L Share annuity vs. wrap fee

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EDJ4now's picture
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I've been doing some business in both, and I would like some input from the crowd. 
Obviously it depends on the fee you are charging, but it seems to me that if I charge 1.25-1.5% for wrap accounts, then I am basically charging the same as the M&E on an annuity, without the benefits of the annuity. 
Pros of wrap:  no surrender fee, better tax treatment (if not in IRA), possibly but not necessarily better fund choices, more loyalty to me if it does well.
Cons of wrap:  No annuity features (tax deferral and guarantees), more work for me, if I don't do well I can't blame AXA or Jackson Nat'l, it's my fault and I can't just switch to a different program.
I make about the same on the back end, but upfront get a little more on the annuity, not enough to matter that much though.
I feel like I'm missing something (and I'm sure many of you agree that I'm missing something) so educate me.
Thanks.

troll's picture
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Are you still with EDJ? Are you using Jackson National?

EDJ4now's picture
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Bobby,
Check out the signature line on my posts.  I have used a few companies, Jackson is one of them. 

troll's picture
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EDJ4now wrote:
Bobby,
Check out the signature line on my posts.  I have used a few companies, Jackson is one of them. 

Sorry. I never read the sig lines.
I don't think you need much educating. I've used JNL for exactly 54 months now. The earliest clients have earned an average of 24%/year over that period, net of fees. For you kids, that means after the fees have been taken out. There's no way I would consider doing something different. The 4 year product pays 3.7% plus a 1% trail, starting in year two. That's not bad if that's the route you want to go. Much less messy than jumping through all the hoops of doing asset-based fees and the clients don't get a quarterly statment with a line items showing fees being deducted and paid to you.

the word's picture
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Joined: 2007-04-16

 
How can all these "money managers", with their wrap accounts, call VA guys crooks?  Wrap accounts will cost 1.0-1.5 for the advice, plus the funds fees....let's say total 2.5-3.0.  My VA will cost 1.25 M&E, 1.15 funds, and rider .25-.5....lets say total 2.5-3.0. 
Apples look like apples, but then I grab your hand and tell you how your going to sleep at night because my VA has a gauranty backed by a 140 year old insurer. I'm sure "money manager" will guaranty to feel your pain. 
 
 

now_indy's picture
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Joined: 2006-07-28

With a wrap, you should be able to buy institutional funds, which generally have lower annual fees than their subaccount counterparts.
I see what you're saying, but I think that the wrap is worth it (from the client's perspective anyway) in most cases.
It looks like all of the wrap cons have to do with the broker (more hassle to maintain, can't blame anyone but you, etc.), not the client.

updownup's picture
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Joined: 2007-04-17

That’s a great question.  Managed Money advisors think they are at the top of the mountain.  The thing is that not one product fits every situation.   There will come a time soon that advisors will face an arbitration because they did not at least consider an annuity with a living benefit. 
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If you add the “true cost" of ownership of a Mutual Fund vs. an annuity your looking at a difference of 20 bp.  True cost includes trading costs of the fund. 
 
But forget comparing them show me another hedge Strategy with guarantees for 2-3% all in.
 
For those interested Google “confessions of a VA critic” read the entire article
 
As far as VA firms, <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Jackson has a great UIT strategy and ING has great living benefits

jcskimmer's picture
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Joined: 2007-04-11

If you are charging 1.25-1.5 percent for a wrap account (I assume you mean per year) you better be making me like 24% a year ... funny that is what JNL annuities are doing ... and they don't cost that much ...
On the other hand, it depends on the client because many clients might need the liquidity ... but that is another topic on another board.

Indyone's picture
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Joined: 2005-05-30

I use both.  It depends on the client and you just need to risk profile them.  I ask questions like, if you invested $500,000 with me and the first statement you received showed a value of $450,000, how would you react?  I've gotten answer from "I wouldn't sweat it...this is a long-term investment" to "I wouldn't sleep for a month!".  Usually after you ask a series of risk profiling questions, you have a pretty good idea where to put them.
As far as pros & cons go, on taxes, managed money gets some tax preference on dividends and LT gains, as well as step-up basis on estate taxes, but has some negatives on fee treatment and lack of tax deferral.  In my world, fee-based is a little cheaper, but clients who want protection don't care at all about a percent or two extra for the guarantees.  Investment alternatives are absolutely better in fee-based accounts because you have much more in the way of choices.  Sometimes that is a curse as you can feel paralyzed by the sheer volume of alternatives.  Obviously, JNL has some good alternatives, for annuity fans, even though the choices are by necessity, more limited.
JNL's payout is right in the middle of what I've seen...3.5%-4% up front and 1% in year 2.
EDJnomore, I don't thing you're really missing much...I see the alternatives much as you do...bottom line, it depends on the clients

Indyone's picture
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Bobby Hull wrote:The 4 year product pays 3.7% plus a 1% trail, starting in year two. That's not bad if that's the route you want to go.
I'm curious, Bobby...have you done any of this business, or are you still on the "eat now" train?

troll's picture
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Indyone wrote:
Bobby Hull wrote:The 4 year product pays 3.7% plus a 1% trail, starting in year two. That's not bad if that's the route you want to go.
I'm curious, Bobby...have you done any of this business, or are you still on the "eat now" train?

Not a heck of a lot. I know it's not rational, but I have this fear that some hack will get one of my clients to do an agent change and get paid for the work that I did. If I've gotten paid up front, I don't care about the agent change issue. In fact, it's kind of nice to get paid so much and then someone else has to do the work for me.

the word's picture
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Joined: 2007-04-16

lets not forget......you can always create your own trails.  Plan on taking all your income up front and then sit aside a portion of that in your favorite investment. 

ChrisB's picture
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I use a mixture of both, probably 60% wrap, 20% VA's, 20% A/C Share MF's.I use Lincoln National's American Legacy product quiet a bit for the income benefit.  How do Jackson National's products compare to Lincoln Financial?           

troll's picture
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ChrisB wrote:I use a mixture of both, probably 60% wrap, 20% VA's, 20% A/C Share MF's.I use Lincoln National's American Legacy product quiet a bit for the income benefit.  How do Jackson National's products compare to Lincoln Financial?           
I don't know about the guarantees, but the performance is unbelievable. For the most part, the riders are incidental to why I use them.

Philo Kvetch's picture
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Even with the M&E, in a great many cases it's cheaper than owning a mutual
fund.

Best kept secret in the industry.

troll's picture
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Philo Kvetch wrote:Even with the M&E, in a great many cases it's cheaper than owning a mutual fund. Best kept secret in the industry.
Amen. The funny thing is that the critics, who happen to sell people mutual funds, don't even understand the true cost of owning a mutual fund. They thing that's it's just the expense ratio. Cracks me up. Stealing clients is so easy when you show them the true costs that their brokers "failed to disclose to you." It kills the trust they have for the incumbent and replaces it with trust for me, since I put all the costs in writing and they have to initial the form.

bspears's picture
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What is the website to check actual fees on mutual funds?

troll's picture
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bspears wrote:What is the website to check actual fees on mutual funds?
personalfund dot com
I doubt if it's perfectly accurate, but it gives a good indication of the cost.

BankFC's picture
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I was invited to the JH producers conference in Boston this past year, and the single best speaker was an Estate Lawyer from Chapel Hill NC (if I can remember correctly).
Anyway, he was as well versed in VA's as anyone I have ever met.  He laid out the true cost of VA's versus mutual funds, and truly, the cost is nearly identical, and sometimes the MF's are more expensive!
As far as taxation goes, it's very similar too.  People don't seem to think about turnover in portfolios creating short term capital gains (taxed at ordinary income), but it happens in all actively managed MF's.

troll's picture
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BankFC wrote:
I was invited to the JH producers conference in Boston this past year, and the single best speaker was an Estate Lawyer from Chapel Hill NC (if I can remember correctly).
Anyway, he was as well versed in VA's as anyone I have ever met.  He laid out the true cost of VA's versus mutual funds, and truly, the cost is nearly identical, and sometimes the MF's are more expensive!
As far as taxation goes, it's very similar too.  People don't seem to think about turnover in portfolios creating short term capital gains (taxed at ordinary income), but it happens in all actively managed MF's.

They also don't consider the transaction cost of that turnover.
When did you go smart on us, bankfc?

Spaceman Spiff's picture
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Bobby Hull wrote:
Philo Kvetch wrote:Even with the M&E, in a great many cases it's cheaper than owning a mutual fund. Best kept secret in the industry.
Amen. The funny thing is that the critics, who happen to sell people mutual funds, don't even understand the true cost of owning a mutual fund. They thing that's it's just the expense ratio. Cracks me up. Stealing clients is so easy when you show them the true costs that their brokers "failed to disclose to you." It kills the trust they have for the incumbent and replaces it with trust for me, since I put all the costs in writing and they have to initial the form.

The line about the "true cost of owning a mutual fund" is one that is tossed about here often.  Usually by AllREIT or someone who prefers to put ETFs in a wrap.  I'm suprised to see you using it though.  Since annuities are basically mutual funds with some extra bells and whistles, how do you justify telling clients their broker is lying, when you are doing the same thing.  What, sub accounts, because they are technically not mutual funds, don't have trading costs?  I'm going to guess that's a part of the discussion you left alone. 

Philo Kvetch's picture
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The short answer, Spiff, is in this case the correct answer.  And that is that not all annuities use mutual funds.

the word's picture
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Bank FC:
I believe that the lawyer you heard was Mr. Huggard.  He is an estate planner, lawyer, professor, and CFP.  And he is the absolute authority on VA's.  He has a book that you can order. Also, he is a Professor at NC State, please don't confuse that with Chapel HIll.  Furthermore, he represents brokers in NASD cases and seems to think that if you are not showing VAs in comparison to pure funds....you may be getiing into some hot water down the road.  I have the name of the booke somewhere if anyone wants it.
 

the word's picture
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John Huggard.....couldn't remember his first name.

BankFC's picture
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Bobby Hull wrote:BankFC wrote:
I was invited to the JH producers conference in Boston this past year, and the single best speaker was an Estate Lawyer from Chapel Hill NC (if I can remember correctly).
Anyway, he was as well versed in VA's as anyone I have ever met.  He laid out the true cost of VA's versus mutual funds, and truly, the cost is nearly identical, and sometimes the MF's are more expensive!
As far as taxation goes, it's very similar too.  People don't seem to think about turnover in portfolios creating short term capital gains (taxed at ordinary income), but it happens in all actively managed MF's.

They also don't consider the transaction cost of that turnover.
When did you go smart on us, bankfc?

Bobby, I've always been smart... You probably weren't able to notice because you were trying to think of your next "witty" comment. 
 

BankFC's picture
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the word wrote:
Bank FC:
I believe that the lawyer you heard was Mr. Huggard.  He is an estate planner, lawyer, professor, and CFP.  And he is the absolute authority on VA's.  He has a book that you can order. Also, he is a Professor at NC State, please don't confuse that with Chapel HIll.  Furthermore, he represents brokers in NASD cases and seems to think that if you are not showing VAs in comparison to pure funds....you may be getiing into some hot water down the road.  I have the name of the booke somewhere if anyone wants it.
 

You're right.  I was just trying to go off memory.  I suppose you're a Wolfpack fan then?  Anyway, I have a ton of documentation he gave to me, I might pull it out tonight and revisit some of it.
Yes, he was absolutely an authority on the subject of VA's.
 
Also, can anyone name the NCAA div 1 schools whose mascot name doesn't end in S (ex trojans, bulldogs, vols, tigers, etc). 
The Wolfpack is one (I think there are 5).  Winner gets a free Ameriprise Dream Book. 

troll's picture
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Spaceman Spiff wrote:Bobby Hull wrote:
Philo Kvetch wrote:Even with the M&E, in a great many cases it's cheaper than owning a mutual fund. Best kept secret in the industry.
Amen. The funny thing is that the critics, who happen to sell people mutual funds, don't even understand the true cost of owning a mutual fund. They thing that's it's just the expense ratio. Cracks me up. Stealing clients is so easy when you show them the true costs that their brokers "failed to disclose to you." It kills the trust they have for the incumbent and replaces it with trust for me, since I put all the costs in writing and they have to initial the form.

The line about the "true cost of owning a mutual fund" is one that is tossed about here often.  Usually by AllREIT or someone who prefers to put ETFs in a wrap.  I'm suprised to see you using it though.  Since annuities are basically mutual funds with some extra bells and whistles, how do you justify telling clients their broker is lying, when you are doing the same thing.  What, sub accounts, because they are technically not mutual funds, don't have trading costs?  I'm going to guess that's a part of the discussion you left alone. 

That's a great question. I use UIT's. Even though the total cost of the annuities are lower than most MF's, the performance is far superior. These things could cost 5% a year and still put more money in the client's pocket than some crappy MF's.

the word's picture
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Joined: 2007-04-16

Yes, Wolfpack alum here.  Two more....Fighting Irish, Stanford Cardinal.
Do most of the VA's guys use UITS instead of the mutual funds?
I use Pacific Life for lifetime income and use American skandia for their guaranteed return option.  Any opinions?  Could i be using a better annuity? 
Pacific Life has good performance on their model portfolios.
 

Spaceman Spiff's picture
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Bobby Hull wrote:Spaceman Spiff wrote:Bobby Hull wrote:
Philo Kvetch wrote:Even with the M&E, in a great many cases it's cheaper than owning a mutual fund. Best kept secret in the industry.
Amen. The funny thing is that the critics, who happen to sell people mutual funds, don't even understand the true cost of owning a mutual fund. They thing that's it's just the expense ratio. Cracks me up. Stealing clients is so easy when you show them the true costs that their brokers "failed to disclose to you." It kills the trust they have for the incumbent and replaces it with trust for me, since I put all the costs in writing and they have to initial the form.

The line about the "true cost of owning a mutual fund" is one that is tossed about here often.  Usually by AllREIT or someone who prefers to put ETFs in a wrap.  I'm suprised to see you using it though.  Since annuities are basically mutual funds with some extra bells and whistles, how do you justify telling clients their broker is lying, when you are doing the same thing.  What, sub accounts, because they are technically not mutual funds, don't have trading costs?  I'm going to guess that's a part of the discussion you left alone. 

That's a great question. I use UIT's. Even though the total cost of the annuities are lower than most MF's, the performance is far superior. These things could cost 5% a year and still put more money in the client's pocket than some crappy MF's.

You, or someone else, may have to educate me a little bit here.  All of the annuities we use at Jones (Hartford, Lincoln, Sun America, Protective, MetLife) use sub accounts based loosely on funds.  Every annuity I've ever review does the same.  You have some that use UITs as sub accounts?  Or were you saying you use UITs outside of the annuities? 

BankFC's picture
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the word wrote:
Yes, Wolfpack alum here.  Two more....Fighting Irish, Stanford Cardinal.
Do most of the VA's guys use UITS instead of the mutual funds?
I use Pacific Life for lifetime income and use American skandia for their guaranteed return option.  Any opinions?  Could i be using a better annuity? 
Pacific Life has good performance on their model portfolios.
 

I put JH side by side with Pac Life in a Morningstar analysis.  Performace is nearly identical (Pac might have been very slightly better), but the betas of the JH portfolios were much lower than Pac Life.  Guarantee is slightly better too (no 5 year bucket).
For lump sum return of principle, I use Allianz High 5 L share.  Works great.

Philo Kvetch's picture
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Spaceman Spiff wrote:Bobby Hull wrote:Spaceman Spiff wrote:Bobby Hull wrote:
Philo Kvetch wrote:Even with the M&E, in a great many cases it's cheaper than owning a mutual fund. Best kept secret in the industry.
Amen. The funny thing is that the critics, who happen to sell people mutual funds, don't even understand the true cost of owning a mutual fund. They thing that's it's just the expense ratio. Cracks me up. Stealing clients is so easy when you show them the true costs that their brokers "failed to disclose to you." It kills the trust they have for the incumbent and replaces it with trust for me, since I put all the costs in writing and they have to initial the form.

The line about the "true cost of owning a mutual fund" is one that is tossed about here often.  Usually by AllREIT or someone who prefers to put ETFs in a wrap.  I'm suprised to see you using it though.  Since annuities are basically mutual funds with some extra bells and whistles, how do you justify telling clients their broker is lying, when you are doing the same thing.  What, sub accounts, because they are technically not mutual funds, don't have trading costs?  I'm going to guess that's a part of the discussion you left alone. 

That's a great question. I use UIT's. Even though the total cost of the annuities are lower than most MF's, the performance is far superior. These things could cost 5% a year and still put more money in the client's pocket than some crappy MF's.

You, or someone else, may have to educate me a little bit here.  All of the annuities we use at Jones (Hartford, Lincoln, Sun America, Protective, MetLife) use sub accounts based loosely on funds.  Every annuity I've ever review does the same.  You have some that use UITs as sub accounts?  Or were you saying you use UITs outside of the annuities? 

There are annuities that use UITs and even ~gasp~ ETFs in the subaccounts.  Performance blows away anthing I've ever seen from the most popular VAs using mutual funds.  Couple that with the fact that they have a cafeteria style mentality with respect to riders.  The bare bones contract has an M&E of 135bps, and most UITs and ETFs have fees south of 35 bps, making TOTAL fees and expenses below 170 bps, with no short term capital gains to detract from performance.

ChrisB's picture
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PK, do you mind naming some of the VA's that allow ETF's to be used in sub-accounts?  Thanks in advance.Chris  

Philo Kvetch's picture
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Joined: 2005-05-17

Chris, do yourself a large favor and focus your efforts and attention upon
the VA that uses UITs.

ChrisB's picture
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Such as??  Thanks.

BankFC's picture
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Joined: 2005-05-27

Jackson National, Pru Am Skandia has a UIT portfolio too.

ChrisB's picture
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I appreciate it BankFC.

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