Annuity IQ

This is really no big surprise many fee based planners hate variable annuities. I think it is simply because they hate to see fees go to an insurance or investment company instead of going in their pocket. The fact of the matter is a fee based planner will charge, usually, just as much as a variable annuity.

Do I care what a fee based planner charges? Nope, not in the least, I am for people making a living. What I am against is them calling the kettle black because at the end of the day they usually are even with variable annuities when it comes to fees.

Oh, wait! They claim you should index your money instead. I guess I am wrong in my assumption and they are correct. The question is why in the world would you simply invest money for a client in an index fund and then charge a fee for it? In my opinion that is robbery when the client can simply go to the mutual fund company direct and invest and save the 1.5% annual fee the adviser would charge them.

In another article written by a fee based planner yesterday he cited many reasons not to like variable annuities. The reasons are the usual, fees, death benefit, etc. the only difference is he mentioned living benefits and slammed them. This made me chuckle to myself as he picked the least favorable living benefit, what a shocker.

The author, Jeff Bogue, went through all the arguments from high taxes to surrender schedule and he himself said index your money, with him so he can charge you a fee. The problem is his assumptions are all wrong and slanted.

For example he stated that there has only been two rolling ten year periods of negative returns for the S&P 500. Hmm, sounds interesting right? Sure it does, unfortunately he is wrong, as all rolling ten year periods, depending on when they start, can be altered to meet your point. What he does not even mention is the timing of income from the portfolio and the affect negative markets can have on your portfolio.

As many of you know my entire family is in the advisory business. Last Thursday I was speaking to my father, who has 34 years experience as a broker, and I ran a few questions past him. We were talking about annuities and how people got burned in 2000 to 2002 who were withdrawing money from their portfolio. He confirmed he has many people who felt secure to retire only to have their assets decline to a degree that mandated they either go back to work or drastically reduce the withdrawal percentage they were taking.

This, of course, will be ignored by Mr. Bogue and many other fee based planners. What they do not grasp is that investing for retirees is not always about accumulation it is about producing income. Most people will opt for systematic withdrawals from their portfolios to achieve their goals, but when there is a bump in the road that strategy is dangerous. What a living benefit provides is stability regardless of what the market does. In a down market you are protected, in an up market your income can increase. No fee based planner can mimic that type of security.

Given that most investors are seeking income the death benefit argument is simply dumb. Who cares, haven’t you heard we have a retirement crisis at hand and you are worried about passing assets down to your clients heirs? That is being completely out of touch with your prospective and existing clients.

He actually calls variable annuities a rip-off at the end of his article, a rip-off! Here are his exact words; “But in the end, buyer beware because these vehicles are usually a rip-off.” Previous to that he states that these products attract uninformed and risk adverse investors. Uninformed, I doubt it, but risk adverse investors, well duh, of course. What other investment offers 97% upside potential of the market while guaranteeing your money back, current or future income?

The fact of the matter is that variable annuities attract both experienced and risk adverse investors. In my experience and with the experience of others I know in the business, most risk adverse investors will not invest without a guarantee. Instead they will opt for low yielding savings and money market accounts even though they need market exposure. A variable annuity gives them the piece of mind of guarantees with much more potential than guaranteed investments.

I should note to Mr. Bogue that most people will systematically withdraw their money from a variable annuity and this will rarely raise their tax bracket. Compare this to mutual funds which will tax you every year whether you make money or not. Mutual fund taxes are unfair and the vast majority of the distributions that are dulled out to investors are short term capital gains and taxed at ordinary income.

In his example of fees on the long term return of the S&P 500 he conveniently left out the effect that taxes play in the example. In other words, he used gross numbers and compared them to net numbers which is not a fair comparison.

If you want to roast a product make sure you use a level playing field and use examples that are relevant to today’s investors. Do not use 10 year old scare tactics that are complete irrelevant to today’s environment.

To sum it up, it is OK to pay Mr. Bogues to index your money for 1% or more, when you can do it for .19% at Vanguard, as long as he collects the fee and provides no guarantees. It is not OK to pay the insurance carrier for guaranteed lifetime income, regardless of market performance, that creates stability of income for the investor and the piece of mind of knowing what their investments will minimally do for them. Nice try Mr. Bogues, “No soup for you!”

Today in The Cincinnati Post Bruce Williams answered a question from a concerned investor about a variable annuity. A lot of anti-broker and anti-annuity advice was given, but the readers question was not answered.

The reader switched to a variable annuity from mutual funds in a 403 (b) account. Now, I am not going to argue ethics about the transfer as I do not know enough to know why this switch occurred, but I know the answer was bunk.

In a nut shell the reader asked: “Through a 403(b) plan, I had mutual funds with a balance totaling $51,000. I am 47 years old and plan to retire at 55. A financial planner advised me to switch this money to a variable annuity. I have been reading more and more about variable annuities, and I am terrified I’ve made a huge mistake that I cannot correct. Am I stuck with a poor investment that will not be good for my retirement?

The emphasis was added by me because I found that portion of the question disturbing to say the least. I will address that portion of the question later. What Mr. Williams said just took the cake though.

His response:

“Why - other than the fact that a variable annuity can be a very good commission generator - your adviser would advise you to take money out of a sheltered fund where your investments can be moved without penalty is difficult for me to understand. I have not been a fan of annuities for most people, and I believe that would include people of your circumstance.”

Seriously, all you can concentrate on is the commission generated? How about the living benefits that can guarantee future or current income? How about the fact that the current investment probably already generates a commission or a trailing commission anyhow?

Since the investor is only 47 even if he bought a 7 year contract the surrender charges would be gone by the time he needed the money. Also, there is a 10 or 15% free out of the contract if the person needed money in the meantime. Some contracts even allow all the earnings to come out penalty free. Even if the investor left the money inside of the 403 (b) accounts and had to take money out for an emergency they would still face IRS penalties, so I do not see any additional tax woes for the investor. Let us not let the facts get in the way of a good story though.

Mr. Williams went on to say:

“That said, at your age, you could keep it where it is - where it’s likely to perform reasonably well - and satisfy the time requirements. One of the main problems with annuities is, if you need the money early (less than seven years), there are severe penalties. Leave it where it is until the penalty periods have passed. But unless this guy can give you some incredibly good reasons why your particular situation would benefit from the annuity, I would be looking for another adviser.”

Mr. Williams has summed it up for me when he said it is likely that the investments will perform reasonable well, the key word is likely. He has no idea what the investments will do over the long term, nor does he have a clue if the market will continue to grow. A living benefit will answer these unknown questions.

He then slams the adviser for even recommending the variable annuity. He has no idea why it was recommended he just made a blanket statement that they are all bad. This is why people need to avoid these drive by financial advisers, they voice their beliefs as facts and offer little facts in defense of their arguments. They simply do not know how or what variable annuities are good for because they do not care. annuities do not fit into their secluded world of rose colored glasses of the market will never go down.

What concerned me the most about the question the investor asked was that he read a lot about annuities and is concerned he made a bad mistake. This is simple because the media has slammed variable annuities every chance they get. The media takes zero time to understand the product or what it can do for people.

Would they ever list a resource that is positive on annuities? Nope. Do you think they would refer a person to Annuity IQ who busts them on the garbage they spew about these products? Nope, because they will look foolish (no pun intended on MotleyFool.com, but there should be). The lack of positive articles on annuities is appalling and irresponsible on the part of the financial writers who are just too lazy to figure out what is what. This is why the blog exists, to show people what is what about annuities.

The point is that variable annuities are legitimate investments that fill the needs of millions of Americans. Considering the variable annuity assets are greater than even all the assets in 401 (k) plans don’t you think that they merit some positive feedback? Especially, considering that the critics point out that new cash inflows are less than in previous years and new sales are the result of exchanges.

If new sales are down, according to the critics, and most of the new business generated is from exchanges how could total variable annuity assets be larger than 401 (k) assets? After all, the entire 401 (k) plan is the most popular and common retirement vehicle available. This must mean that the basic premise behind variable annuities is correct, tax deferral works and living benefits are a compelling story.

If new sales are down, but the assets continue to grow that must mean that tax deferral is valid and works for the investor. You mix in tax deferral with a guarantee of principal or income, regardless of market performance, it is a very powerful story. Now, tax deferral does not mean anything for a tax qualified account, but the living benefit means a whole lot.

Imagine taking your biggest retirement asset and investing it in a product that guarantees that you will receive either future or current income forever, does that sound compelling? Yes, it does, but apparently to the financial writing world it does not make sense. That, my friends, is why variable annuities are making more sense for investors, guaranteed income forever with no downside market risk.

annuities make sense and these writers have to take an honest look at them instead of their typical half assed attempt to shoot them first and ask questions later.

In response to multiple lawsuits filed by 8 states, with more states likely to follow suit, Iowa’s insurance division has issued a new set of rules for equity index annuity producers. Now, in order to sell EIA products in Iowa the producer will have to complete a class covering suitability and other issues EIA’s may bring to the table. The producer must complete this new class by January 1^st 2008.

This is fairly interesting because the course that the producers have to take will cover the features and benefits available on equity index annuities. It will also cover the basics such as early withdrawals, surrender charges and the advantages and disadvantages of the product.

Now, this sounds like a good idea, but how stupid do you think people who sell equity index annuities are? Producers, generally speaking, know how annuities work and how the benefits work and most know these basic things about EIA’s because most annuities work the same way. The only thing different are that they will, apparently, show producers how certain benefits work.

This is a very weak attempt to say it is not the products that are the problem, but it is the producers that are the problem. I hate EIA products, but even I know there are some good ones out there and I know it is not the agent who is usually at fault, it is the products basic design. If you foresee a problem and you want to nip it in the bud, so to speak, early why not make the insurance carriers deliver a product that is actually user friendly?

Seriously, if I were an EIA producer I would be very upset over these new rules. Why you ask? Simple, every adviser knows continuing education is a joke and you learn very little from it. This is the same thing and it addresses only the agents, not the real problem which is the product itself. This class is another way the state can cover its self and collect more fees from EIA producers and does nothing to address the actual problem.

We know there is a problem in the industry so address it. Get rid of two tiered annuities and ridiculous bonus products and many of the moving parts found in EIA’s. The state insurance supervisor has control over what is approved in his/her state, so fix it that way!

Now, as many of you already know I am no fan of equity index annuities as most of them are big on promise, but short on delivery. I also cannot believe I am going to utter these words, but I just got done reading an article from my favorite Mr. Burns titled; “Equity Index Annuities Fall Short” and I agree with him. To be perfectly clear, I hate index annuities and I think the vast majority of the products are very bad for investors.

Not because it was an anti-equity index annuity, but because everything he wrote was true. In my own comparison on these products I found only one that performed well over the long term. All of the more widely sold products performed pretty badly and those popular products happen to pay the highest commission.

The numbers do not lie and he used real studies to show that the average rates of return on these products are on par with traditional fixed annuities. The problem with EIA’s is the fact that they have so many moving parts and the insurance carrier can change the caps every year. This means you have no idea what your cap is going to be year over year. That is the biggest problem, but not the only problem.

The surrender schedule is usually way too long and the commissions, some of which can be as high as 14%, are high. There is simply too many benefits for the agent and not enough benefits for the consumer. You would be much better investing into a variable annuity with a living benefit or into a traditional fixed annuity instead of an EIA. Do not get me wrong, not all equity index annuities are bad, but most are.

The biggest problem I have with these products is you have people making outrageous claims about the product. Need I remind you of this: