EIA's vs. VA's
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I don't sell either of these products, but this forum seems to lean heavily towards EIA's over VA's. Can someone tell me what the main differences are and the pros and cons of each ?
It is my understanding that you don't need a series 7 to sell an EIA. So any ins salestype who can't pass the 7 can call themselves a financial advisor.
Navet - I'm surprised you are talking about advisors and the Series 7 in the same sentence, since those who pass the Series 7 are registered representatives or stockbrokers.
Another interesting fact, you don't need a CFP to call yourself a financial planner, you also don't need a series 7 to sell mutual funds or VA's, which is basically what you do at Jones isn't it?
Ron - didn't mean to hijack your thread. To get back on topic. I wish I knew a lot about it. From what I understand, there are several differences.
VA's invest in underlying mutual funds, and the risk is borne by the client. It is basically an account with an insurance on it.
EIA's basically buy at the money calls on an index. index goes down, options expire worthless, index does nothing, options expire worthless. The guarantee per year I can't remember what they do with. But if the index goes up, they exercise the options
Biofreeze or anybody else who knows about EIAs, feel free to punch holes in what I said.
I see value in EIA's, not so much in VAs.
Pros for EIAs: Guarantee, market participation, can have short surrenders.
Cons: Usually some surrender, not 100% market upside.
Pros for VAs: Guaranteed income stream
Cons: It invests in mutual funds, high expenses.
DISLCAIMER: I don't use either of these products myself, but the more I learn about EIA's, the more I think they can be appropriate for someones money.
Have gone up against EIAs in the past and here is what I ran with:
EIAs can be sold without a securities license and that is usually the only equity option for an insurance only agent. At least if someone has dual licenses they have the option of fixed annuities, mutual funds, variable annuities or EIAs or corporate bonds..... EIAs have participation rates and when they were first rolled out it was 100% and now most limit it to 50%. In addition to the limit on the daily participation, further reducing the amount of gains. EIAs usually had to be held fully to maturity to get the index gain. If the owner passed or took withdrawals it could be reduced to the minimum rate guarantees.I sold EIA annuities when they first rolled out at 100% participation and looked at them again when up against them as competition about 2-3 years ago and I wouldn't have sold them. But like any other product some are better than others and I may have only looked at the poorer choices when comparing.
VAs can provide a guaranteed income stream with market appreciation for inflation fighting. Lots of folks came in almost crying during the correction and then left with big smiles on their faces after they realized the income stream feature, especially compared to straight mutual funds. VAs can also have guaranteed principal amount riders or even old fashioned death benefits. VAs can allow an advisor to move within subaccounts or into and out of the market via fixed account options. Not maybe the best plan but with panicky customers at least they have options.VA cons: fees and very difficult to explain or get customers to realize what they have. An EIA is just an easier product to explain.
Net / Net there is never one panacea product for every situation. I could argue both successfully in different situations.
Ron
I sell the Nationwide VA with the 10% simple interest step up for 10 years. If the client can leave the principal alone for 10 years the income base is double. 100K initial invest = 200K benefit base which 5% can be withdrawn for life (10K) a year. Like Roxie said most EIA have either a participation rate ie (only 50% of your money is invested in the market) or a cap 10% (market goes up 25%, your account only goes up 10%). With the market still down I like the idea my clients can get a good bull market but also have guaranteed income if the market struggles. Surrender is 7 years on Nationwide. When I was at Jones I was told the same thing about EIA, that they were evil and we needed to save our clients from them. I actually think they are fine, and the best choice for some but I prefer the upside of a VA. Now if you get a tool like BioFreeze pitching 20 year surrender EIA to your 85 year old client, then maybe the Jones guys have a point.
Going back to the original post, I will quote "South Park"----Its a choice between a giant blue duche and a shite sandwich. Long term, they both suck
VA=risk is borne by the client
EIA=risk is borne by the insurance company, but the client doesn't have much upside potential.
Either can be fine depending on the client and what product you are selling them. For instance the EIA's that pay north of 10% commission can't be good for a client due to being tied up for 15-20 years.
Geez, what a harsh crowd to both VA's and Index Annuities. I use both and I use them well. Annuities as a whole make up 35% of my business. They are great tools for clients.
Right! This is why they are now called "fixed indexed annuities"- cuz that's what they are! (never should have been called EIA- very confusing)
[quote=Ron 14]
Why would certain banks and EJ stay away from EIA's ?
[/quote]
As was stated before, they have an unsavory reputation due to some really bad apples, and have seen some heavy litigation. They are hard for even the FA to understand completely, much less the client. If Ice was right, you could probably construct a portfolio with bonds and options that would outperform the insurance contract. (That is if you could offer options).
Publicity.. For jones it would make sense if they would, but it crosses over to a issue they aren't comfortable with (options)... They believe in buy and hold(which in and of itself would make sense for EIAs) however the high commission(ICE is right on some products) the tv news shows saying how bad they are and the fact that they make money underwriting bonds(and this would take away from that)... Also i am sure they would make an insurance company come up with a special one for jones(and minimize commission)..
Ron, no offense...I was rated the thread, not necessarily your post. I've used both VAs and EIAs and don't think either of them are sh*t sandwiches. Some clients simply are not willing to accept market risk. Some clients need a guaranteed lifetime income on at least some of their assets. Many people are exceedingly disappointed with current available bond and CD interest rates and are looking for ways to increase the income they have from CDs, etc. Those are just a few of the reasons I've found to use VAs and EIAs. For those of you writing them off and refusing to offer them as alternatives, I'm cool with that too, but in my world, I'd be writing off at least one in five good prospects if I did that.
[quote=Ron 14]
Why would certain banks and EJ stay away from EIA's ?
[/quote]
Probably the same reason Jones discouraged B and C shares, did not have managed accounts all those years. They want to keep in simple to avoid litigation issues.
Ice- Great explanation.
To put it simple how about...
$100,000 EIA = 80k in zero coupon bonds maturing at 100k + 20k in options potentially capturing upside of index - expenses.
$100,000 VA = 20k x five various mutual funds - expenses.
Structured products are similar to EIAs also. They usually use options with European style settlement so all the costs can be precalculated.
As ice has stated before in another thread, tax deferral is the only part that cannot be replicated by a firm that does not restrict their advisors.
Jone does VAs with complicated riders--why not EIAs? They are much easier to understand AND at the very least you cannot lose principal (assuming blah blah).
Also EIAs are on "autopilot" where VAs have someone somewhere managing the subaccounts.