Gettin People Back in the Market

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donte_drink&drive's picture
Joined: 2010-02-12

I keep running into a lot of people who lost a stupid amount of money in the market in 08-some of 09, got out, and now are scared out of their minds to get back in.  One gentlemen I met has 1.8 million basically on the sidelines, and knows he needs to get it working for him but is scared of the market.  What are some good ideas for people like this? 

3rdyrp2's picture
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Joined: 2008-11-13

An elderly guy with 1.8 mil sounds like he's got enough money to live on unless he's paying a mortgage on a flat in the Hamptons.

donte_drink&drive's picture
Joined: 2010-02-12

ok elderly was a bad choice of words...50's to early 60's is what I meant...still pre-retired but older as well...my apologies for the poor word choice...I've updated

B24's picture
B24
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How old are you, 22?  That's barely mid-life.  And he doesn't necessarily need to be in the market, especially not right now.  I know all the big firms are bringing out their best cliche's about being in the market, but to be honest, I wouldn't have more than 25% of that in the "market".  Think diversification, global, bonds, alternative exposure, etc.  Don't put too much in one place or you'll get burned.

navet's picture
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Joined: 2010-02-25

I like variable annuities. Sorry, but I consider an indexed annuity an act of theft. A VA allows the client to be in the market with a 5% guarantee. It is for income, and only a portion of his assets, say money for necessities.

Moraen's picture
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Joined: 2009-01-22

Quote:I like variable annuities. Sorry, but I consider an indexed annuity an act of theft. A VA allows the client to be in the market with a 5% guarantee. It is for income, and only a portion of his assets, say money for necessities.
 Do yourself al favor and get educated.  You consider indexed annuitiies an act of theft because somebody told you, and not because you've done any research on your own.

navet's picture
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Joined: 2010-02-25

If EIA's are so great, then tell me why. Jones doesn't sell them, but that isn't exactly a death sentence on the product. My issue is that they top out before the market does, they don't actually own the assets(equities), and there have been several negative articles by a number of respected pubs.

ManOnTheCouch's picture
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Quote:Quote:I like variable annuities. Sorry, but I consider an indexed annuity an act of theft. A VA allows the client to be in the market with a 5% guarantee. It is for income, and only a portion of his assets, say money for necessities.  
 Do yourself al favor and get educated.  You consider indexed annuitiies an act of theft because somebody told you, and not because you've done any research on your own.
I couldn't agree more.  If you're using a 5% income rider to justify selling a VA, just look at the indexed annuities with 8% riders, lower fees, and less risk.  With a VA, the client assumes the market risk and pays a high price to insure the income via the rider.  With an indexed annuity, the insurance company assumes the risk, and you have a much greater income guarantee for a lower cost to the client. 
They aren't a one sized fits all miracle, but for a portion of the income producing assets that don't need to be liquid, they're hard to beat.  Also, for performance, they've done exactly what they were designed to do - give the opportunity for higher than average rates of returned when compared to other fixed products.  Check out the Wharton study to verify.  http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf
 

navet's picture
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Joined: 2010-02-25

People who experienced the '08-'09 market decline were thrilled with the 5% VA guarantee. Can you sell an EIA without having your series 7? If so, then I have another problem with them. But most importantly, who owns the equities in the EIA?

Spaceman Spiff's picture
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Joined: 2006-08-08

You're fighting a losing battle on this one, navet.  While Jones doesn't sell them, all EIA's are not bad.  I'm not a big fan of them either, but I've seen some situations where they seemed to have worked well.  You love the 5% VA guarantee, but those EIA folks will tell you that your 5% guarantee isn't a guarantee of your principal going up.  It's a guarantee of your income base going up.  It's not the same thing.  They'll tell you that some clients would prefer to see their principal going up than their income base.  Those clients who saw the big market declines are thrilled about the VA you bought them.  Got it.  Mine too.  Question - what if they had an emergency and had to get to more than the 5% that the VA guaranteed?  What happens to the guarantee?  What if they had to get to all of the money, right now?  Which do you think they'd prefer?   

Moraen's picture
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Joined: 2009-01-22

navet wrote:If EIA's are so great, then tell me why. Jones doesn't sell them, but that isn't exactly a death sentence on the product. My issue is that they top out before the market does, they don't actually own the assets(equities), and there have been several negative articles by a number of respected pubs. Listen to Spiff.  Just because Jones doesn't sell something doesn't make it a bad product.  ManOnTheCouch is right.  Wharton is an extremely respected RESEARCH INSTITUTION, whereas the pubs you've likely read are financial magazines where the authors are journalists, not financial professionals.Please do your clients and prospects a favor and leave the investment industry.

gethardgetraw's picture
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Joined: 2009-10-22

navet, you have proved your ignorance.

navet's picture
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Joined: 2010-02-25

What if the customer wants more than the 5% in the VA? Good question, usually aked by young inexperienced FA's. Retirees need income, first and foremost. VA's provide income. If you need a bolus of cash, fine. Just don't get it from the VA. The VA guarantees an adequate cash flow to take care of income needs during retirement. A simple needs analysis will indicate your customer's income needs. Guarantee that income, then invest the rest of the money in other products that provide some liquidity. ..Now, I am hearing that some of you really like EIA's. And I admit that I am no expert in that product. I don't think they can take the place of a VA. However, I am willing to listen to their benefits. I have doubts about them, though.

joelv72's picture
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Joined: 2008-11-28

ManOnTheCouch wrote:Quote:Quote:I like variable annuities. Sorry, but I consider an indexed annuity an act of theft. A VA allows the client to be in the market with a 5% guarantee. It is for income, and only a portion of his assets, say money for necessities.    Do yourself al favor and get educated.  You consider indexed annuitiies an act of theft because somebody told you, and not because you've done any research on your own. I couldn't agree more.  If you're using a 5% income rider to justify selling a VA, just look at the indexed annuities with 8% riders, lower fees, and less risk.  With a VA, the client assumes the market risk and pays a high price to insure the income via the rider.  With an indexed annuity, the insurance company assumes the risk, and you have a much greater income guarantee for a lower cost to the client.  They aren't a one sized fits all miracle, but for a portion of the income producing assets that don't need to be liquid, they're hard to beat.  Also, for performance, they've done exactly what they were designed to do - give the opportunity for higher than average rates of returned when compared to other fixed products.  Check out the Wharton study to verify.  http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf  I wonder how many moving parts are in this particular contract?

Spaceman Spiff's picture
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navet wrote:What if the customer wants more than the 5% in the VA? Good question, usually aked by young inexperienced FA's. Retirees need income, first and foremost. VA's provide income. If you need a bolus of cash, fine. Just don't get it from the VA. The VA guarantees an adequate cash flow to take care of income needs during retirement. A simple needs analysis will indicate your customer's income needs. Guarantee that income, then invest the rest of the money in other products that provide some liquidity. ..Now, I am hearing that some of you really like EIA's. And I admit that I am no expert in that product. I don't think they can take the place of a VA. However, I am willing to listen to their benefits. I have doubts about them, though.Let me assure you that I am neither a young, nor inexperienced FA.  Should you like to trade PM's on tenure and experience, I'll be more than happy.  The good thing about Jones is that they've educated you enough to know that you shouldn't put all of a client's money into a VA.  And if you haven't learned that point, Field Supervion will enforce it for you.My point wasn't that you weren't providing the required amount of liquidity for the client, but rather that you were missing the point of the EIA vs the VA with an income benefit.  In my opinion they are two completely different products for two completely different uses.  Accumulation vs Income.  But you keep on arguing your point.  It's really fun to watch them pick you apart. 

Moraen's picture
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Joined: 2009-01-22

navet wrote:People who experienced the '08-'09 market decline were thrilled with the 5% VA guarantee. Can you sell an EIA without having your series 7? If so, then I have another problem with them. But most importantly, who owns the equities in the EIA? You should have a problem with VAs as well, because guess what?  You don't need a 7 for that either.  

navet's picture
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Joined: 2010-02-25

Picked apart? Hardly. I still haven't had anyone explain the relative merit of the EIA. The fact that you only need an insurance license to sell it, really helps prove my point. My statement about tenure was not directed at you, although on inspection I see that it read that way. My point with that statement is that I hear from younger people(usually 25-35's) the misconception that net worth and income are directly related. That having a high net worth somehow magically provides you wih your income needs. The determination of income at retirement is a different animal than the choice of investments during accumulation. income has to be planned and properly engineered. Most of the younger FA's I've met don't have a clue about this process. I use the VA for necessary income. Where did you read that I would ever put all a client's money in a VA?

Hey Kool-Aid's picture
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Moraen wrote:navet wrote:People who experienced the '08-'09 market decline were thrilled with the 5% VA guarantee. Can you sell an EIA without having your series 7? If so, then I have another problem with them. But most importantly, who owns the equities in the EIA? You should have a problem with VAs as well, because guess what?  You don't need a 7 for that either. Really???....I actually thought you did...I know you need an Insurance License...but I thought you needed the 7 as well?....oh well...you learn something new every day....I also thought you need a 7 to sell VUL ?...true?    

Moraen's picture
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Joined: 2009-01-22

You don't need a securities license to sell fixed annuities.  Does that make them bad?  Can't you plan income with a fixed annuity?As a matter of fact, for most the business you probably do at Jones, you don't need a series 7.

Moraen's picture
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Hey Kool-Aid wrote:Moraen wrote:navet wrote:People who experienced the '08-'09 market decline were thrilled with the 5% VA guarantee. Can you sell an EIA without having your series 7? If so, then I have another problem with them. But most importantly, who owns the equities in the EIA? You should have a problem with VAs as well, because guess what?  You don't need a 7 for that either. Really???....I actually thought you did...I know you need an Insurance License...but I thought you needed the 7 as well?....oh well...you learn something new every day....I also thought you need a 7 to sell VUL ?...true?      You can sell VAs with a Series 6 and an insurance license HKA.  But you already knew that.

navet's picture
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My point is that I believe that the EIA is a product invented for the purpose of giving insurance salspeople an opportunity to sell in the stock market(albeit indirectly) without a license. I know I've read some articles by various regulating authorities that are raising similar questions(don't ask me to cut and paste, please). I also have a problem with the fact that the EIA doesn't actually hold the securities. I am not as comfortable holding an agreement that says I have a right to the gain that a security,held somewhere else, may achieve. I would rather hold the security myself. With any leverage used at the ins. co. you could end up with nothing, and no recourse. Now, I'm really not here to argue, I'm here to learn. If I'm mistaken, then show me.

Moraen's picture
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So if the insurance company uses leverage and goes belly up, your client gets all of the money in the VA?  What is your recourse then?The fact that the VA holds the securities doesn't mean your client owns them.  You client owns a contract.  Just like with an EIA.  They are both insurance contracts.

navet's picture
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Joined: 2010-02-25

Nonsense. Securities in th VA are held in a seperate account. Ins Co goes belly up, you still own the securities in your account. And the state ins commish will be another means of security. If the security in a VA is suspect, than any mutual fund anywhere is suspect.

Moraen's picture
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navet wrote:Nonsense. Securities in th VA are held in a seperate account. Ins Co goes belly up, you still own the securities in your account. And the state ins commish will be another means of security. If the security in a VA is suspect, than any mutual fund anywhere is suspect.  Are you serious?  Question:  Are the mutual funds in the subaccounts the same as if it was not inside an annuity?Those subaccounts function "like a mutual fund", but aren't actually mutual funds.  Also, your argument is for guaranteed income.  But the guarantee is removed if the insurance company goes belly up.  And if the insurance company goes belly up, it is likely that any mutual funds are tanking as well.Also, the insurance company separate account belongs to the Insurance company.  I may be wrong about VAs and that you will get the mutual funds if the insurance company goes belly up, but even if that's true, who cares?  If you are doing your due diligence, the insurance company likely won't go bankrupt, and you'll be good to go.Same with EIAs.  I don't know how long you've been with Jones, but did you know that Jones used to be anti-VA?  Wake up! 

Spaceman Spiff's picture
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He's actually correct, according to the wholesalers I've asked, on the subaccount issue.  Hartford goes belly up on the insurance side, their mutual funds/sub accounts could survive.  You lose the income guarantees from them, but your $$ is still there. navet - Here's where I could see using an EIA.  I've got a client who is 70 years old.  She has plenty of income for the rest of her life, inflation included.  Her essential needs are met with that income.  She uninsurable.  She'd like to pass money more money on to her kids than what she has right now.  Fixed annuity rates suck right now and you have to renew then when the contract renews or the insurance company says bend over on the renewal rate.  She doesn't want something aggressive like CAIBX or ABALX, but she'd still like to participate in the growth of the market.  But she's terrified that it'll go down 45% again like 2008.  What do you put her in?  I can see making an argument for an EIA that participates (albeit not 100%) with the returns of the S&P on the upside and earns 2-3% in the down years.  Just like a fixed annuity, the account balance is always going up.  Sidebar - if your clients who liked the VA in 2008 would have purchased a Fixed annuity back then, they would have ended up with a very similar amount of $$ to pull income off of.  Except that it would have been principal, not income benefit.  Real $$.  OK, back to my 70 yr old.  She gets to reinvest, is protected from the market, but yet gets to grow when the market does.  Sure, there could be some very big downsides, but for a 70 year old that simply wants to grow her $$ better than a fixed annuity, some guys would say an EIA is a great option. The problem is that some folks think that EVERYONE needs to own an EIA.  And there are some horrible ones out there.  And if you think explaining income benefits is tough, try explaining point to point indexing or some of the more exotic indexing structures that some companies use.  It's one solution that doesn't fit everyone.  But there are going to be some situations where it could be a very viable option. 

joelv72's picture
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Spaceman Spiff wrote:He's actually correct, according to the wholesalers I've asked, on the subaccount issue.  Hartford goes belly up on the insurance side, their mutual funds/sub accounts could survive.  You lose the income guarantees from them, but your $$ is still there. navet - Here's where I could see using an EIA.  I've got a client who is 70 years old.  She has plenty of income for the rest of her life, inflation included.  Her essential needs are met with that income.  She uninsurable.  She'd like to pass money more money on to her kids than what she has right now.  Fixed annuity rates suck right now and you have to renew then when the contract renews or the insurance company says bend over on the renewal rate.  She doesn't want something aggressive like CAIBX or ABALX, but she'd still like to participate in the growth of the market.  But she's terrified that it'll go down 45% again like 2008.  What do you put her in?  I can see making an argument for an EIA that participates (albeit not 100%) with the returns of the S&P on the upside and earns 2-3% in the down years.  Just like a fixed annuity, the account balance is always going up.  Sidebar - if your clients who liked the VA in 2008 would have purchased a Fixed annuity back then, they would have ended up with a very similar amount of $$ to pull income off of.  Except that it would have been principal, not income benefit.  Real $$.  OK, back to my 70 yr old.  She gets to reinvest, is protected from the market, but yet gets to grow when the market does.  Sure, there could be some very big downsides, but for a 70 year old that simply wants to grow her $$ better than a fixed annuity, some guys would say an EIA is a great option. The problem is that some folks think that EVERYONE needs to own an EIA.  And there are some horrible ones out thereAnd if you think explaining income benefits is tough, try explaining point to point indexing or some of the more exotic indexing structures that some companies use.  It's one solution that doesn't fit everyone.  But there are going to be some situations where it could be a very viable option.  There you go!!  Just like VA's there are armpit stinky EIA's as well.  The fact that there are contracts out there offering 10-12% surrender periods and paying the salesman 10% is why the insurance products all get a bad rap.  Since an EIA goes further and lets a broader sales force (no series X whatsoever) and have mind boggling return structures (all togehter lending to more abuse), they get an even worse rap. 

Moraen's picture
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I stand corrected then.  Thanks Spiff.  This is why I leave insurance products to people who are EXPERTS.  Not someone who thinks they may know something.I know just enough to get somebody in the wrong product.  But I'll outperform those mutual funds ALL DAY!

I am legend's picture
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navet wrote:If EIA's are so great, then tell me why. Jones doesn't sell them, but that isn't exactly a death sentence on the product. My issue is that they top out before the market does, they don't actually own the assets(equities), and there have been several negative articles by a number of respected pubs.Ha ha--Jones is the final authority on what is good to sell!!???  I will call Jones before I have my next client meeting.By the way, something that looks very attractive right now for someone who needs income later would  be zero coupon muni bonds.  Most people think rates will be higher in a few years so buy a zero muni now and then have more principal to invest at higher rates later.

ManOnTheCouch's picture
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To address a few questions asked earlier. Someone asked "how many moving parts are in that EIA?"   On the particular one refenced, there are none.  The rates are set whent he contract is issued.  You do pay for that though becase moving parts generally provide a better value to the client because they move with the options pricing.   It was also asked, "who owns the equities in an EIA?"  First things first, generally, an "equity indexed annuity" or, more properly, a fixed indexed annuity, is not comprised of equities in the index they track.  They are primarily bond based investments with that use options create their correlation to an index. To better explain how they work, let's start with a typical fixed annuity.  An insurance company has their investment account primarily composed of high quality bonds.  It has a certain yield from which the insurance company takes their spread and pays a fixed rate of return the the policy owner.  A fixed indexed annuity or EIA works very similarly. Interest is earned on the investment account of the insurance company.  Now, instead of paying a fixed rate of return, options are purchased with the interest to track the equity index that a particular product will follow.  So, say the insurance company's investment account earns 6%.  They would take 2% for themselves and pay 4% out in a fixed annuity.  In the indexed annuity, they take the 4% and buy options.  Buying options like this on an intituational level gives them purchasing power the ordinary investor never has.  It's a strategy that is difficult to replicate on your own. What it does give is safety of prinicpal, opportunity for growth above that of other fixed investments, tax deferral, and numerous income options.  Like many other investment choices, there are good and bad ones.  They are not for everyone and need to be used suitably - just as any other recommendation should be.   Now, I'm sure I've come across as an indexed annuity shill.  I want to mention that I'm a big believer in MPT, and don't think indexed annuities are for everyone.  However, it bothers me to see so much misinformation about a product that I've used and been thanked repeated for using by my clients - particulary those nearing or in retirement that can't afford losses.  I just view them as another tool on my belt for the right situations when building a balanced portfolio.

joelv72's picture
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That would be me.  If you are implying that moving parts are baked into the contract for the benefit of the client you are either a) a lying tool; or b) a woefully ignorant tool.  If you can present me with an 8% guarantee from a reputable company with no moving parts and decent participation rates and surrender period, I would put some of my own money into that.

Wet_Blanket's picture
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Man on the Couch:  I guess what I don't understand is if the bonds are yielding 6%, the Ins Co takes 2%, and 4% purchases options, where do they get the guaranteed floor rate when the market is negative (ie. the options are worthless)?

ManOnTheCouch's picture
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I grossly simplified the example.  The 4% is sliced up numerous ways by the actuaries to provide the benefits they think will sell.  This can include additional liquidity provisions, higher fixed accounts, higher minimum guarantees.  The bottom line is that the pie is limited in size and split to create competitve products.  So, there's a lot of give and take with various annuities.  For example, higher minimum guarantees will often provide lower caps and less liquidity.  In almost all cases the minimum guarantees are never paid because the indexed annuity will perform well enough to avoid it.  They're usually just marketing.  For more technical and historical information, check out the Advantage Compendium website run by Jack Marrion.  They have tracked almost all the technical data on indexed annuities.joelv - there are certain products where the rates are set and baked into them - never to change.  To protect themselves, the insurance companies will set these terms with greater margin for error to protect their profit.  By using moving parts, the margin can continuously be kept narrower.  In both cases, the insurance company is protecting itself, however, when you have static terms, they must build in a greater margin for error.

N.D.'s picture
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Joined: 2009-07-13

The S&P hit a bottom on 5/25/1970 around 69It struggled around for ~4.5 years then hit another bottom on 10/03/1974 around 62You know what the next 30 years were like...The S&P hit a bottom on 10/09/2002 around 776It struggled around for ~6.5 years then hit another bottom on 3/09/2009 around 676 (666 intrady)Where do you want to be in 3, 5, 10 years? If it is an annuity, fine. If it is directly in the market, good. Jump in and swim or head back to the house. Looking back, you will be glad you did... 

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