Annuity IQ

If you saw the nightly news on NBC last night you saw the story on annuities. I cannot believe they actually aired that story. Now, I am not justifying the broker who sold that person the annuity at all I think that broker should be imprisoned. But, NBC failed on being specific on the Annuity contract sold to the investor.

They did not mention that the contract sold was an equity index annuity, not a variable annuity or a fixed Annuity. There is a huge difference in these products, but NBC made blanket statements that are inaccurate and untrue about annuities as a whole. What they did was generalize all of the products and the sales people selling these products. I am no fan of equity index annuities, but even I think this story was over the top!

Stories like these, which I have direct knowledge of the industry and the product, raises my suspicions about the information I receive from the mainstream media. I know this story was inaccurate and full of generalizations; do they do this with all stories? Your guess is as good as mine.

The product sold to this investor was clearly the wrong product. Given the fact that this person was 87 and had dementia he should not have been sold any investment product. That was the real story, not just the annuity product. This misinformation is the reason annuityiq.com exists to begin with.

NBC needed to do real research, apparently they did little to none at all. They interviewed Consumer Reports for an annuity story, I mean come on! This is not a TV or a car this is an investment product and they should have consulted experts on this issue.

I do not like equity index annuities. I think they are extremely confusing and dangerous products. With that being said, there are some good equity index products out there that can help and not hurt people. The first rule of thumb is, if it sounds too good to be true, it probably is.

This was clearly a bad story and I sent off a very strongly worded letter to NBC, let’s see if they respond back.

Here is the letter I sent:

Dear NBC News,

I just watched your piece about annuities and I am concerned. Not at the agent who sold it to the gentleman, but at you (although I am angry at the agent too). I feel that the broker who sold this product to a person with dementia was the real story, not just the product. As a former financial advisor, I would never sell any product to anyone with dementia or any other mental illness, and that should have been the key component of the story. How in the world can you generalize that all annuities are like the one sold to that gentleman? You cannot. Did you even know what product he was sold? I do and it was an equity index annuity. You needed to make that CLEAR to your viewers.

What you said that was wrong or inaccurate:

You said “You have to plunk down a huge amount of cash”. That is not always true and most investments involve big lump sum investment.

You said; “annuities take years to mature”. That is not true at all, annuities do not mature. CD’s mature, annuities have surrender schedules that end after a certain number of years. You can, however, access up to 10% or more of your purchase premium every year. That means you have some liquidity.

You said; “many agents selling annuities do not understand how they work, but they can make big money”. Yes, the investment world is commission driven; almost every job is based on sales, including journalism. You depend on selling ad space. No ad space sold, no paycheck. Your point was not accurate. Most annuities pay 7% or less in commission and the product sold to the gentlemen you interviewed was a high paying and bad annuity product.

I cannot believe you did not bring in an expert to talk about this. Instead you used consumer reports, why? I would use consumer reports to talk about cars or TV’s, but annuities, I do not think so. A simple Google or Yahoo! Search would have brought you several experts who could have given you a fair and balanced view of these products and given you the problems with the product sold.

You just caused panic for every person in America who owns an annuity contract, and why did you do that? Because one broker sold one bad product? You need to run a revision on this story and explain yourself. You need to explain that this was a specific Annuity, an equity index annuity (which are bad products for the most part), not a regular fixed annuity or a variable annuity.

annuities are tricky investments and that is why AnnuityIQ.com exists. To state annuities are bad or to use this one case to show annuities are evil is irresponsible journalism. Although this is not an isolated case, it is, however, a serious problem with equity index annuities, not of all annuities. I do not sell annuities I show people how they work. You should have consulted us first and you could have gotten a balanced fair answer. This would have included condemning the broker who did this and the product, but making it clear on what type of product it is and a fair warning to seniors. Instead you opted to generate fear and even more ignorance.

Here is the link to the story: http://www.msnbc.msn.com/id/14607656

You may have read about this on different news web sites. We felt that we needed to comment on this new development. We should mention that we hold Raymond James in the highest esteem. Their commitment to quality and fair play is legendary in the financial services world.

We also commend them on their decision to reduce base fees on variable annuities, it makes our job easier. However, this does not change the fact that different optional benefits still incur additional fees to the consumer. It also does not change the fact that all living benefits are different and unique in the industry. Therefore, what we do at Annuity IQ is still very important.

What we really like is Raymond James not only reduced the fees to the consumer, but they put their money where their mouth is and reduced their commissions to the brokers. I know the brokers do not like this, but it now allows for a more level playing field. Raymond James has mandated that no variable annuity product can pay more than 7% over a 7 year time period (this means the up-front and trailing commission can not equal more than 7% total) and the maximum surrender schedule can only be 7 years. They also mandated that the M&E fees to be 1.15%.

Capping commissions is nothing new to the industry some firms always capped variable annuity commissions, usually wirehouses and major banks. The cap is, generally, at 4% to their sales force and some even forbid you from taking trail commissions. The firm will then keep the difference between what the product actually pays and the cap of 4%.

For example:

If a product pays 6% commission the broker only receives 4% and the firm will then keep the extra 2%.

The idea was to create a level playing field, but the reality is that it is a huge money maker for the brokerage firms. If they had initiated what Raymond James has done, then the consumer would have been the real beneficiary, but I digress.

Will the rest of the broker dealers follow suit?

This is the question at hand and we really hope that they all do, but it remains to be seen. If the industry lowers fees all around this will be a true win for the consumer, even though it will pay the broker less money. This also deals a decisive blow to the anti-variable annuity crowd.

This move by Raymond James eliminates 2 of the biggest complaints variable annuity pundits have; high commissions and high fees (which several studies already debunk by the way). The rest of their arguments are usually irrelevant and will naturally disappear over time. Even though we disagree with these arguments of the variable annuity pundits, we do agree that lower overall fees are a great thing. Now, the consumer can get an even better deal than before by using Raymond James.

We applaud this move and are hoping that the industry takes notice and adjusts to what Raymond James has started.

I believe we need a more balanced approach to variable annuities. It is easy to say that Variable annuities are not right for anyone. It is also easy to say that annuities are right for everyone. In today’s world people are polarized in their positions and being polarized is getting nothing accomplished.

variable annuities offer an opportunity to invest their money tax deferred and provide guarantees that no other investment can offer. They do have drawbacks, but all investments have some kind of drawback. annuities are long term investments and if you draw money out before 59 ½ then there is an IRS early withdrawal penalty. You do have, usually, up-to 10 to 15% annual liquidity on these contracts and you have income guarantees, called living benefits.

People concentrate too hard on the negatives of these investment products and not enough on the good qualities that they offer. We can all make a case against any type of investments based on some negative qualities. There is no such thing as a perfect investment vehicle for all people. By simply pointing out one or two negatives about an investment does not constitute a sound argument. You must look at the bigger picture.

The bigger picture is that variable annuities get people who need equity exposure to invest their money. They do this because a variable annuity offers living benefits and guarantee people their money back in some way shape or form. What people fail to realize is that many investors who are risk adverse and need equity exposure will not invest in mutual funds. They will often times invest in a variable annuity.

This is important because risk adverse investors will stick with safe investments which can guarantee them a low rate of return. I know for a fact that you cannot talk these people into investing in regular mutual funds and if you do then they are not going to be happy at all when it goes down in value. If, on the other hand, they had a variable annuity with a GMAB then they may be comforted to know they can get their money back after a set number of years.

Is paying an extra 1% that big of a deal? Think of it this way; if the average annuity costs the investor 2% a year they have 98% participation in the market. If they did nothing at all then they would have, as of right now, 3-4% total return in safe investment vehicles, including fixed and equity index annuities. Not to mention that several studies show that mutual funds loose between 2.5 and 5% of their total performance because they are taxable investments.

With variable annuities you are investing in sub-accounts and these sub-accounts hold less cash than your typical mutual fund. You have far less turnover rate than in traditional mutual funds and this means that you have lower internal expenses for trading the stocks and more money invested in stocks or bonds. This combined with the tax deferral and living benefits can make a variable annuity superior to mutual funds, especially for investors who are risk adverse.

I could not recommend anyone putting 100% of their assets into these products though. That makes no sense at all and can create significant issues down the road. I believe they are appropriate investments for those people who are looking to insure their riskier investments. We insure or homes, cars and our valuable possessions, but for some reason when we talk about insuring our investments the experts go nuts.

That is what we are talking about insuring your investment portfolio. The odds of you ever using your homeowners insurance are slim, but we always renew the policy. When we consider just over the last 10 years we have had several market hiccups and one really nasty, long bear market to think that it cannot happen again is crazy.

As a matter of fact the odds are high that we will suffer another bear market in the future. As we all know the market never goes straight up or down and that is what living benefits can help stabilize. If you are taking income from your portfolio a dramatic market downturn can create havoc with your income and negate your opportunity for a recovery. For some reason many experts who do not like variable annuities miss this important fact.

When they quote 10% a year from the S&P 500 they are never talking about the rate of return for people who are taking income from their portfolios. The fact is when you are taking withdrawals from your account and the market goes down it takes a long time for your account to recover, if it ever does. This important fact needs to be brought up again and again.

I have been reading several advice columns who criticize brokers for recommending variable annuities to investor whoa re about to retire. When we consider that these investment vehicles, Variable annuities, have guaranteed living benefits it makes sense to recommend a portion of the investment to go into a variable annuity. As we stated above, insuring a portion of your investments is not a bad idea. I am not advocating using 100% of your money to go into these products, but a portion of your money sure does make sense.

Did you know that variable annuities have 1.8 trillion dollars in assets? This is more than the entire 401 k market place. That is just an astounding number, 1.3 trillion dollars.

With all of these assets we are still puzzled as to why variable annuities are the redheaded step-child (no pun intended I have red hair) of the investment world. The fees are coming down and living benefits are adding more value to the consumer. These living benefits can no longer be ignored and they should not be.

Here is why:

A $100,000 investment in the S&P 500 made in 01/01/200 turned into about $60,000 by 12/31/2002, a 40% drop. If you where taking income from this investment you would have had to make some tough decisions. Let’s say you started taking, from day 1, 5% withdrawals or $5,000. As you continued to take these withdrawals in this declining market you account value would have gotten crushed and would be worth about $45,000 to $50,000.

Since you started taking out 5% a year as your account value decreased your withdrawal percentage increased. By 2002 you would be taking out 10%, or more, of your account value to maintain the $5,000 a year income. This puts a huge strain on your investments and diminishes any chance of your portfolio to recover.

You would have to choose, continue with this excessive withdrawal amount or drastically alter your life style and take much less income out of the investment. Both options are difficult decisions to make.

On the other hand, if you had a variable annuity with a living benefit then the decision would be easier to make. Even with higher fees and all the other negative claims variable annuity pundits make about these products it was still a better option. Why? Because if you had a 5% for-life benefit then your income would not have to change at all.

As a matter of fact this income will continue for as long as you live, even if your account goes to zero. This important fact is over looked by many variable annuity pundits. When you consider the fact that if the market suffers significant losses over the first year or 2 after you retire and you are taking income chances are, even with positive returns over the next few years, your money can still run out prematurely.

This is important to know because people who retired in 1999 through 2002 are in this situation. Why not insure a portion of your retirement? Why risk it all because, historically speaking, the market has always done ok? The fact is you should not risk it all and the market goes up and down.

The impact of taking withdrawals from your investments during a negative market is now being closely looked at. Genworth has a great example of this, but of course it is not client approved. If you risk it all and it does not work out, do you really want to go back to work at 70 or 80 years old? I doubt it and these new living benefits need to be looked at in a very new light and they deserve the benefit of the doubt. variable annuities are not right for everyone, but thee benefits will transform the investing world over time.

Annuity IQ are about to announce that they are initiating coverage of two new variable annuity contracts. They have decided to add Genworth and Lincoln National to the list of existing annuity coverage.

Also, Annuity IQ is looking at initiating coverage on Midland National. Midland just released a new variable annuity designed for advisors and it looks fairly interesting. Our concern is that the new contracts do not generate enough business to be worth adding to the variable annuity database. Annuity IQ requires 1 billion dollars in sales to even be considered to being added to tour ratings list.

I am excited to be adding these two new contracts to our database and we should have all the information within a couple of weeks. Genworth barely missed out being rated last spring, as their numbers were less than 1 billion in sales. Lincoln was above the 1 billion dollar threshold, but they did not have any stand out living benefits, now they have some interesting things cooking over their.

We will keep you updated when these new contracts get added to our database.