Why VA's?

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regrep23's picture
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So I'm reviewing VA's b/c I take the Series 7 in three days and i'm trying to figure out why anybody would want to invest in them. They have higher fee's, Term life has cheaper death benefits (at least according to WIKI), and to get the income for life benefit you could just use a SPIA (and cheaper ?).So when then should I ever suggest a VA to a client?

troll's picture
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Joined: 2004-11-29

Concentrate on debt, options, and regulations.  This is what will help you pass the 7.  I agree with ice, do not think about how you will apply the knowledge in the real world, just know your information.  Don't overthink it.

regrep23's picture
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Joined: 2008-02-16

It's nice to know there aren't going to be a lot of VA questions on the S7.  I'm not to worried about it, I did pretty well on the practice exams.  However, I'd also like to know for practical purposes when should someone recommend a VA v.s. another fixed income instrument.

rankstocks's picture
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Joined: 2005-02-10

I generally don't like variable annuities.  Compared to a properly diversified portfolio in mutual funds, I can't seem to justify an extra 1.5-2.5% annual expense, limited investment choices, 7 year surrenders, ordinary income on the earnings when distributed compared to long term capital gains and dividend tax rates.  In the last 5 years, I've gone up against annuity salesmen competing for the same money at least a dozen times, haven't lost one.  Generally, annuity slingers sell on fear, and that doesn't work for people's serious money.

troll's picture
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Joined: 2004-11-29

VA's are for the FEARFUL - both the client of losing their principle, or the broker for losing their job!The client benefits by being able to focus on the return OF their money, versus the return ON their money.The broker benefits by a nice, high commission sale.They have a place.  Yes, the expenses are high - but ALL insurance makes things more expensive.  Your car insurance makes driving your car more expensive, etc.I'm not a fan of non-qualified annuities because the extra costs eat up the tax savings on a similar portfolio of mutual funds AND convert the gains into ordinary income versus capital gains.

stokwiz's picture
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Joined: 2004-12-04

It depends on the client. VA's may not be appropriate for someone with small assets like $100,000. When you have a $500,000 portfolio of mutual funds that are not in a tax deferred account and can throw off a 20% capital gain and dividend distribution in any given year adding $100,000 of taxable income that isn't  needed = huge inefficiency and unhappy clients and no referrals. Explain that to your client in a year like 2000 when on top of the distribution their account value is down as well. Also the ability to re balance without a 1099 is a huge benefit. Better to earn interest on your  taxes than pay taxes on your interest. I do taxes as well so probably have more exposure to seeing mistakes of advisor's when people should've been in VA's and were not-borders on malpractice. Consider the massive tax increase that's coming in 2010 and all arguments about annuities taxed at ordinary income rates rather than low capital gain and dividend rates are  moot .  VA's contain higher fees, but fees are an issue only in the absence of value. Ask any widow who received say $500,000 from a VA after 2002 when many portfolios were down 50% and  she received all money invested, minus withdrawals. Yes VA's have higher fees, say around 3%with everything including the benefit riders, so it's really an issue of an extra point or 2. Compare with someone who's wrapped the hell out of someone, and you're looking at fees being equal, with no added benefits for the wrap accounts. But consider uncle Sam's fee, which can be as high as 35% on earnings every year. Or consider the widow in 2002 who's account would've paid a 50% fee (in terms of the market drop). 3% looks like a bargain, especially if it keeps them from panicking and selling out! With products on the market today like Pru's, you have over 100 investment options from 30 managers with the ability to invest in everything from a hedge fund to sectors such as precious metals, oil, Asia, as well as use leverage with Pro funds ultra accounts, rising rates, etc.  There is also the ability to lock in a clients highest daily account value for income purposes, and an option for complete liquidity from day 1,as well as a 4 year schedule. Again, annuities aren't for everyone, depends on your market. When I ask someone who's just paid a ton of capital gain and dividend taxes why they aren't in a VA (I also make sure they are maxing out their 401(k) and Ira's first), it's usually because their adviser didn't know any better. Well, he does now, because these clients are mine.
 
Stok

troll's picture
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Joined: 2004-11-29

It's crap like this that give VA sales a bad name.  If you have to use fear, half-truths, and outright lies to sell a product, you should look at something else.  Let me blow a few holes in your pitch.  I will use Founding Funds throughout as my example for a couple of reasons.  Available in both annuities I give examples for, lowly rated for tax efficiency and a 2 star fund (so no cherrypicking).
 
stokwiz wrote:It depends on the client. VA's may not be appropriate for someone with small assets like $100,000. When you have a $500,000 portfolio of mutual funds that are not in a tax deferred account and can throw off a 20% capital gain and dividend distribution in any given year adding $100,000 of taxable income (only if the entire distribution is short term gains and nq divs, please name me one fund that is appropriate for all a clients money that does this, this is fear and a lie) that isn't  needed = huge inefficiency and unhappy clients and no referrals. Explain that to your client in a year like 2000 when on top of the distribution their account value is down as well. Also the ability to re balance without a 1099 is a huge benefit. Better to earn interest on your  taxes than pay taxes on your interest.(It's not what you make, it's what you keep, again fear) I do taxes as well so probably have more exposure to seeing mistakes of advisor's when people should've been in VA's and were not-borders on malpractice.(You crossed the malpractice line) Consider the massive tax increase that's coming in 2010(you have a crystal ball?  Again fear and at best a half-truth) and all arguments about annuities taxed at ordinary income rates rather than low capital gain and dividend rates are  moot .(you forget about the double taxation at death for non q money, and you don't know what the tax code will look like in 2010.  The fees destroy any tax advantages)  VA's contain higher fees, but fees are an issue only in the absence of value. Ask any widow who received say $500,000 from a VA after 2002 when many portfolios were down 50% and  she received all money invested, minus withdrawals.(Yes there are times that a VA has worked for a client, but the vast majority of the time they do not.  More fear, "if you die at exactly the right time you could benefit big time!!" Yes VA's have higher fees, (You think) say around 3%with everything including the benefit riders, so it's really an issue of an extra point or 2.(Only a point or two?   "Mr. Client you won't even notice it") Compare with someone who's wrapped the hell out of someone, and you're looking at fees being equal, with no added benefits for the wrap accounts. But consider uncle Sam's fee, which can be as high as 35% on earnings(Again only if ALL earnings are short term, what are the odds of that happening?  How about zero) every year. Or consider the widow in 2002 who's account would've paid a 50% fee (more fear)(in terms of the market drop). 3% looks like a bargain, especially if it keeps them from panicking and selling out! With products on the market today like Pru's, you have over 100 investment options from 30 managers with the ability to invest in everything from a hedge fund to sectors such as precious metals, oil, Asia, as well as use leverage with Pro funds ultra accounts, rising rates, etc.(Lie, not if you use the HD 7)  There is also the ability to lock in a clients highest daily account value for income purposes,(Sound great but only really works in the event you retire at a market bottom and is no more effective than other step-ups available in many other contracts) and an option for complete liquidity from day 1,(half-truth, you forgot about the higher fees)as well as a 4 year schedule. Again, annuities aren't for everyone, depends on your market. When I ask someone who's just paid a ton of capital gain and dividend taxes why they aren't in a VA (I also make sure they are maxing out their 401(k) and Ira's first), it's usually because their adviser didn't know any better. Well, he does now, because these clients are mine. (When an idiot tax advisor tells my clients something this stupid, I pull out the example below)
 
Stok
 
Hartford Leader Annuity (no riders) purchased 10/19/2000 with $56,178 in Founding Funds subaccounts.  Value on 3/31/2008  $74,075.   Same purchase date buy the A shares value 3/31  $98,136.  Same purchase date buy the A shares and pay the taxes out of the account at TOP tax rate  $87,025.  And in the event they need to liquidate they get... wait for it... a tax loss!!!  If they liquidate the annuity, about an $18m in regular income hit.  So using this tax inefficient fund, clients would have paid more in taxes each year, ended up with more money net, and have minimal tax consequences when withdrawls start further widening the advantage gap.  Cost is only an issue in the absence of value?  Exactly what value did the annuity provide that was worth 42% of the gains in 7.5 years?  "Mr. Client, annuity slinger probably used phrases like "sleep well at night" and "gaurantee" and "tax deferral" when he showed you the annuity.  What he didn't emphasize is the additional costs.  They compound just like returns.  In my example the cost is 2.25% each year after paying the taxes which results in 42% of your gains going to the annuity company and not you.  Do you feel this is a fair price for the gaurantee?"  So you don't accuse me of a poor comparison, Pru Va with the HD7 would be worth $77,899.   Insurance companies write policies that statistically they know they will profit on.  In my experience, the only thing an annuity gaurantees for the vast majority of people is less money,  higher taxes in retirement, and the possibility of being double taxed at death destroying your legacy gift to your children.

snaggletooth's picture
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Joined: 2007-07-13

Primo,
 
Did you have any clients retire in 2001-2002 when accounts might have been down 20-30+%?
 
Using this as an example is selling based on the fear of retiring at the wrong time.  Would it be worth it to have a portion of clients' money in VA's just in case they did retire in today's early 2000's (whenever that will be)? 

troll's picture
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Joined: 2004-11-29

Yes I did, but only a small percentage who were in love with the 90's.  I did have most clients retire down from the high, but not nearly that far.  Back then, annuities did not have the living benefits, just death benefits.  So they would not have helped anyway as far as 2000-2002.  If retirements avg 5 years, everybody would get an annuity in my practice.  But the avg retirement lasts 20+ yrs.  No matter how you run the numbers, a very high percentage of the time non-annuity investments would work better based on cost alone.

stokwiz's picture
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Joined: 2004-12-04

Wow Rimo, I must've taken some of your clients!  You must have a weekend DJ gig cause you sure are good at spinning my post!  True I don't know the future of tax rates (or the market)and neither do you, but with a democratic house, your idol Nancy Pelocy and company in charge with looming deficits, do you think they'll extend the tax cuts? No, never mind, I know what your answer will be. That's why it is called PLANNING and not strictly being in the vacuum of past performance as you illustrate. I use VA's only after all other tax deferred vehicles have been applied, and only if the amount of investment under consideration warrants it. I don't even use the living benefits most of the time, but make my clients aware of them. They insure their business, house etc., why not their largest asset, their life savings? (Ooops, there I go again, more fear)Maybe if you had more than 3 clients from 2000 thru 2002, and learned how to read a tax return, and had more than 25,000 total dollars under management, you would be surprised at how capital gains can hurt clients. cap gains were at 20% short and long term,and dividends were taxed at ordinary income rates in the past, and if you follow politics you know if the Dem's get in they are talking about 25% cap gain rates and divs at ordinary income rates-You should educate yourself  on the product I discussed, as well as taxes, and knowing the difference between fear and FACT before posting. VA's aren't for everyone, They comprise maybe 30% of my business, probably more than a mutual fund slinger like you, but they are an excellent tool and are too readily dismissed by the uninformed adviser who's average clients net worth is so low  that taxes aren't an issue.  In my tax business I see over and over again new client referrals who's adviser hasn't a clue about the tax ramifications of the investments they peddle, like Primo.I place investments where they are needed, after careful analysis of the entire portfolio, estate and retirement plans and current investments.  I  would say you're a liar, but I won't because I know you just don't know any better. Oh, did I mentioned VA's weren't for everyone? Yes I did, Primo had me believing I forgot to state that but I did, twice. VA's weren't for your  ex clients either, but they're doing much better with me now,and Bob said to tell you Hi. He's glad to be out of those "Founding Funds".They didn't meet my minimum, but I made an exception for you.
 
Stok

troll's picture
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stokwiz wrote:Wow Rimo, I must've taken some of your clients! You must have a weekend DJ gig cause you sure are good at spinning(if you consider the truth and actual returns spinning, so be it) my post! True I don't know the future of tax rates and neither do you, but with a democratic house, your idol Nancy Pelocy and company in charge with looming deficits, do you think they'll extend the tax cuts? (I have no bloody idea, but if they do change the tax code for the good or the bad, I will not be 1 year into a 4 year CDSC)No, never mind, I know what your answer will be. Maybe if you had more than 3 clients from 2000 thru 2002, and learned how to read a tax return, you would be surprised at how capital gains killed (strong word, I think giving up 42% of gains AFTER TAXES to fees is getting killed)clients. cap gains were at 20% short (and this is common?, or the result on a couple monster years in the market?  Clients still did better with the huge cap gains as they made more during the go go 90's.)and long term,and dividends were taxed at ordinary income rates in the past,(and if you read my post based on REAL LIFE instead on conjecture and innuendo, you would have seen that the VA fees did not make up for the taxes, they left the client with less money) and if you follow politics you know if the Dem's get in they are talking about 25% cap gain rates and divs at ordinary income rates-(and talking about it means it most certainly will happen, more fear based on conjecture)You should educate yourself  on the product I discussed,(did, it left the client with less money using the EXACT same investment, see previous post) as well as taxes,(less money lost to Uncle Sam than VA fees) and knowing the difference between fear and FACT(dispute one fact I posted) before posting. I  would say you're a liar,(give a specific example, the facts I posted are public information.  I even gave you the specific dates) but I forgive you because I know you don't know any better. Oh, I mentioned VA's weren't for everyone-("When I ask someone who's just paid a ton of cap gain and dividends taxes why they didn't own a VA" so it appears anyone paying cap gains and div taxes is your suitibility determination, nice!!) but they were for your ex clients, they're doing much better with me now,(your comprehension is poor.  VAs are doing worse due to high fees.  I know how to speak slower for the challenged crowd, but how do you type slower)and Bob said to tell you Hi. They didn't meet my minimum, but I made an exception for you.
 
Stok
 
Here is what bugged me the most about your post.  You should know better.  I posted actual results because they cannot be contradicted.  Investments available inside VAs are available outside VAs.  It takes very little skill to tell a client that you could save them taxes with a VA and that if the market goes to zero they have a gaurantee.  It takes a tremendous amount of skill to take taxable consequences in an account for the financial betterment of the client and keep the client.  It is funny that you cannot refute any of the returns I posted.  Its funny that you did not respond to the double taxation of nq annuities.  It is funny that you talk about taxes going up, but fail to admit that long term rates most likely will always be lower than most regular income tax rates.  It is funny that you try to insult me while running turbotax for your clients for $80 a pop.

troll's picture
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Joined: 2004-11-29

Read something interesting in another thread.  Buying an annuity is making a bet against the insurance company, and those actuarial geeks work very hard not to be wrong.  Don't you think you should work just as hard not to be wrong?  Also, why do you think illustrations say hypothetical returns for illustrative purposes only instead of historical returns?  Could it be if they gave historical returns, anybody who could run a hypo could see the disadvantage of a VA?

troll's picture
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snaggletooth wrote:Primo,
 
Did you have any clients retire in 2001-2002 when accounts might have been down 20-30+%?
 
Using this as an example is selling based on the fear of retiring at the wrong time.  Would it be worth it to have a portion of clients' money in VA's just in case they did retire in today's early 2000's (whenever that will be)? 
 
I am not against annuities in every case.  I am not against using annuities for a portion of a clients assets in the right situation.  In my practice annuities are not used for the journey, they are used when you have reached the destination.   I just feel that lazy brokers use them more for the payout than the client.  Actually been toying with the idea of using a VA with a living bene for the fixed income allocation in my porfolios.  Haven't done the due dilligence yet to see how the #'s come out.

snaggletooth's picture
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Joined: 2007-07-13

Primo,
 
Anon makes it very clear that if the annuity changes investor behavior, then it is a good thing...and I think you agreed with that 1000%. 
 
So, in January when the market was tanking, many of our clients who are in individual stocks and mutual funds were calling wanting to bail.  I did my fair share of hand holding and was successful with about 99% of them.  But, I'm sure a lot of other people did sell when the market was way down.  If the worst is behind us, many people may have missed the bounce back up.  Had they been in an annuity, there is a very good chance they stuck with it and stayed in, especially if they understood the living benefit rider.  Pretty much all of my annuity clients are in the 1-5-10 years until retirement phase with a portion of their qualified money in the annuity.  So, in this case, the annuity is used for the journey too, at least in my book of business.
 
The problem with the clients whose hands you have to hold is that you may not really know you will have to hold their hand until they're waist deep in sh*t. 
 
Primo, what withdrawal rates do you use for your retiring clients?  Do you feel there could be a longevity problem if you need to provide for 35 years of retirement income?  Look at it this way, 35 years of retirement income for someone retiring at 60, is almost 100% of their working years...now that is kind of scary in my opinion.

anonymous's picture
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Joined: 2005-09-29

stokwiz,   
First of all, can you please use paragraphs? Your wall of text is painful to read.
 
I happen to be a fan of annuities in the right situation, and I sell a substantial amount.  However, Primo seems to have your number.   It could be helpful for everyone if you could address his points.  Mainly, I am trying to understand why you like non-qualified annuities and don't use living benefits.  I'm really failing to see how a client and their ultimate beneficiaries benefit.  
 
Major positive of NQ VA without living benefit guarantees:
Tax deferred growth
Ability to move money between subaccounts tax free
 
Major negatives of NQ VA without living benefit guarantees:
expenses that are often 2%+ higher than comparable mutual funds
penalty for pre 59 1/2 use
limited investment options (even if there are many options)
gains get removed first
all gains are taxed as income
no step-up in basis at death (this is huge)
 
Let me make up an example.  XYZ mutual fund has underlying investments that average 10%.  In the MF version, after expenses, it averages 9%.  Inside of an annuity, the extra expenses gives it a 7% return.  Client Jack has invested in both versions.  He put in $100,000 20 years ago.   Ignoring taxes, the difference is $560,000 vs. $387,000.
 
If we factor in taxes, even if we assume that the mutual fund gains will be taxed at 20% EVERY SINGLE YEAR, the MF will still have $400,000 vs. the $387,000.  Oops, we forgot that the annuity still needs to be taxed.  This will be at least $100,000 which brings the value down to under $287,000.
 
Stokwiz, I'm certainly willing to be wrong.  Please show me the advantage, using real numbers, of how a NQ VA without guarantees gives the clients more money.  Also, unless you are willing to say, "I only recommend these for people who don't care about leaving money behind at death",  please include the difference of inheriting these assets.
 
(The overwhelming amount of VA's that I sell are qualified and have living benefit riders.  We hope to never use the riders.  The value is that the guarantee positively influence investor behavior, thus the choice becomes a VA invested aggressively vs. a conservative portfolio that matches the client's risk tolerance.  I don't use these for aggressive investors.  Despite the idiots who argue differently, there is no disadvantage to putting a VA inside of a qualified account.  They will get taxed the same as all qualified assets.)
 
 
 
 

stokwiz's picture
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Joined: 2004-12-04

anonymous wrote:
stokwiz,   
First of all, can you please use paragraphs? Your wall of text is painful to read.  I apologize.
 
I happen to be a fan of annuities in the right situation, and I sell a substantial amount.I  believe this is what I indicated as well. Why do you sell them then? However, Primo seems to have your number. Using terms such as liar and idiot to respond to a financial concept are indication of lack of maturity, and needed to be addressed as such. It could be helpful for everyone if you could address his points. Perhaps, when I have nothing better to do than dumb down my post. My post is clear. Apparently I must say again, VA's are not for everyone. Please re- read my original post. The original topic was from a newbie as to why would people use variable annuities
Mainly, I am trying to understand why you like non-qualified annuities and don't use living benefits. Some of the benefits require the client to be at least 55. Not all of my clients are above 55 as Most are business owners between 45-55. I'm really failing to see how a client and their ultimate beneficiaries benefit.  I could've sworn you mentioned you sell alot 
 
Major positive of NQ VA without living benefit guarantees:
Tax deferred growth Righto
Ability to move money between subaccounts tax free Love it. Can't happen with NQ mutual funds. However for Primo who regularly loses money for clients, you would be unable to write off losses in a variable annuity.
 
Major negatives of NQ VA without living benefit guarantees:
expenses that are often 2%+ higher than comparable mutual funds
Of Course.MF have no guarantees and aren't tax deferred.
penalty for pre 59 1/2 use  72(T), if appropriate
limited investment options (even if there are many options) (?) Again, please familiarize with the Prudential product if this is a rebuke of my post
gains get removed first
just like IRA's,401 (K)'s and other qualified assets.
all gains are taxed as income
Again,Just like IRA's & other qualified plans, As is interest and soon to be dividends. Again review the tax history stated in my post and look forward to the expiring tax cuts. This benefit will be even more important than it is now, and has been in the past.
no step-up in basis at death (this is huge) Just like IRA's & other qualified plans. Are these a bad deal for clients as well? Again, this is reviewed on a client by client basis- If there is reform of the death tax, all securities will lose step up in basis for the beneficiary as well . Again, this is something to potentially be aware of and plan for.
 
Let me make up an example.  XYZ mutual fund has underlying investments that average 10%.  In the MF version, after expenses, it averages 9%.  Inside of an annuity, the extra expenses gives it a 7% return.  Client Jack has invested in both versions.  He put in $100,000 20 years ago.   Ignoring taxes, the difference is $560,000 vs. $387,000. In a perfect world,as hindsight is 20-20. What about the client who is retiring at the beginning of 2 or 3 bad years? Can't happen?
 
If we factor in taxes, even if we assume that the mutual fund gains will be taxed at 20% EVERY SINGLE YEAR, the MF will still have $400,000 vs. the $387,000.  Oops, we forgot that the annuity still needs to be taxed.  This will be at least $100,000 which brings the value down to under $287,000.
 
Stokwiz, I'm certainly willing to be wrong.  Anon, please tell me why YOU sell VA's? I bet we both agree. VA's aren't for everyone.Please show me the advantage, using real numbers, of how a NQ VA without guarantees gives the clients more money.  Also, unless you are willing to say, "I only recommend these for people who don't care about leaving money behind at death", 
VA's don't leave money behind at death?
please include the difference of inheriting these assets.
 
(The overwhelming amount of VA's that I sell are qualified and have living benefit riders. Before the living benefit riders, there would be no need for vA's in a qualified account, save for the death benefit. We hope to never use the riders.  The value is that the guarantee positively influence investor behavior, thus the choice becomes a VA invested aggressively vs. a conservative portfolio that matches the client's risk tolerance. BRAVO, just as I stated. I don't use these for aggressive investors.  Despite the idiots who argue differently, there is no disadvantage to putting a VA inside of a qualified account.  They will get taxed the same as all qualified assets.)
 
 
 
 

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

Don't forget that with NQ annuities the benes can stretch them just like they do an IRA.  Whether they do or don't is up to them.  I believe some annuity companies allow the owners to choose death payouts to force a stretch. 

anonymous's picture
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Joined: 2005-09-29

Stokwiz,
 
NQ VAs look great if you are only going to look at half the picture.  Yep, they are just like qualified plans...as long as the qualified plan increases their expenses by about 2% a year, doesn't have any matching contributions, and don't allow pre-tax contributions.  So to answer your question, "Yes, qualified plans would be bad if they worked the same as NQ annuities".
 
"Again, please familiarize with the Prudential product if this is a rebuke of my post"
When all subaccounts come in at an all-in cost of over 2%, this is limited regardless of the volume of choices.
 
"If there is reform of the death tax, all securities will lose step up in basis for the beneficiary as well . Again, this is something to potentially be aware of and plan for."
 
That's one hell of a crystal ball that you have.  I have no idea to plan for something that doesn't exist.
 
"In a perfect world,as hindsight is 20-20. What about the client who is retiring at the beginning of 2 or 3 bad years? Can't happen?"
 
It can certainly happen.  There is nothing inherent to the annuity that gives the client any protection from this happening especially since you don't usually use the living benefit guarantees.
 
"VA's don't leave money behind at death?"
 
That's not what I said or what I meant.  My point is that they are terrible assets to inherit.   Would you rather inherit a $500,000 VA or a $500,000 MF?
 
The one thing that I can't help but notice is that you have the inability to show how a VA would be better for the client than having the money in the equivalent mutual fund.

troll's picture
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stokwiz,
 
I don't have a problem with annuities in the right situation.  I do however see many cases where they were sold in the wrong situation for the wrong reasons.  Annuities have a very compelling story, are easy to sell, and pay well.  Let's look at pre-retirees and nq money.  My issue is partial disclosure.  Fees and their effect over time, the odds of needing the gaurantee, and the issues with legacy are glossed over while the unlikely possibility of financial armegeddon, tax distributions, and tax deferral are hammered on.  Pointing out the cap gains in 2000 while accounts lost money may convincing to a prospect, but explaining the reason was the index was up 247% the previous five years and taxes lag by a year or two would be more accurate.  Also pointing out cap gains distributions dropped tremendously in 01, went to nothing or close to it in 02, and very minimal in 03 as the market was zooming back upwards would give a client reasonable expectations and an accurate picture as to why he got a cap gain and a loss in 00.
 
You have stated in other threads that you call with an EIA to set appts. (I do not want to start an EIA conversation as it is irrelevant for this thread).  I think your process for setting appts is great and very similar to mine.  However, I have seen in my office there are three primary reasons brokers call with a particular product.  They have the most confidence in said product,  the product fits the greatest number of people, or payout.  For this discussion your reason is not needed.  My point is when you call with a particular product, by default you do an above average amount of business with that product, whether is be a stock, bond, MF, or annuity.  I don't use an annuity in my calls because the first two reasons I disagree with. 
 
In my opinion, our job is to guide clients through investments and one of the greatest ways we can add value is to stop them from making emotional decisions.  Emotional decisions will lead clients to making the wrong choice at the wrong time almost everytime.  I don't think anyone here would disagree.  If an annuity can help to solve this problem, more power to you.  But when I read "paid a ton of cap gains why don't you own an annuity" and "widow in 2002" and "loss in 2000 and cap gains", I see the generation of an emotional response for the benefit of the broker.  This bothers me.  Let me give an example.  I call a prospect and tell him I have a fund that has the potential to do 160% and has returns of 20% over the last ten years!! (ING Russia Fund).  I have not lied.  Fund did 160% in 99.  20% is the ten year number.  What I didn't mention is the fund was down -82% in 98.  This is accounted for in the 10 yr return, but not full disclosed.  I have picked specific information to create an emotional response to illicit interest.  However when it is meeting time (assuming appriate risk tolerance) when I  include the -82% down year in my pitch, its over. Of course the -82% year is accounted for and disclosed in the prospectus so I will just skip it.  What would your response to that be?  If you said that annuity fees eliminated the tax deferral, what would happen to your sales?  If you said you may give up 25-50% of your gains over the course of the next 10 years for the gaurantee you are 93% (% of rolling ten year positive market returns 1919-2006) unlikely to use, although if the next 10 years falls in the 7% the fee will be well worth it, how would your sales go?
 
First question in my decision tree, are you willing to invest in the market?  Second question, do you need a gaurantee.  To this day I am still amazed the majority of people say no.  Very few straight yeses, and the rest ask "what do you mean".  I tell them about an annuity, the benefits and guarantees and the cost.  The reason I was able to quote you real life #'s was I use them each time I present an annuity.   It was this case that opened my eyes as to the real life costs of the benefits.  1-2% ann in fees do not sound that bad to a client.  But when you show them the effect over 8 years, it really gets their attention.  Keep in mind these are pre-retirees and I am assuming for this discussion they still need growth to achieve their goals.  These goals are much easier to achieve without the 2% weight around your neck.  As far as tax deferral, I barely mention it as a benefit as the fees eliminate it.  That is a fact, no way around it.  Taxes (whether stocks, bonds, MFs, ETFs) are discussed later in the meeting to set the expectation for the client.
 
Sorry to ramble, but I think this answers every issue we have had.

Mike Damone's picture
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anonymous wrote: 
The one thing that I can't help but notice is that you have the inability to show how a VA would be better for the client than having the money in the equivalent mutual fund.
 
How about investing for growth and having some peace of mind that you will have income for life regardless of market performance. 

anonymous's picture
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Mike, Stokwiz was saying that he usually doesn't use living benefit riders, thus the income for life doesn't have much meaning.     That piece of mind can ultimately cost the client tens of thousand or hundreds of thousands of dollars...unless this is equalized by the effect of the change in investor behavior.  The fees can easily change a 7% investment into a 5% investment.  Compounded over years, this is huge.
 
If the money is in a equivalent mutual fund, the annuity won't be worth it because the expenses will crush its performance.  The annuity makes sense when it changes investor behavior so that the appropriate comparison becomes an aggressive annuity with a conservative mutual fund.  Regardless, if a client cares about leaving money behind, the tax laws make NQ VA's a bad deal.

troll's picture
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To answer the original question, VAs are for investors that want or need the advantages of investing in equities (probable higher returns over time) but can't handle the negatives of investing in equities (primarily volatility).  There are more advantages and disadvantages in VAs but that is the base answer.

Akkula's picture
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Couldn't you just buy ETFs for a client for capital gains tax efficiency and buy puts on the ETFs to give them downside protection for cheaper than the fees on a VA?  I would think the fees would be much more transparent to clients using something like this rather than the sundry fees in a VA.  Furthermore, you could take advantage of the long-run capital gains tax laws using this strategy instead of having to make all the gains subject to regular income tax like you would in an annuity. 
I wonder what types of strategies are these insurance companies are employing in their own portfolios that allows them to guarantee their separate accounts in order to provide these riders and rates of return for all these annuity holders?  Generally insurance companies are in the business of guaranteeing against catastrophic loss.  VAs seem to not be spreading risk to guarantee against catastrophic loss--they are trying to guarantee against short term market fluxuation.  I am just not sure that VAs in the accumulation phase are really fair ways to accumulate wealth when compared to many other strategies.  VAs may make sense for certain clients, but they seem to have been quite oversold.
I was thinking of times when an insurance contract would be appropriate for funding retirement and thought of one that is not often discussed.  Funding of a nonqualified deferred compensation plan for a company's top executives is one of those uses (at least for the sponsor).  Since the NQ assets that are deferred are technically a company asset until they are paid to participants, the company has to pay capital gains on any participant initiated trades in mutual funds.  Remember, NQ assets cannot be held in a tax deferred trust account since NQ plans cannot be funded according to 409a.   If they fund the plan with insurance instead of NAV mutual funds, participants can feely trade within the contract without causing capital gains that the sponsoring firm would otherwise have to report.      

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Akkula wrote:
Couldn't you just buy ETFs for a client for capital gains tax efficiency and buy puts on the ETFs to give them downside protection for cheaper than the fees on a VA?  I would think the fees would be much more transparent to clients using something like this rather than the sundry fees in a VA.  Furthermore, you could take advantage of the long-run capital gains tax laws using this strategy instead of having to make all the gains subject to regular income tax like you would in an annuity. 
This is a viable alternative.  However, RRs are paid to be asset gatherers, not investment managers.  If there is a way to manage AND gather assets and be profitable, so be it.  A great majority of RR's cannot do both well enough at the same time.  Your comment about taxes holds water until you realize the majority of middle-income's retirement assets are held in QPs.  All withdrawals will be taxed at ordinary income rates, regardless of the investment vehicle.  Moreover, we do not know what LTCG taxes will be in the future.  Currently, as anon as stated, NQ VAs hold a distinct tax disadvantage vs. your ETF strategy.  We don't know if there will be a disadvantage in the future.
 
I wonder what types of strategies are these insurance companies are employing in their own portfolios that allows them to guarantee their separate accounts in order to provide these riders and rates of return for all these annuity holders?  Generally insurance companies are in the business of guaranteeing against catastrophic loss.  VAs seem to not be spreading risk to guarantee against catastrophic loss--they are trying to guarantee against short term market fluxuation.  I am just not sure that VAs in the accumulation phase are really fair ways to accumulate wealth when compared to many other strategies.  VAs may make sense for certain clients, but they seem to have been quite oversold.
 
Holy crap, where do you get this?  There is no industry better suited to manage against ALL risk than an insurance company.  You really think some RR can manage risk better than an insurance company?  You're out of your flipping mind.  VAs allow investors to have better investor behaivor than mutual funds.  Why?  Guarantees!  Guarantees that income will last longer than they do.  Guarantees that they'll be made whole if the market tanks.  Guarantees that their heirs will see more money if the account goes down.  People want guarantees.  Many need them as well. 
 
By the way, how long have you dealt with clients one-on-one?
I was thinking of times when an insurance contract would be appropriate for funding retirement and thought of one that is not often discussed.  Funding of a nonqualified deferred compensation plan for a company's top executives is one of those uses (at least for the sponsor).  Since the NQ assets that are deferred are technically a company asset until they are paid to participants, the company has to pay capital gains on any participant initiated trades in mutual funds.  Remember, NQ assets cannot be held in a tax deferred trust account since NQ plans cannot be funded according to 409a.   If they fund the plan with insurance instead of NAV mutual funds, participants can feely trade within the contract without causing capital gains that the sponsoring firm would otherwise have to report.      

theironhorse's picture
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i think the question is a valid one.  nobody knows how all these living benefit riders will play out 15-20 years from now if many of them indeed are exercised.  i do not pretend to know everything, but who is the annuity "expert" who criticized VA's for obnoxious expenses but within the last 2-3 years came out and admitted they are likely underpriced now when you consider the living benefit riders?  i imagine many of you have read his research report concerning this issue. 
nq life contracts are used quite often for executive carve out compensation, that is nothing new.  most of your very successful insurance agents (nml reps) do this to make the larger $.

snaggletooth's picture
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theironhorse wrote:i do not pretend to know everything, but who is the annuity "expert" who criticized VA's for obnoxious expenses but within the last 2-3 years came out and admitted they are likely underpriced now when you consider the living benefit riders?
 
Moshe Milevsky.

Akkula's picture
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snaggletooth wrote:theironhorse wrote:i do not pretend to know everything, but who is the annuity "expert" who criticized VA's for obnoxious expenses but within the last 2-3 years came out and admitted they are likely underpriced now when you consider the living benefit riders?
 
Moshe Milevsky.
 
Here is the article:
http://www.fool.com/personal-finance/insurance/2007/01/08/are-annuities-too-cheap-part-2.aspx
 
He addressed some the questions I had above regarding using a put strategy to hedge.  It looks like that specific rider in these contracts may be relatively cheap.  He does mention, "Moreover, just because the add-on charges for these optional features may be too low doesn't mean that the overall level of fees for annuities isn't high. "
 
I would be interested in seeing a comparison of the tax differences between how long run capital gains verus regular income tax on annuity payments will affect the value of the portfolio in the long run. 

troll's picture
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Akkula wrote:snaggletooth wrote:theironhorse wrote:i do not pretend to know everything, but who is the annuity "expert" who criticized VA's for obnoxious expenses but within the last 2-3 years came out and admitted they are likely underpriced now when you consider the living benefit riders?
 
Moshe Milevsky.
 
Here is the article:
http://www.fool.com/personal-finance/insurance/2007/01/08/are-annuities-too-cheap-part-2.aspx
 
He addressed some the questions I had above regarding using a put strategy to hedge.  It looks like that specific rider in these contracts may be relatively cheap.  He does mention, "Moreover, just because the add-on charges for these optional features may be too low doesn't mean that the overall level of fees for annuities isn't high. "
 
I would be interested in seeing a comparison of the tax differences between how long run capital gains verus regular income tax on annuity payments will affect the value of the portfolio in the long run. 
 
Try reading posts in this thread, that issue has been covered.

deekay's picture
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Akkula wrote:snaggletooth wrote:theironhorse wrote:i do not pretend to know everything, but who is the annuity "expert" who criticized VA's for obnoxious expenses but within the last 2-3 years came out and admitted they are likely underpriced now when you consider the living benefit riders?
 
Moshe Milevsky.
 
Here is the article:
http://www.fool.com/personal-finance/insurance/2007/01/08/are-annuities-too-cheap-part-2.aspx
 
He addressed some the questions I had above regarding using a put strategy to hedge.  It looks like that specific rider in these contracts may be relatively cheap.  He does mention, "Moreover, just because the add-on charges for these optional features may be too low doesn't mean that the overall level of fees for annuities isn't high. "
 
I would be interested in seeing a comparison of the tax differences between how long run capital gains verus regular income tax on annuity payments will affect the value of the portfolio in the long run. 
 
In short, you can't.  It would be an exercize in mental masturbation.  Why?
 
Do we know what income tax rates will be in the future?  Do we know what a clients income tax rate will be?  No.  Do we know what the LTCG rates will be?  No.  Can (and will) the government dick with all these things on a regular basis?  You betcha.  So... 
 
All we can guarantee is that things will change.  Using assumptions to predict the future (i.e. which strategy is "better") is futile.  Because as soon as one assumption doesn't work out, our choice can become the wrong one.  So the best thing we can do as advisors, is encourage our clients to do something that will put them in a better spot than where they are now.  If it turns out to be an ETF portfolio with puts is better for the client than another strategy, so be it.  If it turns out to be a VA, good deal too.  All we can control is investor behavior, and our own productivity.  If you do these two things well, your specific investment strategy won't matter. 

Akkula's picture
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No, the difference is I can always move a client into an annuity if tax rates change.  Without paying a surrender charge, you cannot generally go the other way. 
People try to predict tax rates all the time when they decide to invest in Roth vs Pretax.  If you are in a taxable account, you have to choose the best strategy given the current situation and then adjust is when those conditions change in the future. 
 
Furthermore, while I respect the posters on this forum immensely, I am not sure the posts on this thread qualify as a formal study regarding annuity investing versus long term capital gains investor over the long run.  For one thing, we need to see the final returns if the current tax situation continues as well as find out how much more risk is assumed by the investor being outsde of the VA.

anonymous's picture
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Joined: 2005-09-29

Akkula, you seem to be missing the fact that the overwhelming majority of VA money is qualified money so tax law changes as they relate to non-qualified assets are meaningless to the conversation.

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