( can't kill the golden goose), upside potential for the subaccounts to increase the withdrawal base amount, a guaranteed accumulation credit of 6% for ten years, or lock in to market appreciation value on contract anniversary.

I won't bore you with the details if you are familiar, but I'll throw up a better description if you want to try to help pick it apart.

Contrast these features against a stock and bond portfolio in wrap, with half the fees and immediate income need. It's not only about the effect of expenses on the portfolio - if you have the porfolio in thirds - one third fixed, one third half stock and bonds with guaranteed minimum withdrawal benefit, one third 50-50 in wrap, you have more withdrawal options in a down market year of perfect storm (decade) - like the last.

Not saying this is the time to lose faith, rather, the world is a more populated and scary place, people need to sleep at night and are willing to give up some upside in exchange for guarantees - and we can use that word here with the insurance product.

We need to be open to modern solutions. For example, the insurance company is buying puts on the subaccount in case the market tanks - this is sophisticated risk management at a price. Probably also counting on a certain percentage of contract holders dipping into the subaccounts and forfeiting the GMWB. But with appropriate planning, these things looks pretty interesting for the right clients.

The financial planning considerations are more complex than you may think. I'm wondering if RIAs are using them or if a lot of guys are hiding behind the fee story for an easy sale.

This article lines out in a slightly different direction but raises the question:

Sep 10, 2010 6:43 am


I don't have the time or inclination to pick it apart, plus I am sure there are people on this forum who have that and more expertise to do so.  I will accept the conclusion that for "the right clients" this could be interesting.  I just think the percentage of investors who can understand this complex product and also fit into the niche where they benefit from it is pretty small.  And I don't put my clients in investments that they cannot understand and most of them are not highly sophisticated.  If you have a highly sophisticated and highly risk averse clientele, this would be more appropriate.

Sep 10, 2010 7:18 am

Agreed, but as an advisor you are obligated to perform due diligence.

There is nothing sophisticated about a pension.

If your retired client lives another three decades and your plan collapses, you are responsible. I'm coming from running simple, clean, portfolios, but consider taking the time and having the inclination to perform proper due diligence - the more you look at it, the more it appears to make sense. Intuitution and simplicity are important, so are results.

I'm just saying, if you look at what we are charging for asset management, and what markets may return going forward, versus the historical averages, and the opportunity to diversify risk, it raises questions.

The analogy would be, you hold yourself out as an investment advisor, but the client sees you as a financial advisor. Client is interested in investments, so you grab the money and don't spend a lot of time on managing the risk of premature death or disability, which is not sexy for the client. And some in our industry have tried to make a virtue out of outsourcing or  avoiding comprehensive risk management, but things have changed over the past decade, certainly the nature of (investment) risk has changed. Client has delegated responsibility to you to perform due diligence and advise. You are almost obligated to present the cost/benefits of guaranteed vs. variable or probable options.

Sep 10, 2010 4:05 pm

Tenth, you always give me something to think about, thanks. But I'm wondering if your argument implies I need to be an expert in everything and perform due diligence on every investment that has the mere potential to improve results for the client.  No one can do that.  I see my obligation to the client as an advisor is to make reasonable best efforts to put together a plan that meets their objectives with the least risk.  That does not involve going into the minutiae of every potential investment.  It does involve being familiar enough with the universe of investments to determine what is suitable, expert in those investments I actually recommend, to know what I know and don't know, and ensure the client is properly advised in all situations.  This sometimes means I need to refer them to an expert on certain insurance products, estate and tax issues, etc. and not collect a fee myself.  Trying to be all things to the client would undoubtably lead to sub-optimal service.  I continue to educate myself to provide the best possible client service, but there will always be limitations to what one person can know and I try to develop a network of experts to complete any gaps in expertise.  That is not me delegating responsibility for risk management to someone else, it is me taking a holistic view of ownership that puts my client's interests ahead of my own and gets them the best possible advice, even if it's not from me.

Lastly, I have never come across a complex product that provides such superior results for clients that it outweighs the risk associated with the fact that the client may not understand it.  That too is a risk that should be comprehended.  This industry is littered with people chasing superior returns by investing in things they don't understand with "trusted" advisors, only to get burned (Madoff anyone?).  I never tell my clients that I am wholely responsible for their financial future.  I tell them we are jointly accountable and I do my best to educate them to properly fulfill their end of that responsibility.

Sep 10, 2010 4:46 pm

Mad, I totally get it and agree, it is always about reasonable best efforts and keeping a focus and strategy in which advisor and client can believe.

Here is a worthwhile link and an easy read for anyone who wants a quick take on the annuity environment:

National underwriter is a top notch outfit.

Anyone who is struggling with issue like: getting started in the industry, aquiring clients by differentiating yourself from the pack, continuing your own education - please join in this safe discussion.

I'm particularly interested in how this issue relates to the new tax law. As you know, the real increase in capital gain and dividend taxes will be more like 60% and 200% - surely there are opportunities and stories to share about how we take the ball here - whatever we solutions we devise. The days of just throwing money in a taxable portfolio or tax exempt bonds - are waning. Obviously higher yielding munis and taxables have had a huge run. How many people read this board? What are your strategies going forward? Are you ready for the rush after November?

Sep 10, 2010 5:07 pm

“Taxes will be the most significant issue that high net worth clients will need to focus in coming years because of the tax increases planned from 2011 to 2013,” he adds. “So techniques that allow them to distribute income more tax efficiently will be of great interest. Income annuities that pay out using the pro rata formula I’ve described allow them to do just that.”

Thomas Hamlin, a producer and branch manager at Raymond James Financial Services, agrees.

“This strategy is totally underutilized by the high net worth,” says Hamlin. “That’s in large measure because the investment brokers who advise them believe that annuities are too expensive and have no place in the client’s portfolio. “But these products represent for the affluent an incredible vehicle for achieving both growth and income distribution objectives.”

 Here we are talking about annuitization for a portion of the portolio - putting some non qualified money in an annuity, taking the tax deferred growth and principal after a number of years, and annuitizing it all for tax benefits and guaranteed income.  If you're a broker or RIA who only collects fee on assets under management, ( or couldn't accept a commission for up front annuitization) - this could represent a conflict of interest.  I go back to the comment someone made here about feeling like a slimy broker or insurance person. Huh? How do RIAs charge for services on annutized money? You can't just say you don't know about annuitization, or GMIB. Partly because, if you're just managing simple portfolios, the tax environment and investment assumptions themselves can be changing. The world is a more dangerous place, historical returns are only historical.  Anyone else here taking another look at these concerns?
Sep 10, 2010 5:13 pm

It seems like the  research is saying, maybe for a third of the portfolio, GMIB rider  for lower net worth and no bells and whistles (lowest internal cost) with pure annuitization for higher net worth.

Sep 10, 2010 5:34 pm

The words "unsafe at any speed" seem perfect for my views on variable annuity products right now.

I no longer believe that fixed annuities can be described in the same classification. SO my criticism here, is exclusively regarding VA products.

I can literally find so many objections to VA accounts, as to literally find them reckless to my career. Apparently, some firms have come to the same conclusion.

Pandora's Box of Finance...

Sep 10, 2010 5:57 pm

Forgive me, perhaps, for my ignorance, but what exactly are the tax benefits of a variable annuity if we will see a tax hike on non-qualified annuity income?

Another question is what happens, tax-wise, in the event of death of holder of a variable annuity and are there better alternatives?

Sep 10, 2010 7:02 pm

Big, how about a link to back up your claim on VAs? This is what I'm looking for. Which firms have come to the same conclusion, are these insurance companies or their competitors?

What specifically is reckless? That's a big claim.

Sep 10, 2010 7:20 pm


Forgive me, perhaps, for my ignorance, but what exactly are the tax benefits of a variable annuity if we will see a tax hike on non-qualified annuity income?

Another question is what happens, tax-wise, in the event of death of holder of a variable annuity and are there better alternatives?


Tennis, I'm no expert, giving it my best shot, potential benefits would be:

Tax deferred growth of any earnings in excess of expenses in the subaccount over time (during the accumulation period).

Ability to annuitize the principal and earnings - in a non qualified account, the return of principal plus earnings can be amortized over the payout period. ( The article speaks to the concerns of higher net worth individuals, maybe looking for 100k or more of portfolio income per year).

In the case of the contract I'm describing the remainder goes to the beneficiaries (even though you draw lifetime guaranteed annual income at a more aggressive rate than the maximum rate that would be recommended on a straight investment portfolio)). Is it in a beneficial IRA, return of non qualified principal, or earnings? Over the past ten years, in a flat market, for a client taking portfolio withdrawals, I don't think the prospect of having taxable gains on ordinary income looms huge.

Since you're using this vehicle (maybe 1/3 of portfolio) to hedge risk, any taxes on ordinary income would be "good".  You can turn withdrawals on and off, depending on what is happening with the rest of the portfolio and the markets and other income - giving some flexibility to control taxes from year to year.

For example, a business owner. Most would prefer to take more risk with their money in the business, where they can do better than what you can do with stocks and bonds. If they are receiving some business income and portfolio income in later years, the business income could be cyclical.

Sep 10, 2010 7:35 pm

Tenth, there was an extensive article yesterday regarding Hartford, and how they sent a letter to clients, bypassing Reps, regarding the conversion of old policies to new ones. The article describe the risk of losing accumulated benefits of prior policies. The typical compliance department today, is all a sudden being required to become EXPERTS on the benefits of both old/new policies. What is the legal risk to a rep, that inadvertantly torches some old benefits? That could be huge, in some cases 6 figures, maybe even 7 figures of benefits in a really big case. 

For a rep that is NOT hand to mouth, when I run the numbers of what I'd make on a client relationship, the long term aspect of using VA producst, is a pure/simple MONEY LOSER. The whole point, of the Insurance COmpany, is to KEEP the money, and boot out the rep. A firm can refuse to renew your agent assignment, and poof, no more trail, and no more statements....

I could write a book on this subject, but I'm going to leave it at this little tid bit. For now...

Hey, humor yourself, like I did. Go find the Society of Actuarials, and see what they say about VA products. Oh, go read the annual report of a major league VA company, and pay special attention to "risk factors" in the report. Unsafe, at any speeed...

Sep 10, 2010 8:35 pm

Good idea. Can't find the bad stuff on VAs  from the actuaries, can you help? Any newer studies?

We're talking about legal risk, and getting paid?

There are level load annuity products that run through the independent grid at a higher payout (avoids admin fees). No surrender to client.

You're saying that behavior by The Hartford taints all insurance companies. Looks like the broker dealers and reps came down on The Hartford pretty hard. In the letter, they did ask investors to review suitability with their advisor.

I think your narrative about legal risk is overblown. Suitability documentation is pretty stringent. If you use a level load with no surrender, I don't see where the (insurance) rep is on the hook.

In fact, I can see where the stringent suitability forces a more thorough review of the financial planning considerations.

On the other hand, if I don't offer this type of vehicle and I'm just running retirement income portoflios based on model allocations and historical averages and a 4% withdrawal rate, perhaps, significant expense ratio to the client (say, 1% plus .25 on ETFS at $500,000 AUM), now I "clean"?

To point out the obvious, if you begin portfolio withdrawals under certain conditions without guarantees the portfolio dies pretty quickly. I know from experience.

Do we have any RIAs on the board that are using annuities as accumulation or income vehicles? I cannot believe that there not one client being represented here where the appropriateness of some the new contracts has been discovered and implemented. REALLY?

Sep 11, 2010 6:45 pm

Almost the only way I use VA's are for a portion of someones IRA using the most aggressive death benefit possible and never touch it.  Met gives clients a minimum guarantee of 7% up to age 80 when you use both of their db's.  80-90 min of 5%.  Plus if the mkt does better you get step ups and 40% of the higher earnings from the epb.  The basic idea is to take 25% or so of a large IRA and put it in the VA and never touch it.  This protects the spouse by giving a guar db.  Take all w/d and RMD's etc out of the other part of the IRA.  This will only work for someone who isn't taking large amounts out of the IRA. 

Oct 5, 2010 12:42 pm

absolutely agree...with the discussion...

Oct 5, 2010 10:01 pm

In simple terms, I like to use VA's with GMWB to supplement their social security and pension to cover their guaranteed expenses. Guaranteed Income = Guaranteed Expenses = Peace of Mind. Then what's left is drawn off of for discretionary purposes at a preset percentage. If the markets up, client spends more. If the market is down, the client spends less.

Oct 7, 2010 2:26 am

I am legend: why not a single pay GUL for those assets?  If it's nothing more than leave-on money, never to be touched, then why not leverage it as much as you can?