VA wholesaler was just here

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scrim67's picture
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I just had a VA wholesaler in my office.     
He was telling me his product can guarantee 6% income for life no matter what the market does and no matter how much is withdrawn from the account.
I asked him what the downside was on his product but his answer was a bit convoluted.
For this unbiased out there please enlighten me what the downsides are to his product.
Thanks in advance.
Scrim

planrcoach's picture
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No matter what the "true" answer, this is the big problem with the products. Complicated for everyone. Annuity companies need to get smarter about the products they manufacture.
When I hear "convoluted", I see handcuffs.
So what is the downside?

Broker24's picture
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The downside probably being huge M&E fees to insure that puppy.  Is that 6% BEFORE or AFTER expenses?

Spaceman Spiff's picture
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Those types of guarantees are becoming pretty common in VAs.  All of our vendors have something like that.  It's expensive.  50 bps avg.   On a typical annuity that puts the M&E up around 1.75 to 2%.    Hartford was the first to offer this at Jones.  The wholesalers like to talk about it, but I don't hear a lot of brokers using it for retirement income. 
The downsides are numerous.  Usually only available Point of Sale.  Not as tax efficient as annuitization since they normally take it out LIFO.  Sometimes they have to use the feature for 5+ years before they can stop it, if they can stop it.  Limited to what they can take out (capped at whatever the guaranteed amount is).  Death benefit decreases with every dollar taken out.  There are probably more I'm not thinking of.
The only time I have thought about using it is when a client wants the safety of a fixed annuity, but really needs the equity exposure for the future.  That feature hasn't sold any annuities in my office yet.
With that said, I have heard of some brokers using those features for estate planning purposes.  They take the guaranteed amount and use it as premiums for a life insurance policy.  Kind of like using an immediate annuity but still retaining control of the assets.  Guaranteed, predictable income, but no worries about the client dying next week.    

Indyone's picture
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Axa?

bankrep1's picture
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The AXA Account must be annuitized in order to get the 6% of course you can drawn down the account first and then annuitize the benefit base, but try explaining that to the client

scrim67's picture
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Try explaning that to the client?
Try explaining that to me!
scrim

bankrep1's picture
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A reasonable person can understand that because of the time value of money the annuitized benefit base does not really = a 6% return but they still advertise it as such

Cowboy93's picture
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Yeah, the annuitzing the benefit base case is not something you want to
get to (since it means the contract is outta $). However, ins companies
don't figure that will happen or they wouldn't offer the guarantee.

I've been through this struggle Scrim, and with the newest generation of
income benefits I have become a reluctant fan of using some VAs.
Upsides are easier to understand and vary by product....in fact, I've
started using the best parts of 2 or 3 benefits/contracts that complement
each other (ex: one with principal guarantee and one w/an income
guarantee).

The downsides (as I explain them to clients): more drag from expenses
(1-2%/yr more than similar funds) and reudced liquidity (4 or 7 years on
most products). You can make up a good bit or all of the expense diff by
raming up the equity allocation vs. what you would have otherwise. I use
a "laddered" approach if I can--add portions of an acct over time so that
the early $ is free of CDSC before tying up too much. I prefer to use the
VAs in IRAs, so the cap gains becoming income tax isn't an issue--but
that's a downside obviously in a non-qual acct. However, if the client
understands the above, I think these things beat the heck out of
individual bonds if the client is on edge of an acceptable withdrawal rate
(say around 6%).

Spaceman Spiff's picture
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Cowboy93 wrote: I prefer to use the VAs in IRAs, so the cap gains becoming income tax isn't an issue--but that's a downside obviously in a non-qual acct.  
OK, I'm confused.  Qualified or non-qualified, if there are gains that build up in the VA, they aren't taxed until you pull them out.  Then they are both taxed at ordinary income rates.  So, why put the preference for the VA in the IRA?  Only for the income bene?  Are you pulling the income guarantee off and then leaving it in the IRA? 

compliancejerk's picture
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Cowboy93,
Which firm you riding for partner?

vbrainy's picture
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Forget the annuity.  You can put $100k in a can in the backyard.  You can draw out 5% for 20 years.  No risk of loss.
I have yet to see an annuity that can perform like a solid group of funds well allocated among asset classes.
American funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE.
In the very worst 10 year period 1996 to 2005, you can take a 5% annual withdrawal and still have about $103,000 in your account at the end of the 10 year period. (the can is empty then)
No need to annuitize, no CDSC.  Oh, and if you die, your kids get the step up WHICH THEY DON'T GET WITH ANNUITIES.
The sales guys are slick and they can help you close any sale.  You have to decide if you want to build your business making alot of money and not doing your best for people. 
I have found very few cases where annuities fit.

troll's picture
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vbrainy wrote:Forget the annuity.  You can put $100k in a can in the backyard.  You can draw out 5% for 20 years.  No risk of loss.  I am not sure that I agree completely, but that is a pretty funny analogy!

aldo63's picture
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100k @6% gives you 16.66 years of principle to take out. The insurance company is betting that it will go up or you will 1035 it out before then. There is nothing free in life. I do not like annuities but you better at least show them to clients because someone else will.You can make a case to use them when someone take his pension payout in a lump sum. at least you can tell them the income will last.
 

scrim67's picture
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aldo63 wrote:
100k @6% gives you 16.66 years of principle to take out. The insurance company is betting that it will go up or you will 1035 it out before then. There is nothing free in life. I do not like annuities but you better at least show them to clients because someone else will.You can make a case to use them when someone take his pension payout in a lump sum. at least you can tell them the income will last.
 
I would rather take a small part of the lump sum and buy an immediate annuity for "income they cannot outlive" and take the rest and do a conservative 40/60 allocation.   We also need to keep the withdrawal rate reasonable (4-5%) to start and increase for inflation every year.
Does this make sense?
scrim

now_indy's picture
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While I haven't used the 6% for life feature (most annuity companies only give you 6% for life if you're over a certain age, ING is 76), I have used the 5% for life feature.  Basically, the client gets 5% of what they put in to the contract, or, with ING for instance, 5% of the highest QUARTERLY value it achieved before the income started. 
I would never put 100% of a client's money into this product, but I have figured out the clients "needs" money and put enough in the annuity to generate that amount for life.  At 5%, there's a good chance that the underlying principal can grow, and every year the client has the ability to lock in 5% of that higher number (if the account value has risen) for life.
As for the downside.  Once you start taking the income, any withdrawals, above the 5% amount, will affect the 5 or 6% gaurantee proportionally (sp?).  The worst case is that the underlying value of the annuity goes to 0. In that case, the client will still get 5% for life until they die, but the kids won't get anything.
This is better than annuitizing because the client can change their minds down the road and get more or less than what they put in.  Think of it as buying a pension that can be busted in case of an emergency.
I realize mutual funds can "make" more money than annuities. But, sometime our job as advisor is not simply to make more money for your client, it's to help them have a stable, rising, income throughout retirement.

blarmston's picture
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A"merican funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE."
Not exactly. Look at the internal transaction costs- the ones that dont show up in expense ratios, and arent required by the SEC to be disclosed. So that 0.7% figure is more than that.

vbrainy's picture
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now_indy wrote:
While I haven't used the 6% for life feature (most annuity companies only give you 6% for life if you're over a certain age, ING is 76), I have used the 5% for life feature.  Basically, the client gets 5% of what they put in to the contract, or, with ING for instance, 5% of the highest QUARTERLY value it achieved before the income started. 
I would never put 100% of a client's money into this product, but I have figured out the clients "needs" money and put enough in the annuity to generate that amount for life.  At 5%, there's a good chance that the underlying principal can grow, and every year the client has the ability to lock in 5% of that higher number (if the account value has risen) for life.
As for the downside.  Once you start taking the income, any withdrawals, above the 5% amount, will affect the 5 or 6% gaurantee proportionally (sp?).  The worst case is that the underlying value of the annuity goes to 0. In that case, the client will still get 5% for life until they die, but the kids won't get anything.
This is better than annuitizing because the client can change their minds down the road and get more or less than what they put in.  Think of it as buying a pension that can be busted in case of an emergency.
I realize mutual funds can "make" more money than annuities. But, sometime our job as advisor is not simply to make more money for your client, it's to help them have a stable, rising, income throughout retirement.

Well, what are you?  a Financial Advisor or an insurance salesman?  Can't you explain to clients the value of the stock market? 
Hey, if your first priority was not to GET PAID THE HUGE ANNUITY COMISSION, you could sell them a AAA bond with a coupon, put the rest in the stock market and call it a day.
There is one reason for the explosion in the annuity market and the hype and BS they spend millions of dollars on to sell this junk, IT IS BECAUSE THEY ARE MAKING A TON OF MONEY off the backs of hard working people who have retired.
That is NOT the way I prefer to make my money.

Indyone's picture
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blarmston wrote:American funds has the ABC Foundation which is their American High Income Trust, The Bond Fund of America and the Capital World Bond Fund.  EXPENSE RATIO ON THE A SHARE IS .70%.  ALL IN.  DONE."
Not exactly. Look at the internal transaction costs- the ones that dont show up in expense ratios, and arent required by the SEC to be disclosed. So that 0.7% figure is more than that.
...and there's that pesky thing called a "load"...

mranonymous2u's picture
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It depends on what the meaning of the word "is" is.
The annuity offers you something that you cannot offer otherwise in the world of equity investing, that something is "IS".  'This contract compounds at 6% per year or the rate that you get on your investments, whichever is higher. If you buy $1MM of this contract and the market goes to zero over the next 12 years, your income IS based off of a $2,000,000 value. You will be able to take a Life with 10 year certain annuitization which will give you at least $12,000 per year.' (Actually I'm not 100% on what the annuitization deal is and it dependes on the age of the client at the time of annuitization at the time a male over 75 would have an annuitization rate of about 7.4%).
You can not say that with a portfolio of Mutual funds, even if it monte carlo's out at 99% of the time. Not honestly, anyway.
Meanwhile, over the last two years I kicked the market's azz net of all fees and commissions inside an American Skandia annuity where they were jiggering around my cash position (I sold them out when I netted people at least 20% profit, and I do it in IRAs so don't gimme crap about taxes or stepped up cost basae). I kicked the market's azz in Hartford's annuity too, up over 50% in one year. I'm outperforming the market in the John Hancock, and I'm working on a $1MM case for AXA.
Could I have done better without the Annuity wrapper? Yeah. I'd have made more money too in B shares. But would I have been as aggressive without the wrapper? NO!  As a result, I would NOT have done as well, even thought I could have done better. The fact that I can shift the risk off to the annuity company for x basis points is absolutely worth it for me and for the client (and the annuity company got those fees and didn't have to pay out a claim against them so they're happy too.) Not to mention... Would the client have bought without the assurance? NO!
Annuities have come a long long way over the past five years. What they offer you now is a way to assure investors with an IS. That's important, because every investor IS not certain that nobody IS going to Hijack a Jetliner into the Indian Point Nuclear Power plant, making NYC dark and unliveable for a thousand years (I know that the plant can take a direct 747 hit without imploding, exploding or melting down) The fact is you don't KNOW what IS in the future and the annuity gives you that "suspenders and a belt" of IS.
I don't do a huge number of them but I do use them and the AXA product is one of the ones that have my name on some contracts.
Mr A
 

babbling looney's picture
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Mr. A makes good points.  With the underlying guarantees you can invest a client who might not otherwise be as aggressive as they need to be.
I have a client that we just did a 6 month review on his VA.  Compounds at 7% annually, 10 year commitment.  He is willing to set this money aside and ignore it for 10 years when he will be approaching retirement... doesn't need it at all. If the contract does worse than 7% the client can annuitize the amount at the end of the 10 years or wait to set up an income stream later.  If the contract does better than 7% the income stream can be from the higher amount.  Death benefit and income benefit is ratcheted quarterly.   We put in $63,000 in August at the end of January it was worth almost $75,000.  We just beat the pants off of 7% and the client is a happy camper.  
Could I have gotten an even better return using those same funds in a wrap account? Yes. However, without the safety net, my client would not have been so willing to let me go heavily international and small/mid cap.  
This strategy wont work for people who need to take income from the contract during the surrender period.  In that case set up another source of immediate or liquid income.   Like Mr. A ....I don't do very many annuities.  When I do, the client is fully informed and aware of the pros and cons.

planrcoach's picture
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I would rather take a small part of the lump sum and buy an immediate annuity for "income they cannot outlive" and take the rest and do a conservative 40/60 allocation.   We also need to keep the withdrawal rate reasonable (4-5%) to start and increase for inflation every year.

Does this make sense?
For myself, I think this is stone cold cool.
Boomers in trouble, most annuity contracts way to complicated and looking like a future blinking yellow light, maybe handcuffs.
Immediate annuitization can happen at the last moment, or when interest rates are relatively high. Maybe 1/3 of principle.
This is not the sweeping, bells and whistles guaranteed income strategy.
I have been thinking about this a lot. I'll take the middle road and hedge bets with you any time. Wanna be my planner?

planrcoach's picture
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"principal, Joe."

Cowboy93's picture
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Well, Scrim, hopefully you have found a few downsides. ..for some reason
these things arouse relatively strong emotions. I am hopeful that the
marketplace will continue to get more competitive and the cost, liquidity,
and other downsides will continue to be less bad.

scrim67's picture
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When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.
By the time I'm finished reading the contract (or even the slick brochures for that matter) I feel like Tom Hanks in BIG (1988) when he's in the meeting and raises his hand and says "I don't get it"
scrim

planrcoach's picture
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When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.
Obviously annuity products are evolving. It just seems when you look at the risk management features of this insurance product, you hit a wall of diminishing returns. I mean, the idea of betting that I will live longer or less longer than a person my age, and transfering that risk, this is a basic concept.
The idea of bringing market risk down to the individual contract level feels gimmicky, with floors and ceilings and so on. That's when you have to start reading the fine print about fees and fiddle.
And since these are insurance products, to what extent are the performance guarantees tied to the success of the group of insureds (or is it just tied to the general fund of the insurance company since it is not life or health insurance?)
It seems the idea of an individual advisor manipulating the subaccounts as to outperform some kind of baseline return, if that is what we are talking about, well, that kind of goes against the whole risk transfer idea, and seems like individual superior performance would be arbitraged out by the whole market over time.
In other words, either just accept the risk outside an insurance contract, or transfer the risk. I know this is a hybrid, but do we run the risk of mediocrity? Why insure a big up or downside? What do we have here, a baby hedge fund?
I guess I'm too dull to get it.
I rather delegate the investment activity inside the contract to an institutional investment manager, and focus on the highest possible fixed rate of return off the general account.
Or do something else with the money.
 

AllREIT's picture
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vbrainy wrote:There is one reason for the explosion in the annuity
market and the hype and BS they spend millions of dollars on to sell
this junk, IT IS BECAUSE THEY ARE MAKING A TON OF MONEY off the backs
of hard working people who have retired.
That is NOT the way I prefer to make my money.

Exactly, set the clients up with a decent bond fund, a decent TIPS
fund, some REITs and one of the equity ETF's that is based on companies
that increase dividends.

Buying an annuity is like siting down in a tough 40/80 Hold'em at the
Bellagio. You don't make any money from gambling against professionals.
The insurance companies do not intend to lose money on the annuity.

vbrainy's picture
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scrim67 wrote:
When you read the actual contract I find there to be way too much mirrors, faddle, smoke, pocus, fiddle and hocus.
By the time I'm finished reading the contract (or even the slick brochures for that matter) I feel like Tom Hanks in BIG (1988) when he's in the meeting and raises his hand and says "I don't get it"
scrim

Glad I am not the only one.  I spent 20 minutes on the phone with John Hancock trying to get them to explain to me ALL of the expenses of the Venture III.  With the grpIII it turns out it was about 3.60%.  But, that was after 20 minutes and transfers to several people.  That just stinks.  Scrim is right.

anonymous's picture
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 Babbling Looney wrote: "Compounds at 7% annually"
Sorry, Babs, but when you say this, it shows that you don't really understand the contract.  I hope that you never say that to a client. 
The 7% is not real!  I don't simply mean that you have to annuitize the money.  It's fake because the insurance companies lower the annuitization rates and/or have an age setback. 
Ex. Over a ten year period, the contract returns an average of 4% a year.  The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 
The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!
This post is written by someone who is a big fan of qualified VA's in the right situation.
 

planrcoach's picture
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The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 
The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!
 
 
Interesting analysis. Less than CDs packaged in a tax deferred wrapper.
Well, insurance company product designer, what do you have to say about this?

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Interesting analysis. Less than CDs packaged in a tax deferred wrapper.
This better not be an "interesting analysis".  If someone sells VA's with GMIB benefits, they better understand this or they don't have a right to be talking to clients.   It's also not less than CDs because the 3% is only what they are going to get as a worst case scenario.  
I find the "tax deferred wrapper" to be a negative.  Thus, almost all of my VA's are qualified.

scrim67's picture
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anonymous wrote:
 Babbling Looney wrote: "Compounds at 7% annually"
Sorry, Babs, but when you say this, it shows that you don't really understand the contract.  I hope that you never say that to a client. 
The 7% is not real!  I don't simply mean that you have to annuitize the money.  It's fake because the insurance companies lower the annuitization rates and/or have an age setback. 
Ex. Over a ten year period, the contract returns an average of 4% a year.  The client needs to start taking the money.  He can take a lump sum or he can turn the 4% into 7% and annuitize from that bigger number.  The 7% isn't real because the client would actually get more money by keeping the 4% that he earned an then purchasing a SPIA. 
The true value of a GMIB benefit tends to be in the 3% range.  This is true regardless of whether it is stated as 5, 6, or 7%!
This post is written by someone who is a big fan of qualified VA's in the right situation.
 
I think this is probably the most important part of the VA contract that is misunderstood by advisors in general.   If many advisors don't understand how can we ever expect the average investor to?  
That is why I am very reluctant to introduce VA's to my practice.
I will never present something to my client they cannot understand.
scrim

troll's picture
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planrcoach wrote:"principal, Joe."eh?

anonymous's picture
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 If many advisors don't understand how can we ever expect the average investor to?  
Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!
If the advisor understands the contract, it is easy to help the investor understand.
Explanation for a 58 year old client of a 5% 10 year GMIB
Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)
Explanation of a 10% GMAB
Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.

planrcoach's picture
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eh?
You trained me to look harder for my own typos. Famous and you don't even know it.

planrcoach's picture
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If many advisors don't understand how can we ever expect the average investor to?  
Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!
If the advisor understands the contract, it is easy to help the investor understand.
Good points. I am standing here with my pile of cash. If I sign the contract, we both make long term commitments (aside from the type of contractual commitment described by an immediate annuity, a pension).
We contractually manage the potential risks and rewards of future unknown market activity.
With my pile of cash, I am thinking, if I wait, maybe I can get a better deal down the road, a better time, a better product, a more efficient product.
In the dim recesses of my mind, I remember CFP studies talking about risk and reward. The "baseline" would be U. S. government treasury returns, and risk would be, how much return can you get about that level, compared to the security of owning treasuries.
In other words, take expenses and fancy packaging completely out of the picture.
I think if product manufacturers could do some work to clarify the risk/reward in terms of some objective baselines, while packaging the immediate annuity pension concept, these products could take off. I guess they are already.
The product needs to be simplified to accord the instincts of the experienced analytical.

scrim67's picture
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anonymous wrote:
 If many advisors don't understand how can we ever expect the average investor to?  
Advisors don't understand them because annuities are a contract and advisors don't bother to read the contract.   Don't ask a wholesaler.  Go to the source...the contract!  Don't read marketing materials.  Read the contract!
If the advisor understands the contract, it is easy to help the investor understand.
Explanation for a 58 year old client of a 5% 10 year GMIB
Mr. Client, The insurance company is giving us a minimum guarantee on this product.  Even if the investments completely tank, the insurance company promises to give you a monthly income of $4,493.67 starting at age 68 for the rest of you life if you choose to annuitize the contract.  After age 68, this amount will be higher.  The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss. (notice that I don't mention 5% since it is B.S.)
Explanation of a 10% GMAB
Mr. Client, the contract has a one day guarantee.  On February 2nd 2017, if the value of your investments is less than the $330,000 that you are investing, the insurance company will make up the difference.  For example if on 2/2/17, the value is $230,000, the insurance company will add $100,000 to the contract. The cost of this benefit is x % which will be a drag on performance, but we have removed the risk of loss.
What are the time frames for this feature usually?   We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.
scrim

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Would I be accurate in saying this GMAB feature is akin to buying flight insurance?
No one even buys that anymore since the risk of being in a fatal airplane crash has to be less than 1%.  I'm not an actuary but i'm surmising it's way less than 1%.
scrim

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We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.
Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.
The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  
If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 
Perception beats reality everytime.

scrim67's picture
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babbling looney wrote:
We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.
Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.
The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  
If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 
Perception beats reality everytime.
I haven't run the numbers but I would hazard to guess that if someone started investing in 1992 they were still ahead when the market bottomoed out ten years later.   Can anyone verify this info as I'm not 100% sure.
scrim

Cowboy93's picture
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Yes, waaaaay ahead.  However, as abnormally bad as 2000-02 was, 1995-99 was just as abnormally good.  Probably not a coincidence that those periods were together--a little thing known as "reversion to the mean."
Your point--although it was question and not really a point--doesn't change babbling looney's logic from being dead on...and she has done this a lot longer than you.

scrim67's picture
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babbling looney wrote:
We all know the chances of an investment of well diversified funds being less that what is put in ten years later is basically nil.
Tell that story to people who lost big time in the market correction of 2000.    Nil is not the term I would use.  Possibly unlikely.
The reality is that many people refuse to be properly diverisifed against our best nagging and advice.  In addition, there is no guarantee that you or I will still be their advisors in 10 years and who knows what changes they can make to their portfolios.  
If the client was the unlucky person who wanted to retire in 2001 with a diversified portfolio of mutual funds they would have seen a big downturn from their highest gains.  It doesn't matter to them that were still somewhat ahead of the game.  What they saw was that they had lost money. 
Perception beats reality everytime.
I appreciate all the healthy constructive feedback.   I guess a "big downturn" is relative.   I wasn't in my practice back during this big downturn but I have looked at actual performance during the period from 3/2000 until 10/2002.
Most of my retirees and near retirees are in a 40/60 allocation.
Had I been in my practice during that time my clients would've have lost a total of 5.89% during this bad period of 31 months.    This figure includes my fee.    If I didn't charge for my services it would've been down a cumulative 2.50% during this time period.
Now maybe to a few clients a loss of 6% or so during a very bad period would've made them fire me.   I'm thinking most would've thanked me for paring their losses.
Since I haven't lived thru a bad period in my practice I can only pray I won't be fired by a majority of my clients when we get the next bear market.
scrim

babbling looney's picture
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Since I haven't lived thru a bad period in my practice I can only pray I won't be fired by a majority of my clients when we get the next bear market
The last few years have been pretty nice.  Almost anyone could have made money without halfway trying. When the bad times come, and they will, you will need to have prepared your clients that there can and will be downturns. It really helps to have a good personal relationship with them so they can see that you are concerned and suffering along with them.   "I feeeel your pain!"
The worst thing to do and the thing we all want to do when the bottom starts falling out is to hide from your clients.   Believe me there is nothing more stomach churning than calling clients in to tell them they are down in funds and try to do damage control.  The clients don't care that they are up from the start. All they see is that their statements are less than last month and the month before and the month before that.   AND it is going to be your fault.
Trying to decide if it is NOW that we should cut our losses and drastically reposition while we see the continual erosion in a lot of client's portfolios. Not just one client but dozens and dozens of people losing money.  Should we hang on and hope it will turn around?  What if we cut and run too soon and it comes back?  What if it doesn't come back and we keep going down in all asset classes 5% 10%, 15%, 30%!! .....help me Mommy!!!  I want to barf or get drunk....maybe both.
This is why for some clients I like the guarantees provided in the variable annuities.  True.. we don't get the full performance that we would get outside the contract. But if/when the contract value is down, there is still a guaranteed amount of income that would not be there without the riders on the contract.  VA's are not for everyone.
Your certainty and belief that asset allocation will save you is nice.  Reality is slightly different.  I believe in asset allocation too, but I also believe that it isn't a silver bullet.

planrcoach's picture
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--doesn't change babbling looney's logic from being dead on...and she has done this a lot longer than you.
Good market history discussion.
I have a question.
Can any annuity product absolutely guarantee a (partially) equity return based payout, if things totally fall apart?
If an insurance company fails, another takes over. If enough of the products are sold (% of insurance company general fund) - at enough companies - where is the risk transfer?
 

scrim67's picture
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babbling looney wrote:
Since I haven't lived thru a bad period in my practice I can only pray I won't be fired by a majority of my clients when we get the next bear market
The last few years have been pretty nice.  Almost anyone could have made money without halfway trying. When the bad times come, and they will, you will need to have prepared your clients that there can and will be downturns. It really helps to have a good personal relationship with them so they can see that you are concerned and suffering along with them.   "I feeeel your pain!"
The worst thing to do and the thing we all want to do when the bottom starts falling out is to hide from your clients.   Believe me there is nothing more stomach churning than calling clients in to tell them they are down in funds and try to do damage control.  The clients don't care that they are up from the start. All they see is that their statements are less than last month and the month before and the month before that.   AND it is going to be your fault.
Trying to decide if it is NOW that we should cut our losses and drastically reposition while we see the continual erosion in a lot of client's portfolios. Not just one client but dozens and dozens of people losing money.  Should we hang on and hope it will turn around?  What if we cut and run too soon and it comes back?  What if it doesn't come back and we keep going down in all asset classes 5% 10%, 15%, 30%!! .....help me Mommy!!!  I want to barf or get drunk....maybe both.
This is why for some clients I like the guarantees provided in the variable annuities.  True.. we don't get the full performance that we would get outside the contract. But if/when the contract value is down, there is still a guaranteed amount of income that would not be there without the riders on the contract.  VA's are not for everyone.
Your certainty and belief that asset allocation will save you is nice.  Reality is slightly different.  I believe in asset allocation too, but I also believe that it isn't a silver bullet.
I've prepared them for losses.  In matter of fact, I tell new clients the day they sign up that if I'm doing my job right, not only can they lose money some years they WILL lose money some years.
scrim

mranonymous2u's picture
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Not to mention... If you weren't in the right stocks during the tech boom, you were SOL and more likely you were getting fired for underperformance.
"$8 a trade my man!" "Technically, it's a country!" Money Magazine headline "Everybody's Getting RICH!!!"
Asset Allocation didn't work on the way up (either you were in Large Cap Growth and by that I mean MSFT, INTC, GE, CSCO or you were losing money) and it didn't work on the way down!
Point is, you do NOT know! As such you ought not be so strident in your belief.
Mr A

anonymous's picture
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Joined: 2005-09-29

Scrim,
Don't confuse investment returns with investor returns.  These are vastly different things. 
Ex. Imagine that the next 3 years, the S & P 500 loses 20%, 9% and 18%.  It then gains 30%, 15%, and 25% the following three years.  The investment return over that time period is 1.8%.  A $100,000 investment would be worth $111,000.
What might happen to a typical investor during that same time period? Year 1 Neg 20%, Year 2 Neg 9% Year 3 Neg 18% Year 4, Year 5, and Year 6 5% (Why?  Pulled money out of market and put in 3 year CD.)  A $100,000 investment would be worth $69,606.
A Variable annuity client with a GMAB would not need to start investing conservatively.  A typical risk adverse mutual fund client would.
Your clients near retirement are in a 40-60 mix.  My clients are in a 100-0 mix (if we have enough time).  In 10 years which clients are going to have more money?  My conservative clients that were put into VA's typically got about 15% last year net of all fees.  What about yours?
I do not use VA's for aggressive clients who have the stomach to handle downturns in the market.
 

anonymous's picture
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If an insurance company fails, another takes over. If enough of the products are sold (% of insurance company general fund) - at enough companies - where is the risk transfer?
This brings up some good points.  The guarantee is only as good as the claims paying ability of the company.  Insurance company strength matters for all insurance products.  If an insurance company becomes insolvent, the investments are safe, the guarantees are not. 
That being said, I think that the chance is low that the insurance company will have to make good on these guarantees and even so, the exposure has to be pretty low.  Don't forget that the insurance company is charging for the risk that they are taking.  The risk is much smaller now that most of these living benefits force clients to purchase a model portfolio.
The client invests $100,000.  In order for the insurance company to lose money on a 10 year GMAB, the value of the account has to worth less than $100,000 10 years from now.  Even if it is, the loss to the insurance company should still be insignificant.  Let's face it, if equity investments are way down over a 10 year period, we are all in trouble.

anonymous's picture
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I've prepared them for losses.  In matter of fact, I tell new clients the day they sign up that if I'm doing my job right, not only can they lose money some years they WILL lose money some years.
Not all clients can handle risk.  They can all handle it when the market goes up, but not when it goes down.   Your conservative clients CAN'T be invested in a manner that can cause them to lose money some years because they'll want out of their investments causing them to have "real losses" instead of "paper losses".  They'll also lose sleep.
Scrim, if you are doing your job, your conservative clients won't lose money.  This means invest very conservatively to fit their risk tolerance, not yours.  Or invest more aggressively, but with a guarantee.
We can't let our own biases get in the way of our advising.  I can't imagine ever putting any of my own money in a VA, yet, I have the vast majority of my parents' money in them. 
 

scrim67's picture
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anonymous wrote:
I've prepared them for losses.  In matter of fact, I tell new clients the day they sign up that if I'm doing my job right, not only can they lose money some years they WILL lose money some years.
Not all clients can handle risk.  They can all handle it when the market goes up, but not when it goes down.   Your conservative clients CAN'T be invested in a manner that can cause them to lose money some years because they'll want out of their investments causing them to have "real losses" instead of "paper losses".  They'll also lose sleep.
Scrim, if you are doing your job, your conservative clients won't lose money.  This means invest very conservatively to fit their risk tolerance, not yours.  Or invest more aggressively, but with a guarantee.
We can't let our own biases get in the way of our advising.  I can't imagine ever putting any of my own money in a VA, yet, I have the vast majority of my parents' money in them. 
 
I don't understand.   When going over their risk profile I ask them if you gave me X amount today what's lowest you are willing to see that drop to in a year.   Their answer tells me alot about their risk tolerance.
I don't agree that conservative clients won't lose money any years.  They certainly will if i'm doing the right things for them.   I would guesstimate one or two years out of ten will be down years in a 40/60 mixture.
scrim

scrim67's picture
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anonymous wrote:In a 40/60 mix the chances of $100,000 ever dropping even close to $70,000 has to be under 1%.  I don't worry about it.  If that ever happens many of us would be out of business.
scrim
Scrim,
Don't confuse investment returns with investor returns.  These are vastly different things. 
Ex. Imagine that the next 3 years, the S & P 500 loses 20%, 9% and 18%.  It then gains 30%, 15%, and 25% the following three years.  The investment return over that time period is 1.8%.  A $100,000 investment would be worth $111,000.
What might happen to a typical investor during that same time period? Year 1 Neg 20%, Year 2 Neg 9% Year 3 Neg 18% Year 4, Year 5, and Year 6 5% (Why?  Pulled money out of market and put in 3 year CD.)  A $100,000 investment would be worth $69,606.
A Variable annuity client with a GMAB would not need to start investing conservatively.  A typical risk adverse mutual fund client would.
Your clients near retirement are in a 40-60 mix.  My clients are in a 100-0 mix (if we have enough time).  In 10 years which clients are going to have more money?  My conservative clients that were put into VA's typically got about 15% last year net of all fees.  What about yours?
I do not use VA's for aggressive clients who have the stomach to handle downturns in the market.
 

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