Why VA's?
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So I’m reviewing VA’s b/c I take the Series 7 in three days and i’m trying to figure out why anybody would want to invest in them.
They have higher fee’s, Term life has cheaper death benefits (at least according to WIKI), and to get the income for life benefit you could just use a SPIA (and cheaper ?).
So when then should I ever suggest a VA to a client?
Concentrate on debt, options, and regulations. This is what will help you pass the 7. I agree with ice, do not think about how you will apply the knowledge in the real world, just know your information. Don’t overthink it.
It’s nice to know there aren’t going to be a lot of VA questions on the S7. I’m not to worried about it, I did pretty well on the practice exams. However, I’d also like to know for practical purposes when should someone recommend a VA v.s. another fixed income instrument.
I generally don’t like variable annuities. Compared to a properly diversified portfolio in mutual funds, I can’t seem to justify an extra 1.5-2.5% annual expense, limited investment choices, 7 year surrenders, ordinary income on the earnings when distributed compared to long term capital gains and dividend tax rates. In the last 5 years, I’ve gone up against annuity salesmen competing for the same money at least a dozen times, haven’t lost one. Generally, annuity slingers sell on fear, and that doesn’t work for people’s serious money.
VA’s are for the FEARFUL - both the client of losing their principle, or the broker for losing their job!
The client benefits by being able to focus on the return OF their money, versus the return ON their money.
The broker benefits by a nice, high commission sale.
They have a place. Yes, the expenses are high - but ALL insurance makes things more expensive. Your car insurance makes driving your car more expensive, etc.
I’m not a fan of non-qualified annuities because the extra costs eat up the tax savings on a similar portfolio of mutual funds AND convert the gains into ordinary income versus capital gains.
It depends on the client. VA’s may not be appropriate for someone with small assets like $100,000. When you have a $500,000 portfolio of mutual funds that are not in a tax deferred account and can throw off a 20% capital gain and dividend distribution in any given year adding $100,000 of taxable income that isn’t needed = huge inefficiency and unhappy clients and no referrals. Explain that to your client in a year like 2000 when on top of the distribution their account value is down as well. Also the ability to re balance without a 1099 is a huge benefit. Better to earn interest on your taxes than pay taxes on your interest. I do taxes as well so probably have more exposure to seeing mistakes of advisor’s when people should’ve been in VA’s and were not-borders on malpractice. Consider the massive tax increase that’s coming in 2010 and all arguments about annuities taxed at ordinary income rates rather than low capital gain and dividend rates are moot . VA’s contain higher fees, but fees are an issue only in the absence of value. Ask any widow who received say $500,000 from a VA after 2002 when many portfolios were down 50% and she received all money invested, minus withdrawals. Yes VA’s have higher fees, say around 3%with everything including the benefit riders, so it’s really an issue of an extra point or 2. Compare with someone who’s wrapped the hell out of someone, and you’re looking at fees being equal, with no added benefits for the wrap accounts. But consider uncle Sam’s fee, which can be as high as 35% on earnings every year. Or consider the widow in 2002 who’s account would’ve paid a 50% fee (in terms of the market drop). 3% looks like a bargain, especially if it keeps them from panicking and selling out! With products on the market today like Pru’s, you have over 100 investment options from 30 managers with the ability to invest in everything from a hedge fund to sectors such as precious metals, oil, Asia, as well as use leverage with Pro funds ultra accounts, rising rates, etc. There is also the ability to lock in a clients highest daily account value for income purposes, and an option for complete liquidity from day 1,as well as a 4 year schedule. Again, annuities aren’t for everyone, depends on your market. When I ask someone who’s just paid a ton of capital gain and dividend taxes why they aren’t in a VA (I also make sure they are maxing out their 401(k) and Ira’s first), it’s usually because their adviser didn’t know any better. Well, he does now, because these clients are mine.
StokPrimo,
Did you have any clients retire in 2001-2002 when accounts might have been down 20-30+%? Using this as an example is selling based on the fear of retiring at the wrong time. Would it be worth it to have a portion of clients' money in VA's just in case they did retire in today's early 2000's (whenever that will be)?Yes I did, but only a small percentage who were in love with the 90’s. I did have most clients retire down from the high, but not nearly that far. Back then, annuities did not have the living benefits, just death benefits. So they would not have helped anyway as far as 2000-2002. If retirements avg 5 years, everybody would get an annuity in my practice. But the avg retirement lasts 20+ yrs. No matter how you run the numbers, a very high percentage of the time non-annuity investments would work better based on cost alone.
Wow Rimo, I must’ve taken some of your clients! You must have a weekend DJ gig cause you sure are good at spinning my post! True I don’t know the future of tax rates (or the market)and neither do you, but with a democratic house, your idol Nancy Pelocy and company in charge with looming deficits, do you think they’ll extend the tax cuts? No, never mind, I know what your answer will be. That’s why it is called PLANNING and not strictly being in the vacuum of past performance as you illustrate. I use VA’s only after all other tax deferred vehicles have been applied, and only if the amount of investment under consideration warrants it. I don’t even use the living benefits most of the time, but make my clients aware of them. They insure their business, house etc., why not their largest asset, their life savings? (Ooops, there I go again, more fear)Maybe if you had more than 3 clients from 2000 thru 2002, and learned how to read a tax return, and had more than 25,000 total dollars under management, you would be surprised at how capital gains can hurt clients. cap gains were at 20% short and long term,and dividends were taxed at ordinary income rates in the past, and if you follow politics you know if the Dem’s get in they are talking about 25% cap gain rates and divs at ordinary income rates-You should educate yourself on the product I discussed, as well as taxes, and knowing the difference between fear and FACT before posting. VA’s aren’t for everyone, They comprise maybe 30% of my business, probably more than a mutual fund slinger like you, but they are an excellent tool and are too readily dismissed by the uninformed adviser who’s average clients net worth is so low that taxes aren’t an issue. In my tax business I see over and over again new client referrals who’s adviser hasn’t a clue about the tax ramifications of the investments they peddle, like Primo.I place investments where they are needed, after careful analysis of the entire portfolio, estate and retirement plans and current investments. I would say you’re a liar, but I won’t because I know you just don’t know any better. Oh, did I mentioned VA’s weren’t for everyone? Yes I did, Primo had me believing I forgot to state that but I did, twice. VA’s weren’t for your ex clients either, but they’re doing much better with me now,and Bob said to tell you Hi. He’s glad to be out of those “Founding Funds”.They didn’t meet my minimum, but I made an exception for you.
Stok[quote=stokwiz]Wow Rimo, I must’ve taken some of your clients! You must have a weekend DJ gig cause you sure are good at spinning(if you consider the truth and actual returns spinning, so be it) my post! True I don’t know the future of tax rates and neither do you, but with a democratic house, your idol Nancy Pelocy and company in charge with looming deficits, do you think they’ll extend the tax cuts? (I have no bloody idea, but if they do change the tax code for the good or the bad, I will not be 1 year into a 4 year CDSC)No, never mind, I know what your answer will be. Maybe if you had more than 3 clients from 2000 thru 2002, and learned how to read a tax return, you would be surprised at how capital gains killed (strong word, I think giving up 42% of gains AFTER TAXES to fees is getting killed)clients. cap gains were at 20% short (and this is common?, or the result on a couple monster years in the market? Clients still did better with the huge cap gains as they made more during the go go 90’s.)and long term,and dividends were taxed at ordinary income rates in the past,(and if you read my post based on REAL LIFE instead on conjecture and innuendo, you would have seen that the VA fees did not make up for the taxes, they left the client with less money) and if you follow politics you know if the Dem’s get in they are talking about 25% cap gain rates and divs at ordinary income rates-(and talking about it means it most certainly will happen, more fear based on conjecture)You should educate yourself on the product I discussed,(did, it left the client with less money using the EXACT same investment, see previous post) as well as taxes,(less money lost to Uncle Sam than VA fees) and knowing the difference between fear and FACT(dispute one fact I posted) before posting. I would say you’re a liar,(give a specific example, the facts I posted are public information. I even gave you the specific dates) but I forgive you because I know you don’t know any better. Oh, I mentioned VA’s weren’t for everyone-(“When I ask someone who’s just paid a ton of cap gain and dividends taxes why they didn’t own a VA” so it appears anyone paying cap gains and div taxes is your suitibility determination, nice!!) but they were for your ex clients, they’re doing much better with me now,(your comprehension is poor. VAs are doing worse due to high fees. I know how to speak slower for the challenged crowd, but how do you type slower)and Bob said to tell you Hi. They didn’t meet my minimum, but I made an exception for you.
Stok[/quote] Here is what bugged me the most about your post. You should know better. I posted actual results because they cannot be contradicted. Investments available inside VAs are available outside VAs. It takes very little skill to tell a client that you could save them taxes with a VA and that if the market goes to zero they have a gaurantee. It takes a tremendous amount of skill to take taxable consequences in an account for the financial betterment of the client and keep the client. It is funny that you cannot refute any of the returns I posted. Its funny that you did not respond to the double taxation of nq annuities. It is funny that you talk about taxes going up, but fail to admit that long term rates most likely will always be lower than most regular income tax rates. It is funny that you try to insult me while running turbotax for your clients for $80 a pop.Read something interesting in another thread. Buying an annuity is making a bet against the insurance company, and those actuarial geeks work very hard not to be wrong. Don't you think you should work just as hard not to be wrong? Also, why do you think illustrations say hypothetical returns for illustrative purposes only instead of historical returns? Could it be if they gave historical returns, anybody who could run a hypo could see the disadvantage of a VA?
[quote=snaggletooth]Primo,
Did you have any clients retire in 2001-2002 when accounts might have been down 20-30+%? Using this as an example is selling based on the fear of retiring at the wrong time. Would it be worth it to have a portion of clients' money in VA's just in case they did retire in today's early 2000's (whenever that will be)? [/quote] I am not against annuities in every case. I am not against using annuities for a portion of a clients assets in the right situation. In my practice annuities are not used for the journey, they are used when you have reached the destination. I just feel that lazy brokers use them more for the payout than the client. Actually been toying with the idea of using a VA with a living bene for the fixed income allocation in my porfolios. Haven't done the due dilligence yet to see how the #'s come out.Primo,
Anon makes it very clear that if the annuity changes investor behavior, then it is a good thing...and I think you agreed with that 1000%. So, in January when the market was tanking, many of our clients who are in individual stocks and mutual funds were calling wanting to bail. I did my fair share of hand holding and was successful with about 99% of them. But, I'm sure a lot of other people did sell when the market was way down. If the worst is behind us, many people may have missed the bounce back up. Had they been in an annuity, there is a very good chance they stuck with it and stayed in, especially if they understood the living benefit rider. Pretty much all of my annuity clients are in the 1-5-10 years until retirement phase with a portion of their qualified money in the annuity. So, in this case, the annuity is used for the journey too, at least in my book of business. The problem with the clients whose hands you have to hold is that you may not really know you will have to hold their hand until they're waist deep in sh*t. Primo, what withdrawal rates do you use for your retiring clients? Do you feel there could be a longevity problem if you need to provide for 35 years of retirement income? Look at it this way, 35 years of retirement income for someone retiring at 60, is almost 100% of their working years...now that is kind of scary in my opinion.stokwiz,
First of all, can you please use paragraphs? Your wall of text is painful to read. I happen to be a fan of annuities in the right situation, and I sell a substantial amount. However, Primo seems to have your number. It could be helpful for everyone if you could address his points. Mainly, I am trying to understand why you like non-qualified annuities and don't use living benefits. I'm really failing to see how a client and their ultimate beneficiaries benefit. Major positive of NQ VA without living benefit guarantees: Tax deferred growth Ability to move money between subaccounts tax free Major negatives of NQ VA without living benefit guarantees: expenses that are often 2%+ higher than comparable mutual funds penalty for pre 59 1/2 use limited investment options (even if there are many options) gains get removed first all gains are taxed as income no step-up in basis at death (this is huge) Let me make up an example. XYZ mutual fund has underlying investments that average 10%. In the MF version, after expenses, it averages 9%. Inside of an annuity, the extra expenses gives it a 7% return. Client Jack has invested in both versions. He put in $100,000 20 years ago. Ignoring taxes, the difference is $560,000 vs. $387,000. If we factor in taxes, even if we assume that the mutual fund gains will be taxed at 20% EVERY SINGLE YEAR, the MF will still have $400,000 vs. the $387,000. Oops, we forgot that the annuity still needs to be taxed. This will be at least $100,000 which brings the value down to under $287,000. Stokwiz, I'm certainly willing to be wrong. Please show me the advantage, using real numbers, of how a NQ VA without guarantees gives the clients more money. Also, unless you are willing to say, "I only recommend these for people who don't care about leaving money behind at death", please include the difference of inheriting these assets. (The overwhelming amount of VA's that I sell are qualified and have living benefit riders. We hope to never use the riders. The value is that the guarantee positively influence investor behavior, thus the choice becomes a VA invested aggressively vs. a conservative portfolio that matches the client's risk tolerance. I don't use these for aggressive investors. Despite the idiots who argue differently, there is no disadvantage to putting a VA inside of a qualified account. They will get taxed the same as all qualified assets.)[quote=anonymous]
stokwiz,
First of all, can you please use paragraphs? Your wall of text is painful to read. I apologize. I happen to be a fan of annuities in the right situation, and I sell a substantial amount.I believe this is what I indicated as well. Why do you sell them then? However, Primo seems to have your number. Using terms such as liar and idiot to respond to a financial concept are indication of lack of maturity, and needed to be addressed as such. It could be helpful for everyone if you could address his points. Perhaps, when I have nothing better to do than dumb down my post. My post is clear. Apparently I must say again, VA's are not for everyone. Please re- read my original post. The original topic was from a newbie as to why would people use variable annuities Mainly, I am trying to understand why you like non-qualified annuities and don't use living benefits. Some of the benefits require the client to be at least 55. Not all of my clients are above 55 as Most are business owners between 45-55. I'm really failing to see how a client and their ultimate beneficiaries benefit. I could've sworn you mentioned you sell alot Major positive of NQ VA without living benefit guarantees: Tax deferred growth Righto Ability to move money between subaccounts tax free Love it. Can't happen with NQ mutual funds. However for Primo who regularly loses money for clients, you would be unable to write off losses in a variable annuity. Major negatives of NQ VA without living benefit guarantees: expenses that are often 2%+ higher than comparable mutual funds Of Course.MF have no guarantees and aren't tax deferred. penalty for pre 59 1/2 use 72(T), if appropriate limited investment options (even if there are many options) (?) Again, please familiarize with the Prudential product if this is a rebuke of my post gains get removed first just like IRA's,401 (K)'s and other qualified assets. all gains are taxed as income Again,Just like IRA's & other qualified plans, As is interest and soon to be dividends. Again review the tax history stated in my post and look forward to the expiring tax cuts. This benefit will be even more important than it is now, and has been in the past. no step-up in basis at death (this is huge) Just like IRA's & other qualified plans. Are these a bad deal for clients as well? Again, this is reviewed on a client by client basis- If there is reform of the death tax, all securities will lose step up in basis for the beneficiary as well . Again, this is something to potentially be aware of and plan for. Let me make up an example. XYZ mutual fund has underlying investments that average 10%. In the MF version, after expenses, it averages 9%. Inside of an annuity, the extra expenses gives it a 7% return. Client Jack has invested in both versions. He put in $100,000 20 years ago. Ignoring taxes, the difference is $560,000 vs. $387,000. In a perfect world,as hindsight is 20-20. What about the client who is retiring at the beginning of 2 or 3 bad years? Can't happen? If we factor in taxes, even if we assume that the mutual fund gains will be taxed at 20% EVERY SINGLE YEAR, the MF will still have $400,000 vs. the $387,000. Oops, we forgot that the annuity still needs to be taxed. This will be at least $100,000 which brings the value down to under $287,000. Stokwiz, I'm certainly willing to be wrong. Anon, please tell me why YOU sell VA's? I bet we both agree. VA's aren't for everyone.Please show me the advantage, using real numbers, of how a NQ VA without guarantees gives the clients more money. Also, unless you are willing to say, "I only recommend these for people who don't care about leaving money behind at death", VA's don't leave money behind at death? please include the difference of inheriting these assets. (The overwhelming amount of VA's that I sell are qualified and have living benefit riders. Before the living benefit riders, there would be no need for vA's in a qualified account, save for the death benefit. We hope to never use the riders. The value is that the guarantee positively influence investor behavior, thus the choice becomes a VA invested aggressively vs. a conservative portfolio that matches the client's risk tolerance. BRAVO, just as I stated. I don't use these for aggressive investors. Despite the idiots who argue differently, there is no disadvantage to putting a VA inside of a qualified account. They will get taxed the same as all qualified assets.) [/quote]Don’t forget that with NQ annuities the benes can stretch them just like they do an IRA. Whether they do or don’t is up to them. I believe some annuity companies allow the owners to choose death payouts to force a stretch.
Stokwiz,
NQ VAs look great if you are only going to look at half the picture. Yep, they are just like qualified plans...as long as the qualified plan increases their expenses by about 2% a year, doesn't have any matching contributions, and don't allow pre-tax contributions. So to answer your question, "Yes, qualified plans would be bad if they worked the same as NQ annuities". "Again, please familiarize with the Prudential product if this is a rebuke of my post" When all subaccounts come in at an all-in cost of over 2%, this is limited regardless of the volume of choices. "If there is reform of the death tax, all securities will lose step up in basis for the beneficiary as well . Again, this is something to potentially be aware of and plan for." That's one hell of a crystal ball that you have. I have no idea to plan for something that doesn't exist. "In a perfect world,as hindsight is 20-20. What about the client who is retiring at the beginning of 2 or 3 bad years? Can't happen?" It can certainly happen. There is nothing inherent to the annuity that gives the client any protection from this happening especially since you don't usually use the living benefit guarantees. "VA's don't leave money behind at death?" That's not what I said or what I meant. My point is that they are terrible assets to inherit. Would you rather inherit a $500,000 VA or a $500,000 MF? The one thing that I can't help but notice is that you have the inability to show how a VA would be better for the client than having the money in the equivalent mutual fund.[quote=anonymous]
The one thing that I can't help but notice is that you have the inability to show how a VA would be better for the client than having the money in the equivalent mutual fund.[/quote] How about investing for growth and having some peace of mind that you will have income for life regardless of market performance.