Suggestions from the experts?

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Borker Boy's picture
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I have a couple, both 50 yoa, who have $500k in non-qualified money they want to put away for 15 years to use in retirement. They have a very high income and don't want to pay additional taxes from their investments.
They say they don't anticipate needing this money between now and retirement, but they don't want to lose it--of course.
I've proposed a strategy to put a portion of the money into a 10-year fixed annuity--that will grow back to $500k upon maturity--and the other portion into a VA. 
Any suggestions for a better way to handle this?

babbling looney's picture
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You might want to consider some tax free bonds, since all the gains in the annuities are going to be taxed when they take them out.   And the yield on tax frees in their high tax bracket will be pretty attractive.
Questions to consider are: What is their tax bracket now?  What type of income from other sources will they have at retirement and will that also put them in a large tax bracket then?  (Of course who knows what the IRS will be using as tax tables in the future, but you can use the ones we have now as a best guess)  If they don't like taxes now, they probably won't like them in the future. 
Also do they have any intentions of leaving these funds to children? If so, the annuities suck as a wealth transfer vehicle and you might want to look into life insurance.  A single premium product can be a good tool for wealth transfer.....and pays you pretty good too.   Some of them even have long term care riders to kill two birds with one stone.  You might want to rephrase that when talking about life insurance.

anonymous's picture
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In another thread, I was raving about the benefits of annuities, but I really don't like them for non-qualified money because capital gains is being traded for income tax. 
A diversified portfolio of no to low dividend paying common stocks can be a significant part of the answer. 

mranonymous2u's picture
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Ever heard of Zero Coupon Municipal Bonds?
They have a head start, use the money to create the skelleton of a 20 year muni coupon  bond ladder(say 50M for every other year). Once they start, they are likely to add to it with some of their very high income. The objective is to have them add 50M per year which means that when they retire they will have a bond portfolio worth somewhere near 1.5 MM and an income stream of $60,000 tax free (@ 4%).
With the zeros (which are admittedly rare) but they are priced in the 50 range in 15 years (for AAA 0s) and go down from there so you could build a ladder starting there and you might get a greater compounding out of them. At maturity you could take an income and slide the remnants out to the end of the ladder to create an everlasting income stream (say you put 50M, bought 100M of mat Val, when it matured, you take out $60M and use the 40M to buy 100 bonds at the far end of the ladder.)
Mr. A
Mr. A 

mranonymous2u's picture
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Funny how the people advocating for Annuities in that other thread are advocating against them here. Goes to show you that just because I think they are a hammer, not everything is a nail!
Mr.A

babbling looney's picture
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mranonymous2u wrote:
Funny how the people advocating for Annuities in that other thread are advocating against them here. Goes to show you that just because I think they are a hammer, not everything is a nail!
Mr.A

I guess the point that we have been trying to make is that annuities are applicable to some situations and not to others.  The expert advisor should be able to offer many many types of investment strategies based on each individual client's needs and not on the advisor's own predjudices.  The cocksure (and naive) assertion that a 60/40 split is the bulletproof investment strategy for all times and all people is going to come back and bite some guys in the butt. 
 

AllREIT's picture
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Borker Boy wrote:I have a couple, both 50 yoa, who have $500k in
non-qualified money they want to put away for 15 years to use in
retirement. They have a very high income and don't want to pay
additional taxes from their investments.
So if they get $100 in income from the investments, they would prefer to give up $60 so as not to pay $40 to Uncle Sam?

Talk about cutting off your nose to spite your face.

You only pay income taxes if you have taxable income. I would love to pay more income tax.

And with QDI taxed at 15% I want more QDI if at all possible. It beats working on both a pre-tax and after-tax basis.

Quote:They say they don't anticipate needing this money between now and retirement, but they don't want to lose it--of course.

What are their return expections? This sounds like a good case for split Muni, TIPS, and stock portfolio. VG has a "tax-aware" fund that is 50% muni's and 50% non dividend R1K stocks. Other companies offer similar tax managed funds.

Of course ETF's make zero capital gains distributions. The best
investment these people could make is to learn more about what works in
investing.

Quote:I've proposed a strategy to put a portion of the
money into a 10-year fixed annuity--that will grow back
to $500k upon maturity--and the other portion into a
VA.

This sort of situation is perfect for VA with a principal garantee.
Fixed annuities are usually crap, since you can get worse return to
investing in the underlying bonds that the insurance company would do.

However its possible that muni's will smoke the total return on the annuity (when you take the cap gains haircut on the end)

planrcoach's picture
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Funny how the people advocating for Annuities in that other thread are advocating against them here. Goes to show you that just because I think they are a hammer, not everything is a nail!
That was an interesting discussion. The dangers of losing principal and outliving income are real. Once we understand the goals (purpose) and beliefs (values and principles) of the client, we have an obligation to consider every solution with an open mind.
Since this cuts across the intellectual stuff of investing to include what is basically spiritual stuff for the client, our obligation comes down to good ethics to at least consider annuities.
It's just that actually putting money into annuites can be really hard, especially if you would not do that for yourself.

mranonymous2u's picture
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"It's just that actually putting money into annuites can be really hard, especially if you would not do that for yourself." [emph mine] Planet.
How many times has a client asked you what you have in the market?
How many times have they asked you if YOU owned what you were recommending?
I tell them I have EVERYTHING in the market, my home, my food, my kid's education, everything! I do, this is how I make my living.
But I don't own most of the things I buy for my clients. I cannot and I should not either (skews the perspective). Each person is their own person and I can't make them me. Therefore, I won't judge an investment solely on whether I would buy it for myself.
I told you, this business just is not simple.
 
Mr. A  

planrcoach's picture
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But I don't own most of the things I buy for my clients. I cannot and I should not either (skews the perspective). Each person is their own person and I can't make them me. Therefore, I won't judge an investment solely on whether I would buy it for myself.
I told you, this business just is not simple.
That's cool.
Some people would say, when all the elements "line up", this business is profoundly simple, but it is not easy.
Like, if you see more people, and are slightly more successful in how you interact, and if your case sizes are just a little bigger, then your growth is exponential.
That would be, the profound simplicity of exponential growth.

AllREIT's picture
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planrcoach wrote:Since this cuts across the intellectual stuff of
investing to include what is basically spiritual stuff for the client,
our obligation comes down to good ethics to at least consider
annuities.
It's just that actually putting money into annuites can be really hard, especially if you would not do that for yourself.

The only annuities I use are Vanguard's SPIA annuities done with
AIG.  These make sense, and I explain to clients that we are
investing so that at the date of retirement they can buy into their own
personal pension plan. Generally it makes sense to annuitize about 25%
of the retirement portfolio with an CPI-linked SPIA.

VA's and FA's are just paying the insurance company to do stuff you
are afraid to do yourself. In that case it makes sense to go with the
simplest and cheapest providers such as VG or Fidelity.

planrcoach's picture
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VA's and FA's are just paying the insurance company to do stuff you are afraid to do yourself. In that case it makes sense to go with the simplest and cheapest providers such as VG or Fidelity.
Point taken. Since FAs have to use an insurance product to accomplish risk transer (outliving income)  it's not really a matter of being afraid.
It does make sense to use the simplest and cheapest, especially if that is your business model, but you don't have to -that would stifle things like: taking risk, branding, perceived value, focus on comparative advantages, and just paying for more human interaction.  Being costco is a nice niche, some folks like to go to the mall or speciality golf shop instead of Golf Galaxy.
What a great country.

AllREIT's picture
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planrcoach wrote:VA's and FA's are just paying the
insurance company to do stuff you are afraid to do yourself. In that
case it makes sense to go with the simplest and cheapest providers such
as VG or Fidelity.

Point taken. Since FAs have to use an insurance product
to accomplish risk transer (outliving income)  it's not
really a matter of being afraid.
Quote:

Afraid of outliving your income streams. With the right investment plan that is highly unlikely to occur.

Underneath a fixed annuity is big portfolio of 30 year bonds,

Underneath a fixed annuity with CPI-link is a big portfolio of TIPS.

Underneath a variable annuity is big portfolio of mutual funds, and some out of the money hedges.

Underneath a Equity Index annuity is a is big portfolio of bonds, and some index call options.

There is no magic, just alot of smoke and mirrors with an very expensive admittance ticket.

Quote:It does make sense to use the simplest and
cheapest, especially if that is your business model, but you don't
have to

Actully I do, because it is what a prudent man would do in the best
interest of the clients. For others the choice is "purely incidental" .

There's the sardine key again.

Quote:that would stifle things like: taking risk, branding,
perceived value, focus on comparative advantages, and just paying
for more human interaction.  Being costco is a nice niche,
some folks like to go to the mall or speciality golf shop instead of
Golf Galaxy.

What a great country.

Andy Warhol said that he loved america, because in this country Andy Warhol and Elizabeth Taylor both drink Coca-Cola.

We all have acess to the same market risk exposures.After you take
those out, investment manager alpha vanishes in a puff of fund
expenses.
What is in the best interests of clients is usually clear and
without alot of wiggle room. How you package it up and serve it is
something else.

"taking risk, branding, perceived value, focus on comparative advantages, and just paying for more human interaction"

Investment performance is pretty much a measurable thing, everything else is a human foible.

If people want to  pay for human interaction, IMHO it is more ethical to pay for that openly and directly, than to hide it in commisions and trailer fee's.

Anyways going back to the client in question and the topic of this thread.

You have a few choices among them:

1) Educate the client about investing and set up a conservative investment plan.
2) Sell them an annuity.Very likely a variable annuity --> SPIA scheme.

Choice one involves more effort on your part, pays less, but it may
add greater value to the client. Choice two, involves less effort, pays
more, but *may* not add the most value to the client's life. It could
also be the best fit.

All in we need to do more research to uncover the clients real
motivations and desires, since alot of these they may not even know.

planrcoach's picture
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1) Educate the client about investing and set up a conservative investment plan.
Amen.
What is in the best interests of clients is usually clear and without alot of wiggle room. How you package it up and serve it is something else.
Amen.
If people want to  pay for human interaction, IMHO it is more ethical to pay for that openly and directly, than to hide it in commisions and trailer fee's.
When you start using terms like "hide", this could sound preachy and a little self-interested.
Here's Mary Rowland from FA magazine, 2/7, page 58:
"Who made fee-only the Holy Grail? Seems to me it was the National Association of Personal Financial Advisors and the media. NAPFA wanted to promote its fee-only members as the cream of the crop.
The press wanted a rule-of-thumb to  help readers pick a financial planner: Get a fee-only planner ... the elevation of "fee -only" to a sacred place in planning brought about a change in the behaviour of lots of advisors who wanted to get in on that list. The changes were not always to the client' benefit."
(I know, you are saying, but I am fee-based, not fee only.)
 
" Why should it make that much difference how and advisor gets paid? In the rush to be redeemed, many planners have converted to fees to distinguish themselves from brokers. Theses planners need a new strategy. Soon brokers will be fee-only.  Advisors in some countries have been more creative, charging fees and offsetting them with commissions when that proves cheaper for clients.
An advisor is trustworthy. Or not. ... The real problem is the asset-based fee. That structure may make sense as a method of compensation for money management, but it doesn't work for fiancial planning. You do much more than manage money.
(Anyway, I am just getting a little tired of the apparent holier-than thou attitude of some fee based, fee only, or fee based plus commission "planners". Not you, of course. :). )
 
 

mranonymous2u's picture
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"What is in the best interests of clients is usually clear and without alot of wiggle room."
What a load of crap!
There are so many variables in every person's life and they change every minute of every day and many times by forces that cannot be controlled, or will not be controlled that it is impossible to be absolutely "clear" as to what the best interests of the client are.
We can only take our best guess and give our best advice and weigh this client's situation with similar situations that we have dealt with before.
The Ayatollah of Reit is giving fervency and fanaticism  bad names!
Mr. A
 

planrcoach's picture
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We can only take our best guess and give our best advice and weigh this client's situation with similar situations that we have dealt with before.
This is a huge part of our value proposition - experience.
If I was an advisor in the year 1999, I learned that retirees need to be very careful about assumtions regarding market behaviour in the first years of portfolio withdrawal, and share that cognitive and emotional "knowlege" and experience with newly retiring clients today.
All in we need to do more research to uncover the clients real motivations and desires, since alot of these they may not even know.
Absolutely. Another example of why experience is so valuable. Ask someone who is just starting in our profession what this means. Huh?
If people want to  pay for human interaction, IMHO it is more ethical to pay for that openly and directly, than to hide it in commisions and trailer fee's.
Now, when you attack the messenger, you attack a large number of experienced professionals in a wholesale and potentially self-serving manner. In the sense that the NAPFA and the media have latched on to "fee only" (and apparently fee based), you destroy our profession while seeking to define the playing field.
You might argue this is a competitive economic activity. Since ethics and morality always comes down to the individual practitioner level, it is ironic that any individual would condemn an entire platform (broker dealer).
Here is your point of view: What is in the best interests of clients is usually clear and without a lot of wiggle room.
I think we are talking about costs here. According to your business model, there is always the risk that you'll take on a client and won't be able to meet their needs because of your (efficient) cost structure.
So it comes down to individual situational ethics, again.

AllREIT's picture
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mranonymous2u wrote:"What is in the best interests of clients is usually clear and without alot of wiggle room."
What a load of crap!
There are so many variables in every person's life and they change
every minute of every day and many times by forces that cannot be
controlled, or will not be controlled that it is impossible to be
absolutely "clear" as to what the best interests of the client are.

I never said it was an exact recomendation, just that the set of
appropriate and prudent recomendations tends to be small and
constrained. 

mranonymous2u's picture
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Well, let's look at the bond portfolios that I mentioned above, from the POV of overall costs.
Fee based equaling 75 beeps/year.
Coupon bonds done with a point per.
Zeros done at the equivalent of 2 pounds per (two percent).
$500,000 at .75% = $3,750 first year.
$500,000 ladder w/ coupons = $5,000 first year.
$500,000 ladder w/ 0s = $10,000 first year.
Bonds pay on average 4% (for sake of simplicity)
2nd year, assume that interest rates stay static and thus so does market vaule.
$520,000 at .75% = $3,640
$520,000 = $200
$520,000 = $0
If you can convince the client to add the $50,000 per year...
$570,000 = $4,275
$570,000= $700
$570,000 = $1,000 (only 50 to be invested)
Let's say that the account is "managed" for the 15 years until retirement, then we'll add in the next 15 years.
The portfolio is worth about $2,160,000
Fee based collected a total of... let me wait to tell you...
Coupon bond portfolio manager.. $21,588 total costs
Zero coupon bonder ...27,000 to build that ladder!
OK you ready? Do you want to guess first? I'll wait... .75% on the bond portfolio.... for ALL of the first 15 years...
 
Mr. A (con't)

mranonymous2u's picture
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The answer is $167,847! 170M dollars for doing the same work that a guy taking a point is doing for $22M!
Situational THAT ethic!
Highlight above if you want to see the answer.
Mr.A

planrcoach's picture
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Allreit, I believe you are an RIA who gets a higher payout (% of fees clients pay) - than if you were affiliated with a broker dealer.
In other words, if we both charge 1% at wrap, my broker dealer keeps more.
Tell me if, or how, I am wrong in my understanding.
If your client sues you, they are suing you personally, along with your insurance policy, if you carry it.
My client sues me, also personal. In addition, they can sue my broker dealer - an extra layer of protection, if the claim is legitimate.
Since my client pays for additional protection through my broker dealer at my expense, and you remove a layer of protection by being RIA at a profit, is this a conflict of interest?
What am I missing here?
Maybe someone else knows the answer?

mranonymous2u's picture
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Whoops!
Carried it a couple of years too far!
Nums would be based off a 1.78MM portfolio and the fee based would have skinned off only $122,185 (for sake of the discussion we'll assume that the lack of commission gave the client enough extra earnings to pay off this burden and still have the equivalent interest income to invest like the "commission based" broker!)
The commission based broker would have been at $17,804 which is not entirely fair to say because he would have had some bonds maturing and or called which might have added to his total. Assume that he built a 20 year ladder, 50M every other year (and then filled in the even years with the 50M subsequent investments) of course this isn't fair either because he's not going to get a point on 2, 4, 6, 8 year paper...) but with that he's bumped to $24,804!
The Zero guy comes in at $24,000, but let's see what happens for him going forward!
In the next 15 years of retirement, the Zero portfolio, which has a ladder of 100m "rungs" per year is going to be plucked of it's maturing bonds, $72,000 will be retained and the other 28 thousand will be used to buy zeroes at the back end of the ladder(call it 30 years). In this manner, the zeroes will provide the same income as the coupon ladder. 28,000 at 2% is 560 per year and 8,400 for the 15 years, he totaled out at $32,400.
Coupon bond guy had more bonds to buy each year, 50 per year = $500 =$7500 + $24,804=$32,304
Fee based guy got...well, assuming he didn't get fired! on 1.78MM he was sucking down $13,353 per year for 15 years or $200,295. He totals out at $368,142.
Do you still wonder why you firm wants you to push "Wrap Products"/ it has NOTHING to do with what is "in the client's best interests"!
Mr. A

mranonymous2u's picture
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I mean $322,480.
Been a long day of taking 20% profits off a stock I bought in Oct. (+4% in dividends).
Mr. A

My Inner Child's picture
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anonymous wrote:
In another thread, I was raving about the benefits of annuities, but I really don't like them for non-qualified money because capital gains is being traded for income tax. 
A diversified portfolio of no to low dividend paying common stocks can be a significant part of the answer. 

So the value of tax deferral is zero? Are you stupid about everything or just about money?

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 Are you stupid about everything or just about money?
From reading your posts, I guess all of us are stupid about everything that when we disagree with you.
So the value of tax deferral is zero?
Actually, I would say that in many instances, the value is worth less than zero.   It's very convenient to ignore the fact that depending on the specifics of the investment, capital gains are largely being traded for income tax.  Additionally, if someone is successful, it is very possible that future tax rates will be higher than now.  Let's not forget that the gains must be removed first.  We also have those nasty penalties for pre 59 1/2 withdrawals.  Finally, we have the loss of the step up of basis at death.
CD money going into a fixed annuity can make sense.  Equity money going into a non-qualified VA doesn't make sense from a tax standpoint.   If the guarantee allows someone to invest like they should, it might make sense, but the tax deferrals on these products is not an advantage.  (Yes, there can be the exception where someone makes a ton of money now and expects to be struggling financially in retirement and the money is invested in such a way that much of the taxes need to be paid annually.)
Don't forget a comeback that criticizes me personally instead of one that backs up your viewpoint.

Starka's picture
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"Actually, I would say that in many instances, the value is worth less than
zero.   It's very convenient to ignore the fact that depending on the
specifics of the investment, capital gains are largely being traded for
income tax. Additionally, if someone is successful, it is very possible that
future tax rates will be higher than now. Let's not forget that the gains
must be removed first. We also have those nasty penalties for pre 59 1/2
withdrawals. Finally, we have the loss of the step up of basis at death."

----anonymous

____________________________________________________________ ____________
_

No one has to criticize you personally when you make statements that are
THAT stupid.

anonymous's picture
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Starka, since my comments are THAT stupid, it should be easy for you and Inner Child to point out where I'm wrong. 
 

Starka's picture
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Most of what you put forth as fact in the post that I quoted from is wrong.
For example:

"Equity money going into a non-qualified VA doesn't make sense from a
tax standpoint."

(Just flat wrong)

"Finally, we have the loss of the step up of basis at death."

(The death benefit takes care of that very nicely, thank you.)

I do use VAs on occasion, and like almost anything in life can be very
effective when used properly. In fact, the VA that I use has lower internal
expenses (including M&E) than many if not most mutual funds. But it's
not a panacea for every financial problem.

All we're saying, simply put, that there is no black and white answer with
respect to investment products and their vehicles.

anonymous's picture
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"Equity money going into a non-qualified VA doesn't make sense from a tax standpoint." (Just flat wrong)
Please explain why I'm wrong so that I can learn. 
"Finally, we have the loss of the step up of basis at death." (The death benefit takes care of that very nicely, thank you.)
How?  Stock grows from $40,000 to $80,000.  The owner dies.  The cost basis for new owner is $80,000.  New owner sells next day.  No taxes are owed. 
VA grows from $40,000 to $80,000.  The owner dies.  The cost basis for new owner is $40,000.  The new owner sells next day.  New owner has $40,000 in taxable gain. 

Starka's picture
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anonymous wrote: "Equity money going into a non-qualified VA
doesn't make sense from a tax standpoint." (Just flat wrong)

Please explain why I'm wrong so that I can learn. 
"Finally, we have the loss of the step up of basis at death." (The
death benefit takes care of that very nicely, thank you.)

How?  Stock grows from $40,000 to $80,000.  The owner dies.  The
cost basis for new owner is $80,000.  New owner sells next day.  No
taxes are owed. 
VA grows from $40,000 to $80,000.  The owner dies.  The cost basis
for new owner is $40,000.  The new owner sells next day.  New owner has
$40,000 in taxable gain. 

OK, I'll play.

Stock goes from $80,000 to $40,000. The owner dies. Who cares about
cost basis?

Annuity goes from $80,000 to $40,000. Owner dies. Benficiary admires
the deceased's forethought.

You see? You can game out "what if" scenarios 'til the final trump, but
there's always the other side of the coin. You can never prove your point,
so it's nothing more than your opinion.

anonymous's picture
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Starka,
Come on, man.  Stop the strawman argument. 
You're the one who said that the death benefit takes care of the step up of basis.  In the vast majority of cases, (any time that the annuity doesn't lose money) this step up in basis is a huge disadvantage.  Why is it so hard to admit that you are wrong?
Some annuities do provide protection against loss at death.  This comes at a cost.   That being said, what really stinks about the death benefit of an annuity is that the more that the client pays for it, the more worthless that it becomes.
Ex. The insurance company charges 1.0% for M & E.  The client invests $100,000.  The charge is obviously $1000.  The investment drops to $87,000.  The M & E is now $870 and could pay the client's beneficiary an extra $13,000 at death.  After many years, the investment has grown to $500,000.  The M & E is now $5,000, but the death benefit above the investment is $0.  The investment would have to drop over $400,000 for the death benefit to have any value.  It's a hell of a lot of money to pay for something with no value.
 
 

Philo Kvetch's picture
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anonymous wrote: Starka,
Come on, man.  Stop the strawman argument. 
You're the one who said that the death benefit takes care of the step up
of basis.  In the vast majority of cases, (any time that the annuity doesn't
lose money) this step up in basis is a huge disadvantage.  Why is it so
hard to admit that you are wrong?
Some annuities do provide protection against loss at death.  This
comes at a cost.   That being said, what really stinks about the death
benefit of an annuity is that the more that the client pays for it, the more
worthless that it becomes.
Ex. The insurance company charges 1.0% for M & E.  The client invests
$100,000.  The charge is obviously $1000.  The investment drops to
$87,000.  The M & E is now $870 and could pay the client's beneficiary an
extra $13,000 at death.  After many years, the investment has grown to
$500,000.  The M & E is now $5,000, but the death benefit above the
investment is $0.  The investment would have to drop over $400,000 for
the death benefit to have any value.  It's a hell of a lot of money to pay for
something with no value.
 
 

Look, I'll show you one more time, then you're on your own. So pay
atention.

If the investment grew to $500,000 (after the anniversary date!), then fell
back to the original $100,000 and the client died, how much does
beneficiary receive? Answer: $500,000. That's what the insurance
component is for.

Like I said, you can put up your "what if" strawmen all day. If we knew
what was going to happen tomorrow, there wouldn't need to be a variety
of investment vehicles.

So lighten up, Francis.

anonymous's picture
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"If the investment grew to $500,000 (after the anniversary date!), then fell back to the original $100,000 and the client died, how much does beneficiary receive? Answer: $500,000. That's what the insurance component is for."
The overwhelming majority of VA contracts have a standard death benefit.  This DB will pay the higher of the purchase payment or the contract value.  This means that $100,000 that grows to $500,000 and then drops to less than $100,000 will pay $100,000.
For an additional cost, one could buy an increasing death benefit, such as one that increases 5% a year.
I have never seen or heard of one that pays based upon a resettable high water mark like you are describing.   I am not doubting you, rather I am looking forward for the opportunity to learn.  Can you please name one company who offers this type of DB reset and what is the cost?

Starka's picture
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Most of the ones I have seen have the anniversary feature, either as a
standard benefit or as an add-on rider. Hartford's Director comes
immediately to mind, as does the Protective Life product. In fairness, I
should add that I don't use these products any more, but I have in the past.

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Starka,
Any idea of the cost and is this a "cash and carry" benefit or does it require annuitization?  If it requires annuitization, are the rates legitimate (ie. competive with SPIA rates) or do they use artifically low rates?

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If memory serves, it was anywhere from 35 to 65 bps. As with everything in
our business, it's not for everyone....but the need pops up often enough for
the insurers to keep offering it.

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Thanks.  I'll look into it.  I'm guessing that there might be a catch that I'm missing because 35-65 bps is what I'd expect for a 5% death benefit roll up.  An annual reset would be much more valuable than this.

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I'm not trying to take this thread in a different direction, but it seems like the question is how to manage taxable accounts in a tax efficient way. I have been trying to figure this out myself. I have used Eaton Vance Tax Managed fund so far, and the history looks like net of taxes, you end up in about the same place as some American Funds. They have higher gross returns, but more tax.
Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.
CIB
 

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I should have added-an equity based portfolio (equity mutual funds) without using variable annuities (assuming it's not appropriate).
 

anonymous's picture
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For tax efficiency, in this low capital gains environment, I'm partial to individual stocks that pay low or no dividends. 

AllREIT's picture
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CIBforeveryone wrote:Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.

Muni bonds and ETF's.
Remember that qualified dividends are taxed @ 15% so dividend income is usually quite tax effecient. ETF's have zero cap gains distributions.

But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!

troll's picture
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AllREIT wrote:
CIBforeveryone wrote:Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.

Muni bonds and ETF's.
Remember that qualified dividends are taxed @ 15% so dividend income is usually quite tax effecient. ETF's have zero cap gains distributions.

But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!

Many, not all, ETFs have zero cap gains distributions....

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joedabrkr wrote:
AllREIT wrote:
CIBforeveryone wrote:Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.

Muni bonds and ETF's.
Remember that qualified dividends are taxed @ 15% so dividend income
is usually quite tax effecient. ETF's have zero cap gains
distributions.

But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!

Many, not all, ETFs have zero cap gains distributions....

The few ETF's that had them, were ETF's that changed indexes, AFAIK. Powershares/ishares had zero for 2006.

I know TIP has had returns of capital a few times.

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"But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!" AllReit.
What? You never had to pay taxes on a capital gain on a Mutual Fund you were down on?
Relatively new to the business are you?
I must say that I'm surprised that I didn't hear peep one about the Ethics" of Fee based on the bond portfolio, I mean $200+Thousand dollars to run a portfolio that a commission based broker would be happy to do for $35M and there's nary a nieghbob nattering negativism!?
Mr. A

CIBforeveryone's picture
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AllREIT wrote: CIBforeveryone wrote:
Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.
Muni bonds and ETF's.
Remember that qualified dividends are taxed @ 15% so dividend income is usually quite tax effecient. ETF's have zero cap gains distributions.
But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!

I admit I have not spent a lot of time on it, but the ETFs I looked at did not outperform the managed funds net of costs and taxes. Is there a piece of the ETF world that you can say historically has performed comparably to managed funds over time gross of taxes, and better net of taxes?
 

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mranonymous2u wrote:"But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!" AllReit.
What? You never had to pay taxes on a capital gain on a Mutual Fund you were down on?
Relatively new to the business are you?

Or smart enough to avoid mutual funds and their latent capital gains.

I must say that I'm surprised that I didn't hear peep one
about the Ethics" of Fee based on the bond portfolio, I mean
$200+Thousand dollars to run a portfolio that a commission based broker
would be happy to do for $35M and there's nary
a nieghbob nattering negativism!?

I wasn't too sure how your math worked out, but if you have a decent
bond ladder you will generate a fair amount of commision from buying
and selling all the time and taking slippage.

Depending on the scalability it could be cheaper than holding something like AGG in a wrapped account.

AllREIT's picture
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CIBforeveryone wrote:I admit I have not spent a lot of time on it,
but the ETFs I looked at did not outperform the managed funds net of
costs and taxes. Is there a piece of the ETF world that you can say
historically has performed comparably to managed funds over time gross
of taxes, and better net of taxes?

Oh, I'd say SPY has outperformed most managed funds.

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"I wasn't too sure how your math worked out, but if you have a decent bond ladder you will generate a fair amount of commision from buying and selling all the time and taking slippage."
I explained the parameters but I'll do it again.
The guy who started this thread had a couple of high income earners and they had a windfall of $500,000 that they wanted to put away for retirement.
I mentioned that he could look for a skeleton of a bond ladder with the rungs to be filled in with $50M of their "High income" per year for the next 15 years (which was when they wanted to retire.)
The question then was which method was "best for the client, with the least wiggle room" so to speak.
So I constructed the following three scenarios.
1. that the "Fee Based Advisor" charge a mere .75% to create and maintain a 20 year bond portfolio wherein the client buys 1,3,5...19 year bonds at the rate of 50M per maturity. Subsequent years, the clients add the $50M to fill in the "even years" of the ladder such that in 15 years they have a 20  ladder (granted, a funnel shaped ladder) of bonds. (While I assume a flat 4% interest rate for all scenarios, in the case of the fee based, I assume that the 4% is NET of the 3/4% annual fees.) At retirement, we consider that the clients are taking all income and reinvesting the principal.
2. That a commission based Broker buys bonds with the same ladder and gets paid 1point for bonds purchased. All other variables are equivalent (to the detriment of this scenario versus the fees based).
3. That a commission broker builds a Zero Coupon Bond ladder that starts at the 15Yr target and grows out from there. 100M maturity value per year. The Zero buyer is being paid 2% commission to buy the bonds. At retirement the client is taking the 70+M that the other two bond funs would generate and buying the 30-M worth of long term Zeroes at 2% commission.
Surprisingly, the coupon Broker is going to make the least amount of money in this scenario (over the 30 year time frame) at something in the order of $32,304. This takes into account the fact that their are bonds maturing eventually every year and their is interest to be reinvested too. (it leaves out called bonds and the selling of any bonds mostly because, if rates haven't moved there isn't a need to call bonds. but if all bonds had 10 call protection and all callable bonds were called at the ten year mark then the additional income per year would be $500 for 20 years, or $10,000, bringing his total to $42,304.
Zero broker comes in at $32,400.
Holier than thou (I do what's best for the client) Fee Guy (assuming he didn't lose the account to a commission guy) would have hit the account for $322,482 after being given every benefit of every doubt. If I had a way to compare the pricing of Fee Based to Retail then we could see just how many basis points the pricing adds to the portfolio. I can't see it adding three quarters of a point, which means that the fees would be coming out of interest which means that the portfolio value would be lowered (which would, mean less fees, but not by enough to offset the thievery!).
Mr. A
 
 

AllREIT's picture
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mranonymous2u wrote:Holier than thou (I do what's best for the
client) Fee Guy (assuming he didn't lose the account to a commission
guy) would have hit the account for $322,482 after being given every benefit of every doubt

If you can pull $322,482 in GDC over 15 years out of an account with
only $500,000 in bonds, you are a much better "fee based" advisor than
I am.

Paying a small commision on really long term (15 year+) assets is going to be cheaper than paying an annual fee.
But if you factor in the cost of keeping the bondladder fresh and
rolling maturities, I doubt that it really works out to be less than
0.5-1% per year in trading costs.

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See that's the wonderful thing about Math, it's not about your opinion.
Math works even if you refuse to understand what has been written.
First of all the 322M is based on 30 years of fees.
Second, It's on a bond portfolio that starts off at $500M and the client adds $750M plus reinvests interest over the next 15 years and then reinvesting the 50M per year for the retirement 15 years.
You are right, the 322M is high, but that's because of the deleterious effect the fee based paradigm would have on the bond portfolio.
The $42M num included commissions on called paper every year from year ten out, remember?
"Paying a small commision[sic] on really long term (15 year+) assets is going to be cheaper than paying an annual fee. But if you factor in the cost of keeping the bondladder fresh and rolling maturities, I doubt that it really works out to be less than 0.5-1% per year in trading costs."

I have no idea what you are even trying to say here. And what if you want to the SPY (for a 15 year hold) are you going to just buy it and not take fees on it?
Mr. A

Starka's picture
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So to recap, if a broker is to help a couple in their late 40s, high earners
both, who inherit $500,000 and want a bond ladder, it's best to do so in a
commission based brokerage account. Buy the bonds, collect the
commissions, then forget they exist for the next 15 years.

OK, A. You're right on this one. What's your point?

mranonymous2u's picture
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No Starka,
That's not at all what was said. Not in the slightest.
Mr. A

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