Skip navigation

VA wholesaler was just here

or Register to post new content in the forum

154 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Feb 2, 2007 7:54 pm

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.

Feb 2, 2007 8:06 pm

[quote=babbling looney]

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.

[/quote] 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

Feb 2, 2007 8:36 pm

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.

Feb 2, 2007 8:49 pm

--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?

Feb 2, 2007 8:52 pm

[quote=babbling looney]

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.

[/quote] 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

Feb 2, 2007 8:57 pm

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

Feb 2, 2007 8:58 pm

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.

Feb 2, 2007 9:13 pm

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.

Feb 2, 2007 9:27 pm

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. 

Feb 2, 2007 10:05 pm

[quote=anonymous]

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. 

[/quote] 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

Feb 2, 2007 10:07 pm

[quote=anonymous]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.

[/quote]
Feb 2, 2007 10:11 pm

[quote=anonymous] 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.

[/quote] The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.   If that ever happened many of us would be out of the business anyway.

scrim

Feb 2, 2007 10:31 pm

I'll take my chances

Let me be the first to say "I told you so"    

Feb 2, 2007 10:37 pm

Well, I hope it never happens in my lifetime.

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

scrim

Feb 2, 2007 10:53 pm

[quote=scrim67]

[quote=anonymous] 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.

[/quote] The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.   If that ever happened many of us would be out of the business anyway.

scrim

[/quote] After figuring in taxation the amounts after ten years might be closer than we think.

I'm not sure exactly.

scrim

Feb 2, 2007 11:15 pm

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.

Good point - yes we are all in trouble, big time, in many ways. But you are paying big bucks now for a guarantee later on. I have to think that the insurance company is betting on some kind of historical return pattern. More aggressive than a pension fund?

Alternatively, I can pull back on stocks and bonds if I see deterioration.

I'm thinking about opportunity costs and time frames, and being on hook forever.

We now have: six billion people, exponential growth in global interdependency, bird flu, terrorism, global warming, increasing expectations from have-nots aka the internet.

When we are talking "guarantees", do we take a step back. I think I understand the part about the insurance companies willing to "take" a risk. I understand real estate and cash, and I feel okay about the markets right now. Not being (too) paranoid, just thinking about insurance company promises in the context of choice.

Feb 3, 2007 2:40 am

The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.  

This is about as arrogant of a statement that I've ever heard an advisor make.  What chances are you taking?   You have the client in your 1% wrap program.  The GDC drops from $1000 to $700.  So what happens?  You lose $200 of income.  Yeah, that's some big chances that you're taking. 

Never forget that it is your clients' money.   They are the people taking the risk, not you.   It doesn't matter if the loss stops the clients from having the retirement that they imagined.  Scrim still gets paid and will be able to report that his AUM is now 200 million. 

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

You just don't get it.  The answer is probably close to zero, but that is completely irrelevant.   They don't have to kick in because VA investors with living benefits don't get out of the market when the market goes down.  They stay invested, thus allowing them to ride the market back up.

After figuring in taxation the amounts after ten years might be closer than we think.

I'm not sure exactly.

Not only are you not sure exactly, you don't have a clue.   As long as we're talking about qualified VA's, the taxation is identical. 

For a conservative 40/60 type of investor for qualified money who has a 10 year + time frame, let's look at the pluses and minuses comparing your wrap account to a VA with a 0% GMAB?

1)Upside potential: The VA wins easily since it can be invested 100% aggressively.  (My typical conservative VA investor has averaged close to 15% over the last 3 years.)

2)Downside risk: The VA wins easily since it is impossible to lose money.

3)Mind over Heart: The VA wins easily because if client suffers a loss, they will stay invested.

The bottom line is that if the money is qualified, the time horizon is long enough, and the client is conservative, nothing beats a VA.  On the other hand, if those 3 things aren't in allignment, a VA is probably not the best choice. 

Feb 3, 2007 3:10 am

Met with a  potential client recently , lost half is 401k ( 250k ) in his company stock and poor fund choices. Yes I explained the whole diversification story but all he could focus on was the negatives.Presented  F.T founding funds portfolio …Loved the returns ,loved the brochure,loved the concept.Was not interested without the guarantee …In comes a VA with the ability to purchase those funds and give a principle return guarantee. Now we all know over the next 10-20 years he will pay extra for the riders he will probably never use but in the end ,the rider is the only reason the client is invested.

Feb 3, 2007 3:42 am

he will pay extra for the riders he will probably never use

Yes and no.  It will be very unlikely that the insurance company will have to make good on the guarantee.  However, I would argue that he's still using the guarantee because it's allowing him to invest in a way that he otherwise could not do comfortably.

This is probably a perfect example of the VA hurting investment performance because of the fees, but helping investor performance because he'll stay invested. 

Our clients are investors and not investments.   As an industry, we really need to start focus on the investors and not the investments.

Feb 3, 2007 4:44 am

[quote=anonymous]

The chances of a 40/60 mixture ever dropping from 100k to 70k has to be way under 1%.  I'll take my chances.  

This is about as arrogant of a statement that I've ever heard an advisor make.  What chances are you taking?   You have the client in your 1% wrap program.  The GDC drops from $1000 to $700.  So what happens?  You lose $200 of income.  Yeah, that's some big chances that you're taking. 

I apologize if I came off as arrogant, my statement didn't come out right 

Never forget that it is your clients' money.   They are the people taking the risk, not you.   It doesn't matter if the loss stops the clients from having the retirement that they imagined.  Scrim still gets paid and will be able to report that his AUM is now 200 million. 

I wonder if the insurance companies have statistics on how often the living benefit riders "kicked in" on VA's.

What would your guess be?  10% of the time?  Maybe less?

You just don't get it.  The answer is probably close to zero, but that is completely irrelevant.   They don't have to kick in because VA investors with living benefits don't get out of the market when the market goes down.  They stay invested, thus allowing them to ride the market back up.

Maybe true, remember I have not gone thru a bad market yet.  I am curious to see how many clients I retain when this happens.

After figuring in taxation the amounts after ten years might be closer than we think.

I'm not sure exactly.

Not only are you not sure exactly, you don't have a clue.   As long as we're talking about qualified VA's, the taxation is identical. 

I didn't realize we were only talking about Qualified Accounts

For a conservative 40/60 type of investor for qualified money who has a 10 year + time frame, let's look at the pluses and minuses comparing your wrap account to a VA with a 0% GMAB?

1)Upside potential: The VA wins easily since it can be invested 100% aggressively.  (My typical conservative VA investor has averaged close to 15% over the last 3 years.)

2)Downside risk: The VA wins easily since it is impossible to lose money.

3)Mind over Heart: The VA wins easily because if client suffers a loss, they will stay invested.

The bottom line is that if the money is qualified, the time horizon is long enough, and the client is conservative, nothing beats a VA.  On the other hand, if those 3 things aren't in allignment, a VA is probably not the best choice. 

[/quote]