There's two ways to choose risk management as far as I see.

a) construct mutual fund portfolios which match your clients risk tolerance

b) use annuities with living benefits

I choose the former because it's less expensive, treated better taxation wise, and assets are usually more available

When I sit down with my clients and explain the way I run my practice I explain even in "conservative" portfolios not only is there a chance you will lose money some years,  you WILL lose money some years.

When we get past that part, I close the sale.

scrim

Scrim,

How big of a tax benefit do you think mutual funds are over VAs?

[quote=BankFC]I think the 3 and 4 year products are probably best...plus you are doing some "annuitizing" of your book in the process.[/quote]

Exactly.

Has anyone gone back and rolled over those 3-4 year annuities into "new" contracts or do you tend to just let them hang out there and spin off a trail.

[quote=BankFC]

Scrim,

How big of a tax benefit do you think mutual funds are over VAs?

[/quote]

Not very

You're right.  In fact the difference is very small, due to the fact that mutual funds have something called TURNOVER, which is the buying and selling of a stock within a year.  This is taxed at ORDINARY INCOME RATES.

No mutual fund I am aware of is truly taxed at the 15% LTCG rate. 

[quote=BankFC]

You're right.  In fact the difference is very small, due to the fact that mutual funds have something called TURNOVER, which is the buying and selling of a stock within a year.  This is taxed at ORDINARY INCOME RATES.

No mutual fund I am aware of is truly taxed at the 15% LTCG rate. 

[/quote]

To that point I use tax efficient funds whenever at all possible.

I try and explain to my clients the difference between tax free and tax efficient.   I think they get it.

scrim

The point is that saying "I prefer mutual funds because of the better tax treatment" is a very weak argument at best.

Wow...how timely is this...quoted VERBATIM from a client email I received just  few minutes ago...

"I know, but I want to put it in something secure.  That one plan you were talking about just scares me.  It seemed to much like a gamble and I don't want to lose everything.  My mom was in something like that and lost $16,000.00.  I don't know if she made it back or not."

I'd proposed a fee-based package to her on a large life insurance settlement recently and was asking her what she thought of proceeding.  Well, guess what the next proposal includes?!!

If it's money the client is going to leave to their kids, but don't want to see it go down, a VA is perfect (especially with restricted beneficiary options if the kids aren't responsible). 

Actually, if it is money that they are planning to pass to heirs an annuity is not a very good choice because it has no step up at death and the beneficaries get to pay ordinary income tax on the deferred gain.  

If the kids are irresponsible they would be better off by putting the money into investments in trust that has spendthrift provisions.

If they are young enough or healthy enough instead of an annuity, why not do a single premium life policy? They would get an immediately magnified death benefit that would pass tax free to the heirs and free up some of their cash to do other investing.

"If it's money the client is going to leave to their kids, but don't want to see it go down, a VA is perfect."

I'll concur what with what babbling looney is saying, non-qualified annuities are not good assets if the purpose is to give money to the kids.

Scrim, you ignored my question asking why annuities are not appropriate to use for qualified money.   

"I prefer mutual funds because of the better tax treatment" 

For qualified money, the tax treatment is identical.

For some of your clients, investing in mutual funds in a conservative portfolio will GUARANTEE that they can't achieve their financial goals.

(Disclosure:  My variable annuity business varies from year to year.  It probably ranges from 5% of my assets to 20% of my assets depending on the year.)

Here's an interesting "did you know".  I can't back this up, but I heard from someone at T. Rowe Price that they now have more dollars invested with them through sub accounts then they do directly in their mutual funds. 

[quote=babbling looney]

If it's money the client is going to leave to their kids, but don't want to see it go down, a VA is perfect (especially with restricted beneficiary options if the kids aren't responsible). 

Actually, if it is money that they are planning to pass to heirs an annuity is not a very good choice because it has no step up at death and the beneficaries get to pay ordinary income tax on the deferred gain.  

[/quote]

I agree with you for non-qual money to a point, but in an IRA it doesn't matter.  Even with non-qual money, the fact that the annuity locks in market gains annually gives the client peace of mind. A lot of children gladly paid taxes on their parent's annuities in 2002, when the actual account value was down 40% from the high. And with the ability to stretch annuities, they are not as painful tax-wise as they once were. I can still see going either way depending on the client's risk tolerance and goals.

[quote=babbling looney]

If the kids are irresponsible they would be better off by putting the money into investments in trust that has spendthrift provisions.

[/quote]

I agree that is better, but some people don't want to pay a couple grand to setup the trust.

[quote=babbling looney]

If they are young enough or healthy enough instead of an annuity, why not do a single premium life policy? They would get an immediately magnified death benefit that would pass tax free to the heirs and free up some of their cash to do other investing.

[/quote]

That's another good way to go, if the client is very sure they will NOT need the money. In the annuity, they can pull it out if needed.

Like I said, I agree with pretty much everything you said.  Depending on the individual and their situation, annuitites sometimes work great, sometimes there are better options.

Right on. 

As financial advisors we need to be flexible and make our recommendations to suit each client's individual situation.  We need to give all the options and help the client decide which suits them best.

I think that this is what we are trying to convey to Scrim.

[quote=anonymous]

"If it's money the client is going to leave to their kids, but don't want to see it go down, a VA is perfect."

I'll concur what with what babbling looney is saying, non-qualified annuities are not good assets if the purpose is to give money to the kids.

Scrim, you ignored my question asking why annuities are not appropriate to use for qualified money.   

"I prefer mutual funds because of the better tax treatment" 

For qualified money, the tax treatment is identical.

For some of your clients, investing in mutual funds in a conservative portfolio will GUARANTEE that they can't achieve their financial goals.

(Disclosure:  My variable annuity business varies from year to year.  It probably ranges from 5% of my assets to 20% of my assets depending on the year.)

Here's an interesting "did you know".  I can't back this up, but I heard from someone at T. Rowe Price that they now have more dollars invested with them through sub accounts then they do directly in their mutual funds. 

[/quote]

VA's are less appropriate only because of the higher fees.  There is no additional tax benefit.

This all being said,

Starting next year I will revisit some VA products for those clients who still seem a bit reticent adding to their fee based accounts.   If they are scared I may introduce an alternative.

Last time I checked the fees with some of the riders approached or even exceeded 3%.  Perhaps thru economies of scale they are lower presently. 

As far as being more aggressive, many of the contracts I read insisted that for principle protection guarantees you were required to have a 60/40 model as the most aggressive.    I felt it defeated the purpose.

Thank you for all the feedback and I will do more research when I return to the office.

Scrim

In some situations for HNW individuals, it can be used to control the RMD of

the individual, and pass on large sums to heirs. To wit: Annuitize the

annuity before the client turns 70 1/2, and use the distribution to fund a

VUL, naming an heir as the owner and benefciary, and the client as the

insured.



Agreed that this is a special circumstances scenario, but it does happen.

[quote=Starka]In some situations for HNW individuals, it can be used to control the RMD of

the individual, and pass on large sums to heirs. To wit: Annuitize the

annuity before the client turns 70 1/2, and use the distribution to fund a

VUL, naming an heir as the owner and benefciary, and the client as the

insured.



Agreed that this is a special circumstances scenario, but it does happen.[/quote]

As long as the client doesn’t mind giving that money away, and if it’s more than 12k/yr then they have to file a gift return.

[quote=joedabrkr]

[quote=Starka]In some situations for HNW individuals, it can be used to

control the RMD of

the individual, and pass on large sums to heirs. To wit: Annuitize the

annuity before the client turns 70 1/2, and use the distribution to fund a

VUL, naming an heir as the owner and benefciary, and the client as the

insured.



Agreed that this is a special circumstances scenario, but it does happen.[/

QUOTE]As long as the client doesn’t mind giving that money away, and if it’s

more than 12k/yr then they have to file a gift return.[/quote]



True enough, but that’s why the Good Lord gave us ILITs!

Scrim,

2 points:

1)There are plenty of quality VAs that have total expenses of under 3%.  This includes the expenses of the underlying funds.  When your clients invest, they have to pay you 1.5% + the cost of the underlying funds.  The difference won't be that large.  Regardless, it is the extra cost that is the issue, not the gross cost.

2)I don't know of any VAs that force people into model portfolios that don't get more aggressive than 60/40.  All the ones that I use allow people to be 100% invested in equities.

I just put about $300,000 into a VA for a client today.  The sale was simple.  They had a choice of using mutual funds and investing in a conservative portfolio or using a VA and investing aggressively.  As the advisor, I do not care what they do.  I'll get paid either way and I don't need to make more money today.  I give them the pluses and minuses of all options and let them choose.

[quote=anonymous]

I just put about $300,000 into a VA for a client
today.  The sale was simple.  They had a choice of using
mutual funds and investing in a conservative portfolio or using a VA
and investing aggressively.  As the advisor, I do not care what
they do.  I’ll get paid either way and I don’t need to make more
money today.  I give them the pluses and minuses of all options
and let them choose.

[quote=scrim67]

I try all the time in my own mind to make a case for
annuities in an overall investment plan.  I just can’t rationalize
it to this point since the negatives way outweigh the positives in my
professional opinion.  If I ever use annuties I will have a client
take a very small portion of their nest egg and buy an immediate
annuity.   

Perhaps this is retarding the growth of my business but my peace of mind is worth the price.

scrim