Newsweek's Jane Quinn on VAs

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anabuhabkuss's picture
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Any of you read that column on this week's Newsweek?
She basically says Annuities are bad and her back up this week was an "insider" who wished to remain anonymous (probably because he/she makes a living off selling them) says they're bad.
I'm not lying. That's what she says. An insider says they're bad. Oh and the only way to grow your income is if the underlying asset allocation or investments performs at least 8% consisently which is "nearly impossible".
If people really want to attack the VA, I'm all for it (though I'd much rather Indexed annuities get the real attention) but at leasy have some common sense to back it up. Her argument was about as deep as saying "mutual funds are bad...because they might not perform"

Vin Diesel's picture
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people love bashing annuities...they are an easy target. it's like anything else, they work well for people in certain situations. but unfortunetly some advisors over sell/use them.
you would expect more jounalisit integrity from a publication like newsweek
 
 

EDJ to RIA's picture
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I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

Dust Bunny's picture
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EDJ to RIA wrote:
I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

That's probably because you haven't been in the business long enough.
 

Philo Kvetch's picture
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EDJ to RIA wrote:
I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

I have.

Indyone's picture
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EDJ to RIA wrote:I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...
Rather than educate you, we'll just keep taking those accounts where a VA works well...

rialsoon's picture
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It seems like it is a matter of free choice, unresolvable. Companies have the freedom to manufacture a product, reps to disclose and sell, consumers to choose. And we know what the market is doing - annuity sales are booming, and a lot of folks are making money dissing them. There you have it. What we think almost doesn't matter.

Vin Diesel's picture
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EDJ to RIA wrote:
I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

never? let me guess you use wrap accounts...

troll's picture
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EDJ to RIA wrote:
I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

If an average annual return, net of ALL fees, of 25% compared to 17% on the S&P 500, over the exact period is not working well, then I haven't seen one either.

Philo Kvetch's picture
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Bobby Hull wrote: EDJ to RIA wrote:
I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

If an average annual return, net of ALL fees, of 25% compared to 17% on
the S&P 500, over the exact period is not working well, then I haven't seen
one either.

That's particularly true if you happen to know of a variable annuity whose
total expenses are lower than that of most mutual funds of the same share
class.

Broker24's picture
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Annuities are not just about best returns. You can't just compare the
return to say, a mutual fund. Sometimes people need some guaranteed
income. The right annuity will provide that for you (with decent returns).
But, I stress two things: SOME guaranteed income (not ALL of your
assets), and the RIGHT annuity - not one of these 15 year surrender
indexed annuity BS products sold to an 80 year old.

The problem is not necessarily the product, but to whom and how it is
sold. I am not a big user of annuities, but I think a well-built annuity is
appropriate in certain situations.

Philo Kvetch's picture
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Broker24, it's ALL about returns...everything we do.

All the rest is just talk.

troll's picture
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Philo Kvetch wrote: Bobby Hull wrote: EDJ to RIA wrote:
I've never seen a situation where a VA works well.
Ok, let's hear it from the annuity gang...

If an average annual return, net of ALL fees, of 25% compared to 17% on the S&P 500, over the exact period is not working well, then I haven't seen one either.
That's particularly true if you happen to know of a variable annuity whose total expenses are lower than that of most mutual funds of the same share class.
I think I might have one.

Dust Bunny's picture
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Philo Kvetch wrote:Broker24, it's ALL about returns...everything we do. All the rest is just talk.
No it isn't.  It's about meeting the client's needs.  Some people need more security and will be satisfied with trading off all of the possilbe return in the market for that.
 

Philo Kvetch's picture
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Dust Bunny wrote: Philo Kvetch wrote:Broker24, it's ALL about
returns...everything we do. All the rest is just talk.
No it isn't.  It's about meeting the client's needs.  Some people need more
security and will be satisfied with trading off all of the possilbe return in the
market for that.
 

Then why don't they just buy CDs and be done with it?

No, they come to us because there's an element of greed there. If you don't
believe it, just try delivering a few years of 1 or 2 percent returns and see
how long the relationship lasts.

anonymous's picture
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I have to agree with Dust Bunny on this one.  Nobody is saying that clients don't want higher returns.  They all do.  This just isn't usually their primary goal.
 

Philo Kvetch's picture
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anonymous wrote: I have to agree with Dust Bunny on this one. 
Nobody is saying that clients don't want higher returns.  They all do.  This
just isn't usually their primary goal.
 

It's not? Then why do they come to see us?

anonymous's picture
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They want help accomplishing their financial goals.  Accomplishing goals often means taking less risk and getting lower returns.
Protection goals certainly have nothing to do with getting higher returns.  This is why my clients buy lots of life and DI insurance.
With retirement planning, it's about putting together a portfolio that the client won't outlive.   You can have 2 clients with the exact same amount of money and the same retirement goals.  One client can get a higher rate of return on their money, yet still run out of money first because of volatility.

Philo Kvetch's picture
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And how does one do all that without returns?

anonymous's picture
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The fact that one needs returns does not equate to "it's ALL about the returns"
If it was all about returns, wouldn't clients simply be looking for money managers and not financial advisors? 

Philo Kvetch's picture
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anonymous wrote: The fact that one needs returns does not equate to
"it's ALL about the returns"
If it was all about returns, wouldn't clients simply be looking for money
managers and not financial advisors? 

And just what do the expect an advisor to do for them?

Dust Bunny's picture
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Philo Kvetch wrote: anonymous wrote:
The fact that one needs returns does not equate to "it's ALL about the returns"
If it was all about returns, wouldn't clients simply be looking for money managers and not financial advisors? 
And just what do the expect an advisor to do for them?
Speaking for myself and the clients that I have: 
They expect me to monitor their portfolios so they don't have to think about this stuff. 
Meet with them at least 3 times a year to review their progress and call them if there is anything new or needs attention.
Recommend any moves that would be appropriate when market conditions or interest rate environment changes. 
Some people are only interested in principal protection and an income stream.  Some are interested in growth and total return. Some aggressively while others are more adverse to risk.  They expect me to know which are which and make the investments and strategies something that they are comfortable with.
They expect me to also offer advice and strategies on various topics like estate planning, retirement planning, tax efficiency, protection strategies (life, health and DI insurance).  I also do loan and debt counseling. On occasion I seem to be a family counselor for clients going through death, divorce or other family disasters.
I also make a mean cup of coffee and great coffee cakes.
My main job is to keep the clients' focused on their goals and keep them from emotional swings in their money management strategies. It isn't all about a percent of return on their money. Obviously, my clients don't want to lose money, but it isn't about getting the highest return.  This is why annuities and VAs are appropriate for some people.  They are willing to trade off some of the possible return for safety. 
As an advisor we are obligated to explain both the good and bad about all investments we present.  Do you explain to your clients the positives of VAs or do you only stress the negatives?
 

Philo Kvetch's picture
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The coffee aside, you can do none of the rest without returns.
(Where did I say that I'm opposed to annuities?)

anonymous's picture
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And just what do the expect an advisor to do for them?
Help them accomplish their goals.  Yes, higher returns are a means to helping accomplish this.  Nothing more.

Philo Kvetch's picture
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They're a MEANS to helping?  Can you name another "means" to accomplish financial goals?

EDJ to RIA's picture
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Do you think the fact that they're about the only product left that pays 7+% commissions has anything to do with their popularity amongst salespeople?
Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included.
Comments?

Dust Bunny's picture
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Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included
A SPIA has a terrible internal interest rate and when the contract is up the money is gone.  Sure, you have an income guaranteed from the SPIA ....for a while......but in your scenario, there is no guarantee that the other money in stocks will increase to replace the spent SPIA.  
You are taking a big chance that the market is not going to have a downturn just when the clients need the other pool of money, that was not in the SPIA, for income.  It could be that the original pool of money is now drastically reduced by the vanished amount in the SPIA and a market downturn where the remainder has lost a 10 to 20% value.  How happy is your client going to be with you then?
So the answer is NO, you can't get a guaranteed income in your scenario.
I've done this strategy with guaranteed annuites. SPIA for 10- 15 years while the other annuity is guaranteed to grow back to the original amount of cash invested. When the SPIA is spent they can then annuitize the second contract. Maybe we even have a third contract to kick in as well. Its usually something I only do for those older clients who are very risk intolerant and don't care about growing their money. 
This strategy isn't as attractive right now in this low interest rate environment as it was in the past, however.  You need to put more into the SPIA to generate the income needed and have to wait much longer for the second annuity to grow back.

Dust Bunny's picture
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You also seem to be assuming that ALL of the client's money would be going into a VA.
In my cases I use VA's for various purposes and also have portfolios outside of the tax sheltered product.  It would be a bad idea to have everything in one investment.

EDJ to RIA's picture
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How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

Dust Bunny's picture
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Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
I thought you said it was all about return.  Yah....client's just love seing their portfolios go down and really appreciate those capital losses as a tax strategy   There is nothing wrong with your managed portfolio strategy. I do it all the time. The issue is that for some people it isn't the most appropriate investment plan.
I think I'll take the guarantee of a multi billion dollar firm (that has been in business for decades) that they will still be in business  to pay out on their fixed annuities.  I'd take that over the guarantee provided by a wet behind the ears former Jones broker who is so cocksure of himself that he won't take precautions with other people's money when they need it.

Indyone's picture
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Philo, easy now...you're starting to sound like Put Trader...

Philo Kvetch's picture
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Indyone wrote:Philo, easy now...you're starting to sound like Put Trader...
Geez...that's a lousy thing to say!

Indyone's picture
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...sorry...I just couldn't help but notice the debate style you were using...it brought back memories...some not all that bad to be honest...

Mike Damone's picture
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Indyone wrote:Philo, easy now...you're starting to sound like Put Trader...
That was harsh man.

troll's picture
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EDJ to RIA wrote:
How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

EDJ to RIA's picture
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Bobby Hull wrote:EDJ to RIA wrote:
How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

Man, annuity salespeople get so defensive!
So you're saying the fees inside the annuity (M&E, management, turnover costs, admin) are less than 1.25% total? Can I get to all of my money anytime I want with no strings attached? How many choices of investments do I get?

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Dust Bunny wrote:
Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
I thought you said it was all about return.  Yah....client's just love seing their portfolios go down and really appreciate those capital losses as a tax strategy   There is nothing wrong with your managed portfolio strategy. I do it all the time. The issue is that for some people it isn't the most appropriate investment plan.
I think I'll take the guarantee of a multi billion dollar firm (that has been in business for decades) that they will still be in business  to pay out on their fixed annuities.  I'd take that over the guarantee provided by a wet behind the ears former Jones broker who is so cocksure of himself that he won't take precautions with other people's money when they need it.

I didn't say anything about returns. Though after-tax returns are important.
I'd take the stability of a $500 billion company that's been around since the 1800's (Standard Oil/Exxon-Mobil) to be here to pay their dividend also.
I've been investing for 20 years by the way, just the last 4 at Jones.

troll's picture
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EDJ to RIA wrote:Bobby Hull wrote:EDJ to RIA wrote:
How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

Man, annuity salespeople get so defensive!
So you're saying the fees inside the annuity (M&E, management, turnover costs, admin) are less than 1.25% total? Can I get to all of my money anytime I want with no strings attached? How many choices of investments do I get?

I'm saying those returns are net of ALL fees. Your liquidity is dependent upon which surrender option we choose. If you can't stay in the market for at least 7 years, you can't be my client.

now_indy's picture
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EDJ to RIA wrote:
Can't you get guaranteed income from having a well-diversified and well-managed portfolio of stocks, then buy a SPIA with part when the client feels like they need it? Then you save all those M&E fees, no surrender charges, manage for tax efficiency and have no strings attached...with say a 1.25% fee, transaction costs included.
Comments?

The problem here is that the scenario you described will PROBABLY work for the client. Some clients are scared of losing all of their money, they DO NOT like PROBABLY as an investment strategy.
Yes, annuities are more expensive. But, be careful you don't miss the forest (protection with predictable income) for the trees (higher fees). 
I'm not saying they are right for every client, or even for all of a client's money. But, having an annuity take care of a client's basic income NEEDS (utility bill, gas, mortgage, etc.) is a nice thing. Use your above strategy for the income WANTS (travel, gifting, etc.).

EDJ to RIA's picture
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Bobby Hull wrote:EDJ to RIA wrote:Bobby Hull wrote:EDJ to RIA wrote:
How about a portfolio of say 200 companies that have increased their dividends for the last 10+ years. Have the div's sent to client as income which will increase every year. When a company reduces or stops their div, replace them with another. Max 15% tax on div's (now), not ordinary income. Stepped up basis to kids. Doesn't matter if value of principle goes down 10%, we're not touching it. Or sell some of down stocks and lock in a loss to offset future gains.
Isn't that guaranteed income without using the word guarantee? Can the insurance company guarantee that they will be in business in 10 years?

How about I get ahold of one of your clients, show them an annuity with an avg. return over the last 4.5 years of over 24%, and tell them that they won't have to pay you that fee anymore?

Man, annuity salespeople get so defensive!
So you're saying the fees inside the annuity (M&E, management, turnover costs, admin) are less than 1.25% total? Can I get to all of my money anytime I want with no strings attached? How many choices of investments do I get?

I'm saying those returns are net of ALL fees. Your liquidity is dependent upon which surrender option we choose. If you can't stay in the market for at least 7 years, you can't be my client.

If you think annuities are good investments, you can't be my client!
I'm just busting your chops on the annuities. To each his own. We all have our competitive side and as long as we follow our respective rules, there's plenty of business to go around!

larmisk's picture
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Get real people!  Everything is determined by the bottom line.  "Suzie O" talks annuities down also, but she does it because the insurance company she was working with would not give her a piece of the action.  She wanted a piece of each policy sold while she was "spreading the word".  No $, No do!

the word's picture
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Ben Bernanke, our Fed Chairman, owns variable annuities.  In fact, they are his largest investment holdings.  Believe it.
Those who bash VA's truely don't understand the product, and to a larger extent there clients .
If you do understand the product, and still feel the need to endlessly bash the product, then you are probably just not that smart.
Hull, what sub account of which VA is bringing in that 24%?
 
 
 
 

rialsoon's picture
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Know what you do about money and investing, pretend you are the client. You are offered an annuity option - it carries no surrender charges, and your advisor gets no commission up front.
Taking that potential conflict of interest and sales pressure off your mind, you decide to choose the annuity option.
Because money is more like health and spirituality than it is like cars or houses, it deserves objectivity. You may or may not believe this, but it is more fun to be free on the side of objectivity.
Since that is a subjective idea, all we can really argue about is preferences.

Broker24's picture
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Philo Kvetch wrote: And how does one do all that without returns?[/
QUOTE]

Philo-
The idea is not that annuities have no returns. Some people will pay the
extra 75-150 bips over a straight MFD to get the guarantee.

Philo Kvetch's picture
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And just why do you suppose that all annuities are 75-150 bps more
expensive than your straight mutual funds?

AllREIT's picture
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EDJ to RIA wrote:Do you think the fact that they're about the only
product left that pays 7+% commissions has anything to do with their
popularity amongst salespeople?

Can't you get guaranteed income from having a well-diversified and
well-managed portfolio of stocks, then buy a SPIA with part when the
client feels like they need it? Then you save all those M&E fees,
no surrender charges, manage for tax efficiency and have no strings
attached...with say a 1.25% fee, transaction costs included.

The simplest case against annuities, is that you are betting against the insurance companies actuaries, and those boys don't play to lose.

Ultimately a VA is just a basket of expensive mutual funds, wrapped
up in package of options. The actuaries work very hard to make sure
those options are mispriced so badly, that even after kicking 6% to the
salesman, the insurance company still comes out on top.

The best arrangement from the clients perspective is to invest in
solid investment strategy and then buy CPI-linked SPIA's as needed.

The final result of a VA is the purchase of a SPIA when the contract is annuitised. So the question is the path taken to get to that point.

You can do it under a heavy burdern of management/COI fee's (to recover the 6% and give the insurco a profit) or a lighter burden of low cost management fee's.

anonymous's picture
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Bust on annuities all that you want.  My annuity clients outperform my mutual fund clients.  This is because the guarantees of the VA allow the annuity clients to invest more aggressively.
Take a conservative client and have them invest aggressively.  If the client is in mutual funds, they will pull money out if the investments go down.  Thus, conservative clients can't invest aggressively in mutual funds.  If the same client invests in a VA with a guarantee and they invest aggressively, they won't move money if the market goes down.
The end result is that the guarantees of the VA allow one to invest in a manner that is greater than their risk tolerance.
The cost of a good VA is not that much more than a good mutual fund portfolio and can be less expensive.

ChrisB's picture
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anonymous wrote:
Bust on annuities all that you want.  My annuity clients outperform my mutual fund clients.  This is because the guarantees of the VA allow the annuity clients to invest more aggressively.
Take a conservative client and have them invest aggressively.  If the client is in mutual funds, they will pull money out if the investments go down.  Thus, conservative clients can't invest aggressively in mutual funds.  If the same client invests in a VA with a guarantee and they invest aggressively, they won't move money if the market goes down.
The end result is that the guarantees of the VA allow one to invest in a manner that is greater than their risk tolerance.
The cost of a good VA is not that much more than a good mutual fund portfolio and can be less expensive.

 
I could not agree more. 

Ashland's picture
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the word wrote: Ben Bernanke, our Fed Chairman, owns variable annuities.  In fact, they are his largest investment holdings.  Believe it.
[

While this is true - it also is misleading. Bernanke's largest holding is his former 403b invested w/ TIAA Cref. I don't think this means that he is for or against VA's. It means he worked for Princeton for long time.

http://www.fmcenter.org/atf/cf/%7BDFBB2772-F5C5-4DFE-B310-D8 2A61944339%7D/2006disclosurereport.pdf

AllREIT's picture
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Ashland wrote: the word wrote:Ben Bernanke, our Fed Chairman, owns
variable annuities.  In fact, they are his largest investment
holdings.  Believe it.

While this is true - it also is misleading. Bernanke's largest
holding is his former 403b invested w/ TIAA Cref. I don't think this
means that he is for or against VA's. It means he worked for Princeton
for long time.
http://www.fmcenter.org/atf/cf/%7BDFBB2772-F5C5-4DFE-B310-D8 2A61944339%7D/2006disclosurereport.pdf

Without misleading statements how else would annuities be sold?

It's also not clear why Bernanke, who is an economist would be/should be an authority on investing.

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I agree that Bernanke's holdings are meaningless.
Without misleading statements how else would annuities be sold?
I find that the truth works quite nicely.   With a certain fact pattern, I don't know anything better than a VA with a living benefit.  I prefer GMAB. 
1)Qualified Money2)Conservative Investor3)Investing conservatively won't allow them to reach their goals4)Long enough time horizon that surrender charges are not an issue and they qualify for the living benefit
Anti-annuity people tend to not understand the importance of the living benefits.  The argument is basically that it is a waste of money because the insurance company is smart and won't have to pay on this benefit.  That completely misses the point of the living benefit for the conservative client.  The true importance of the living benefit is that it changes investor behavior.  As we all know, investor performance is what counts, not investment performance.   Living benefits do hurt investment performance because there is a cost.  However, they improve investor performance because investors have no reason to sell during a down market. 

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