[quote=anonymous]

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.

Here’s a metaphor:



People riding in cars occasionally get thrown from them and suffer major

and sometimes fatal injuries. The % of people this happens to per mile

driven is exceedingly low (we could look it up somewhere I’m sure).

However, I’m sure there are people who would prefer not to ride in cars at

some point in their history to due the "danger."



Now cars have seatbelts, airbags, child safety seats, mirrors, computers, etc.

Point is, they are more likely to protect you in the small chance you are in a

very bad collission. Almost no one (say 99.9% of people) ever has their life

saved by these features. However, they are still good features and worth the

few hundred or thousand they may tack on the cost of the vehicle.

[quote=scrim67]

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

[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.[/quote]

If you place people into a 60/40 Asset allocation fund, what are the odds of them not being diversified and rebalanced?

[quote]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.[/quote]

This is why target date and defined portfolio funds are so useful.

[quote]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=scrim67]

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

[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.[/

QUOTE]



Following this reasoning then: Its the right thing for clients to lose money? If

I were a client listening to this, I’d get right up and leave. This is a job done

right?   

[quote=AllREIT]



The odds of a losing 10 year period for a 60/40 portfolio of investment
grade bonds and a conservative stock protfolio are very low, and any
losses are likely to be livable.



The insurance company knows this, which is exactly why they offer this
insurance with VA riders. They do what clients are afraid to do, and
make a handsome profit for thier troubles.

[/quote]

With less than three years experience and no VA sales as of yet I've read this thread with interest. 

My question is; Why would you not separate the assets classes between annuity companies and just pay for the guarantees in the areas with the largest chance of loss?

And yes I know most companies require set portfolios, but I'm with EDJ and know at least one wholesaler has told me you can invest in any allocation you like.  Therefore there must be enough high rated companies out there to choose from (when you have more options than I) to make this a feasible possibility.

i.e.  Client portfolio looks something like this

50% - Fixed income, outside of VA since guarantees against loss are essentially worthless for bonds.  (assuming defferal not needed)

25% - Large Cap (however you like, personally I think the guarantees unecessary, but who really knows)

12.5% Small cap in XYZ annuity company VA

12.5% International equities in ABC annuity company VA

Go ahead now, tell me the problems with my theory.

Yes, it is exactly like flight insurance.

It's nothing like flight insurance.  Flight insurance doesn't allow people who are afraid of flying to get on a plane.   If a plane crashes, the passenger is still dead.  VA living benefits change investor behavior.  Flight insurance has no effect on traveler behavior.

The insurance companies are not this game to lose money

That's true, but the cost of the riders is not a profit center for the companies.  In fact, there is concern that the riders are underpriced.    The rider is the hook that gets people to invest their money.  The insurance company makes money because they are taking a cut off of the top of the investment.  The riders are designed to be relatively profit neutral. 

The odds of a losing 10 year period for a 60/40 portfolio of investment grade bonds and a conservative stock protfolio are very low, and any losses are likely to be livable.

Again, this is talking about investment performance instead of investor performance.  It has virtually no meaning.  A conservative investor has a very real possibility of removing their money after just 1 negative year.    

I.e they  "delta hedge" their annuity liabilities, such that changes in the index values don't affect thier net position.

What are you talking about?  The change in the value of an index has no bearing whatsoever on a VA. 

[quote=anonymous]

Yes, it is exactly like flight insurance.

It's nothing like flight insurance.  Flight insurance doesn't allow people who are afraid of flying to get on a plane.   If a plane crashes, the passenger is still dead.  VA living benefits change investor behavior.  Flight insurance has no effect on traveler behavior.

The insurance companies are not this game to lose money

That's true, but the cost of the riders is not a profit center for the companies.  In fact, there is concern that the riders are underpriced.    The rider is the hook that gets people to invest their money.  The insurance company makes money because they are taking a cut off of the top of the investment.  The riders are designed to be relatively profit neutral. 

The odds of a losing 10 year period for a 60/40 portfolio of investment grade bonds and a conservative stock protfolio are very low, and any losses are likely to be livable.

Again, this is talking about investment performance instead of investor performance.  It has virtually no meaning.  A conservative investor has a very real possibility of removing their money after just 1 negative year.    

I.e they  "delta hedge" their annuity liabilities, such that changes in the index values don't affect thier net position.

What are you talking about?  The change in the value of an index has no bearing whatsoever on a VA. 

[/quote] Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

scrim

[quote=scrim67]

Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

scrim

Scrim,

As long as you have some positive years in the account, it's unlikely that one bad year will cause mass defections, unless that one year wipes out all your gains and eats into the original client principal...that's when you really earn your pay...

Well here's an interesting question then.....as the popularity of VA's and the use of living benefits grows for qualified money, is it possible tht it could have such a profound impact on investor behavior that it could actually have a distortive impact on market valuations?

IN other words, if more people are investing in the equity markets because of the security blanket they gain from the living benefits........

Joe, I share your concern, if it is too good to be true...

Someone said, it is (not) like flight insurance, because now people who are afraid to fly will get on the airplane.

It just seems like layers and layers of embellishment of market reality, smoke and mirrors.

The assets classes are cash, fixed, equity, real estate, commodity.

Pensions, making an immediate annuity, might be a sort of class.

Anything else is basically just packaging.

If we are talking about the greatest new thing since sliced bread here, the market will find it (hedge funds) out.

The nail that sticks up gets hammered down.

Gad 12, stop listening to wholesalers.  You can listen to them, but your info itself in this area really needs to come from the contract and the prospectus.  

My question is; Why would you not separate the assets classes between annuity companies 

What's the advantage of using multiple contracts? 

50% - Fixed income, outside of VA since guarantees against loss are essentially worthless for bonds.  (assuming defferal not needed)

 Since when can't bonds lose value?  They lose value everytime that interest rates go up.  Tax deferral is not a legitimate reason to buy annuities in the vast majority of cases.  This is why my VAs are almost always qualified.   The VA will allow someone to be invested 100% equities thus the 50% fixed income is not needed.

25% - Large Cap (however you like, personally I think the guarantees unecessary, but who really knows) 

Are you joking?  Large cap can take huge hits.  How can a conservative investor take the huge losses.  If large cap drops 20% a conservative investor is not staying put.

 Go ahead now, tell me the problems with my theory.

It doesn't make much sense to have a theory on a product that you've never sold and your info comes from message boards and wholesalers.

Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

Scrim, it sounds, to some extent, that you are not treating your clients as individuals.  You are correct that most clients will expect down years and will handle them just fine when they happen.  I promise many of my clients that we will have years where I help them to lose money.

However, there are many clients that can't stomach losses and their money must be invested in a way that stops losses from happening.  This means the money must be invested very conservatively or there must be a guarantee. 

The fact is that there is a large population of people who need market rate returns, but can't emotionally take risks.

[quote=joedabrkr] [quote=scrim67]

Again, I'm barely more than 3 years into my practice so i'm probably being naive here.   Are you saying that if you in advance explained to clients that losses in some years is perfectly normal and healthy that they still will leave after one down year?   Gee, I hope not!

scrim

[/quote]

Yes believe it or not, some will.  IT sounds like you're doing a good job of managing expectations, so you'll probably do better than some on this count.  But some clients just hear what they want to hear.

Don't sweat it.  Keep your head down and keep working.  You're doing fine.
[/quote]

When it happens, you need to make sure you are the one talking to your clients. Because whoever is talking to the ones who want to act on emotion will be their advisor.

This is a great example of why there are a lot of different strategies you can pursue with clients, and as long as you are consistent, you will help them to be successful.

After you make it through your first severe down market with your clients - and like Joe says, you will - then you will be a "real" financial advisor. Managing expectations is a key concept that comes out of experience, it is a lot more important than doing market outlook forecasts, and so on.

You will be amazed at how the vast majority of your clients just stick with the plan, and say, "that's why I hired you." In fact, if you were holding the right portfolio mix, your clients will do better than their friends, and that is when you will get a lot of referrals from your clients. That will be a great time to do even more client-bring-a-friend appreciation events, and show people who you are and what you do.

Unfortunately, for the clients who want to act on emotion, they will be tempted to switch strategies. I don't mean to knock people who like to sell annuities in any way - they have their own strategy. But some of those clients who were invested in fourty, fifty or sixty percent stocks are going to be asked to move the portfolio over to an annuity at precisely the wrong time, in terms of strategy for allowing the stock and bond portfolio to recover from the normal market correction.

If you are running "cleaner, classic" investment portfolios (not using hybrid products like some of the guaranteed annuities) you are pulling together a lot of different, complex strategies (capital gains, lower taxation rate of stock dividends, blending after tax dollar income in retirement with pre-tax retirement income) - this is a terrific opportunity to teach your clients how to be "real" investors that get to partner with you.

The more they understand everything, and the more years they spend with you, the more loyal they become. But you still have to provide a lot of touch, personal contact.

When you are taking on a lot of new clients, it takes a lot of time. Face to face office meetings, preparation, paperwork. Later on, your familiar client "old friends" can be serviced very efficiently - often just over the phone.

But there is a temptation to let things work with less contact, and that will really come back to bite us in a down market.

Now is the time to be having a lot of contact with all of our clients, in preparation for the inevitable down market. If last year was a good year, we should be calling them and trimming five or ten percent of the portolio from equities to fixed.

Maybe saying, " I see we got ten and a half percent total return on the stock and bond portfolio last year, and the guaranteed certificates did pretty well too, especially the laddered stock market certificates. You managed to capture much of the total return of the stock market, with a lot less risk - only fifty percent of your money is in stocks."

Last year was a great year, and the analysts are saying, this year, maybe stocks could go up eight percent. How much risk do you want to take to get eight percent. Let's move fifty thousand back from stocks to bonds in your IRA, there won't be any taxes, nor any cost to you, since we're just doing an exchange.

Do you think  you will be able to sleep at night if we do that? By the way, the market will probably go up fourty percent, and then you'll be mad at me, because we did exactly the "wrong" thing. But I don't know, if them market goes up fourty percent, it will probably go down. Anyway, we already have enough money to sustain your portfolio rate of four percent, and that is the big thing.

You know, when you talk to your friends about money, or whatever, we all like to talk about this stuff, just keep in mind, you are invested in about fourty percent bonds, and we need that, because inflation is another kind of real risk, and the stock represent ownership, which can help with inflation over the long run. And just keep thinking about those dividends piling up from the bonds and the cash and the certificates, in case the market goes sideways.

Really, I think that is the most likely scenario, the market could just go sideways this year, and then we'll at least get something from all of those dividends. Of course, even those bonds can go down, so then we'll just think about or draw money from your certificates if that happens, or the cash.

By the way, we're doing a client appreciation lunch in a few weeks, in the little private room in that really nice restaurant. I really just want to say thanks to you and everyone, some informal discussion, but if you want to bring a friend, maybe someone is interested in what I do, that's a great low-key way for them to check me out.  But if you just want to come by yourself, it is really going to be laid back and fun, I'll probably just talk for a few minutes, but there are some really nice clients coming.

you are invested in about fourty percent bonds

stocks

When we get into a bear market what would be a reasonable expectation of clients who will "fire" me?

I'm thinking 10-15% would be reasonable.

For those who have been thru it what should one expect?

Thanks in advance for any constructive feedback.

Scrim

Joe, I share your concern, if it is too good to be true...

Someone said, it is (not) like flight insurance, because now people who are afraid to fly will get on the airplane.

It just seems like layers and layers of embellishment of market reality, smoke and mirrors.

The assets classes are cash, fixed, equity, real estate, commodity.

Pensions, making an immediate annuity, might be a sort of class.

Anything else is basically just packaging.

If we are talking about the greatest new thing since sliced bread here, the market will find it (hedge funds) out.

The nail that sticks up gets hammered down.

These guarantees are not too good to be true.  In fact, they are inappropriate for most investors.  They are a serious drag on performance, thus there is nothing to hedge.  They don't increase investment returns of a specific investment.  They decrease the investment return.

However, they do increase the investment return of some investors simply because they allow conservative investors to invest above their risk tolerance,  and, probably more importantly, they allow the investor to stay invested instead of chasing returns. 

For some people the VA living guarantees are simply the security blanket that they need to get over their fears.  This security blanket comes with a price.  It's just that the price of this security blanket is less than the price of not having it.  ie. a conservative investor will have more money in the future by investing aggressively in a VA with a guarantee than they would have by investing conservatively outside of a VA.

VA's are not good or bad.  They, like other products, are appropriate or inappropriate. 

When we get into a bear market what would be a reasonable expectation of clients who will "fire" me?

I'm thinking 10-15% would be reasonable.

For those who have been thru it what should one expect?

Thanks in advance for any constructive feedback.

If they are treated like individuals and you are giving great service, the answer may be 0%.  I tell my clients that they'll call me when the market goes down to make changes and instead, I'll ask them to invest more.  As someone else said, managing expectations is very important and you do sound like you do that.

On the other hand, if one is charging a fee and their practice is simply about investment return, it seems like it would be hard for a client to keep paying a fee knowing they would have been better off putting their money in a CD.