Annuity IQ

I was happy to see an article on the disadvantages of flat fee variable annuities on the WSJOnline publication yesterday. Even though it painted all annuities as being bad it did bring to light that the flat fee variable annuity is not very good.

Actually, this article was strikingly similar to an article I wrote on the issue 6 months ago, found here. It also hammered home points I made about these products on the WSJ forum at the end of April. This, of course, troubled me.

When you Google the term Flat Fee variable annuity or flat fee annuity my site, Annuity IQ, comes up on the first page of the results. This led me to review the information I provided on both my site and the WSJ forum. As I reviewed the information I provided and then at the information the WSJ provided, it was almost identical.

What troubled me the most was the fact that since the information I provided was so close to theirs it made me wonder if they used my story as the foundation for this story. If they did then they did not cite Annuity IQ as part of their research which, obviously, they should have if they did use my information. It is clear that a basic hunt for information would show my web site and with the information provided by WSJ being so similar it makes me wonder how this could have happened.

I think you know where I am going with this and I have sent letters to all of the managing editors of the WSJ. If I get a response I shall fill you in as to what they say. I know that mimicking good ideas is the best form of flattery, but that, in my opinion, is no excuse not to list a source of information. I just want credit where credit is due, if they used my site as part of their research I should be cited, period.

Read the two articles and make up your own mind, but it seems pretty clear to me what happened. Their article can be found online, if you’re a subscriber to the online version, or in the paper version in the May 26^th edition on page B-1.

OK, so I was checking out my RSS feeds yesterday, like I do every morning, and I ran across something unusual. I have an RSS feed, or did, right to Mr. Burns blog and to my surprise it was no longer active.

Being the inquisitive person that I am, I then visited the site to see what was going on. I could not believe my eyes! Talk about being a hypocrite, this guy who for years has stated the following:

1. Always index your money or use Vanguard.
2. Never pay commissions.
3. Do it yourself, it’s easy.
4. He am always right.

I guess he never meant a word of what he preached because now he is an active participant in selling fee based investments. He and a group of other people are using Dimensional Advisor Funds and charging a management fee for the service. Now, granted the management fees are low, they range from .50% to .25% for investments over 4 million, but it still stinks of hypocrisy.

Seriously, he has been talking about the ‘Couch Potato’ method of investing for how many years now? On top of that he has consistently criticized brokers and others for charging fees to manage money, but I guess it is OK that he is the one who charges fees now.

This explains why he has been talking so much about American Funds lately. As the fees he is charging, combined with the mutual fund fees, are equal to the fees American funds charges on an annual basis. I am willing to bet that he will soon start to make that comparison between his new company and American Funds.

I am not opposed to anyone making a living providing a reliable and solid service, but to sell your soul like that is just wrong. I mean, going and giving all of that advice to index your money and now making a 180 turn around and saying, well what we are offering is different and better, I mean come on.

Not to mention that he still has no direct roll with talking to clients his title is Chief Investment Officer. In other words he will be collecting a fee for cheerleading the Dimensional Funds. What I find amusing is that you can buy the Dimensional Advisor Funds only through an adviser or RIA, so much for the words of wisdom, right Scott?

Anyhow, I thought you all might like to know that even Mr. Burns realizes there is money to made in the real advice game. Since it is OK for him to collect advisory fees then it must be right, because Scott is never wrong.

I wonder if he will continue his ‘Couch Potato’ portfolio, or will that be replaced by Dimensional portfolios now?

Of course experience matters, especially when you are dealing with annuities and other financial instruments, but I have witnessed a growing trend. There is a difference between actual experience, individual vs. combined experience, as in adding together more than one persons time in the business.

I have 14 years of actual financial services experience which is a decent amount of time in the industry, but not as impressive as saying 30 years experience. What many people are now doing is using combined experience to make themselves sound more impressive. By that measure I could sound extremely impressive because my whole family is in the financial services industry.

My families combined experience is 75 years of experience, wow, a long time. Of course, this just sounds good and has little bearing on knowledge and all the different events that the market has suffered from over the past 75 years. As a matter of fact, all that combined experience covers just about the same time periods in the market, especially over the last 15 years.

In other words, it is meant to impress and has little impact on actual experience or knowledge. More or less it is a play on words, but I see more and more of this all over the place. Someone who claims 30 years combined experience could have one person who has been licensed for 29 years and another person licensed for 1 year or possibly it could be 30 people licensed for 1 year apiece.

In my opinion it is just stupid to make the combined experience claim and while you may look strong on paper, the experience you claim to have is misleading. By their logic I can now count my families time in the business as experience, but where does it end? Can I include my friends and co-workers? If so then I can chalk up another couple hundred years….funny I do not feel that old.

My point is, do not be afraid to be honest about your actual experience. While a longer time in the business is desired by many investors it is not always a good indication of knowledge. Some of the brightest people I know have less than 10 years experience in the business and they have taken their CFA exam and are on the fast track to becoming an investment banker or other high profile positions. The more honest you are the better the return.

I just read an article titled, “10 Reasons I think variable annuities are a Bum Deal” which is yet another poorly written article by a huge anti-annuity person.  It is safe to assume the author does not have a clue to what he is talking about.

Let us begin our journey of showing you why he is oblivious to how and what variable annuities can do for people.

He first states that 90% of annuities are being sold wrong, that is, of course, his opinion and not based on any facts. I am willing to bet that he believes all people should invest with him and pay him a hefty advisory fee though.

He then goes on to say this, “No-load, low-fee variable annuities do exist, but few people ever buy them because they’re not actively marketed.  On the other hand, high-commission annuities are sold aggressively – mostly by insurance agents. Instead of educating their customers about annuities, many insurance agents take advantage of the fact that their customers don’t understand annuities.”

Umm, hello! Have you been to Vanguard, T. Rowe Price or Fidelity’s websites recently? Perhaps you may read money magazine or any other drive by advisor’s commentary on variable annuities. They ALL brag about the no-load Variable annuities, if that is not aggressive marketing I do not know what is, but don’t let the facts get in the way of your rant.

If you want to talk commissions then let’s talk commissions. Is paying you 1.5% in an advisory fee annually for 6 years more or less than a 6 or even a 7% variable annuity commission? Now, are you really educating people on variable annuities? No, you are not. Instead you fill the internet with garbage. I, on the other hand, take a more balanced approach to things and do educate people on annuities. Again, do not let the facts get in the way of your rant.

He then goes on to mention the usual arguments, fees of course. He states that a variable annuity fee is 12 times higher than a no load mutual fund. Umm, ok so you sell your clients no-load funds and charge them for it? Why, isn’t that the pot calling the kettle black?

He also states that some annuities charge you to trade between sub-accounts in the contract. This is only true if you make more than, usually, 12 or 25 exchanges in a year. Anything more is considered market timing, you know the thing mutual fund families got in trouble with a couple years back. By the way, most contracts do not charge you the 30 to 50 dollar charge if you have an account balance over $50,000.

Back to the commission thing for reason number 2 and this is what shows me he has NO clue to what he is talking about, he says this; “(Some heavily promoted “bonus” annuity contracts pay commissions up to 14 percent.)” Well contrary to popular belief the limit variable annuities do not pay more than an 8% commission.  

To my knowledge, in the last 14 years, no variable annuity has ever paid a 14% commission. They have equity index annuities that pay out that high of a commission, but not a variable product. Plus, bonus variable annuities actually pay the agent LESS commission, not more.

His next reason is that variable annuities have an IRS early withdrawal penalty if you take money out before 59 ½. He fails to mention that the penalty is only on the growth of the account, not the principal amount. He also fails to mention that these are exactly the same rules as IRA’s and 401 (k) plans.

Yawn, here is what he said next; “variable annuity investors who want their money back in the early years have to pay what I consider punitive surrender charges in the form of early-withdrawal fees that enrich the insurance company.” Punitive charge? You mean the contingent deferred sales charge that every agent has to have the client sign multiple disclosures for? In fact, the fees and the CDSC is the most disclosed item on a variable annuity and there are far more disclosures for variable Annuity charges than for mutual fund charges. Here is a solution, if you need your money quickly do not invest in anything other than a money market account.

On to his next reason, taxes, here is what he said; “The tax benefit of a variable annuity is often its strongest selling point – yet in real life it is usually a cruel illusion.” I guess he likes paying taxes on money he has invested regardless of whether or not he has used it. Also, considering that the average mutual fund has a 78% turnover rate and most distributions are taxed at ordinary income, not taxed at his prized long term capital gains rate, this argument is useless to him.

Then he gives a poor example of how this tax treatment works, in his view. What he fails to show is all the money you had to pay, either out of pocket or from the investment, in taxes on owning a mutual fund because of the annual distributions. I love how these drive by advisor’s use gross numbers for their side of the argument and net numbers to show how ‘bad’ the annuity is, that’s fair and balanced, right?

Number 7, variable annuities inside of IRA and 403 (b) plans. This is an oldie, but a goody, here is what he said, “But inside an account that is already tax-sheltered, there is no additional benefit to an annuity. The extra costs pay for nothing. In my view, placing Variable annuities inside already tax-sheltered accounts should be illegal.”

OK, this is like beating a dead horse, a variable annuity is not sold for their tax deferral inside of an IRA. They are sold, more so in recent years, because investors value the future income guarantees that a variable annuity provides through living benefits. Investors realize that the market can turn bearish at anytime and they now know it can be severe. These living benefits protect them from this, but I guess that point does not matter to him.

Wait! A new one, oh, never mind…annuities stink for beneficiaries. Seriously, how many people are investing their money for their heirs? Not only that, but there are non-qualified stretch annuity concepts to be used, control from the grave and a ton of optional death benefits that can be selected to help the heirs pay the taxes on the investment. The fact remains that Annuity investments are made by the owner because s/he likes the idea of a living benefit or tax deferral. These are, usually, not investments made for the heirs of the contract owner.

Finally, he says this, “If your financial advisor is suggesting that you buy a variable annuity without fully educating you on these points, you could be in grave financial danger. The rest of this person’s advice has to be suspect, now and forever.  Trust is the primary ingredient in any investor-advisor relationship; it would be very hard for me to trust anyone who recommended such a product without fully explaining its ramifications.”

Considering he has not educated anyone about anything, in regards to annuities, I find his analysis a joke and an insult. If he cannot even get the commissions on a product straight then how can you trust him to know exactly what he is talking about.

And, do not forget this, he makes his living off of charging people a management fee for buying no-load mutual funds and that makes him suspect and biased in my eyes. If you want information on variable annuities, than go to someone who has some authority on the issue. Do not go to someone who is predisposed to hating them and only specializes in managed money. It is like the old analogy; if you want great seafood then do not go to a steakhouse. 

In the annuity world there are traps and pitfalls, this is not news though. What is news is that Allianz will finally be called out on their sales practices and product line. In my opinion, it is about time.

Not all of Allianz’s products are bad, but their most popular products are. Typically, their popular annuities are structured like this, low rate of return, long surrender schedules, forced annuitization and they pay high commissions to the agents selling them.

Being an annuity lover, these products have always left a bad taste in my mouth because they simply do not deliver the promises they say they will. I know many people love EIA’s and that is fine because there are some good ones out there.

With that being said, how can anyone say that a product that offers a 10% bonus, has a 10 year surrender schedule and you have to annuitize it to realize the products gains is a solid investment? In some situations it may be good, but not at the levels Allianz was selling this product at.

Does the lawsuit have merit? In short, yes it does. Do I agree with the attorneys claims? No, not all of them. Allianz has been a powerful figure in the IMO, insurance marketing organizations, for years now. They have a dedicated IMO based in San Diego, California that specializes in helping you sell more Allianz products, to seniors especially. This, I am sure, will all come out in the lawsuit.

Now, the attorneys say that seniors should never buy a deferred annuity because of surrender schedules and liquidity. They are partially right, a senior should not buy an Annuity if they will need access to more than 10% of their investment. Long surrender contracts, over 7 years, should be the main thrust of the lawsuit not all annuity surrender schedules.

To put all annuities at the same level as these products Allianz is being sued over is incredulous. There is a vast difference between an equity index annuity, a variable annuity and a fixed Annuity. They all work differently and should never be compared to each other as equals.

Anyhow, the question at hand is can Allianz win? I will predict they will not, but either will the clients. As with most class action lawsuits the real winners will be the attorneys and the people who actually got hurt will receive very little.

A good example of a class action lawsuit is the Google click fraud settlement. Google was sued over not identifying people intentionally clicking ads and it cost advertisers millions upon millions of dollars in fraudulent clicks. Google settled for 90 million, or so, but the attorneys received 30 million in fees. The people who got hurt only received a few dollars in the settlement….I should have been a lawyer, but, unfortunately, I have a soul I wish to keep.

Allianz will probably not win because the plaintiff’s attorneys will parade hundreds, if necessary, of elderly people who were sold these annuities. No jury in the world will disregard people that are probably their grandparent’s age. The tragedy is people did get hurt by these products, but they will see little return from this upcoming long process they will have to endure.

Equity index annuities are a tough and complex game with many moving parts. Great care should be made when recommending these products. Any annuity that can afford to pay the agent a 10% commission and the client a 10% bonus cannot be good for the client, as they will have to pay for the insurance carrier’s generosity at the end of the day.