While the sub-prime crisis is very real it is widely overblown. Yes, firm are writing off billions in “bad Loans” and, by all news accounts, the sky is falling. What is not being made clear to many investors is the fact that these loans are really only affecting large institutions who, largely, leveraged these investments as much as 32 times. That means for every dollar they had in these investments they leveraged it to borrow $32. Only when there was a run on the bank did we see firms really start to get hurt, i.e. Bear Stearns and several hedge funds.

If these institutions did not leverage the investment so much then everything would be ok. Of course they did leverage their exposure and when foreclosures went up, about 11% right now, then this increase devastated the investment and their ability to borrow against them. However, not all of these loans are bad and that is the other issue that we are looking at.

While there are billions in bad loans, to unqualified borrowers, what we are seeing is institutions including most loans, AAA rated with sub-prime borrowers. The institution then writes off most of there loan portfolio that has some exposure, but not total exposure, to sub-prime borrowers. This is why we see billions being written off by large institutions, they are writing off everything.

Here is why they are doing it. They take the big hit, whether it is real or not, then they are getting a tax deduction for it. What they are not telling you is that such a small percentage, generally speaking, is exposed to sub-prime that many of the write offs they are taking will reappear on their books in a few years. The current tax code allows these banks to write off their loans and then, if they become profitable again, add them back to the books at a later date.

Therefore, a bank can take a $10 billion dollar write off today and lets say that only 10% of those loans are actually “bad”, or in default, take their write off today and then when this is all sorted out and $9 billion turn out to be good loans they can add them on to the books later. They are keeping all of the cash flow that these loans produce and can add them back in as an asset later, its a pretty good deal for them, kind of.

The point is that many of these loans are good cash producing investments with higher rates of return than one might think. It is similar to the limited partnership deals that went south in the 1980’s, many people got hurt, but those who held on ended up ok and the “vultures” who bought up large sums of the partnerships bought high cash flow products and made a killing. Will this happen again with these sub-prime investments?

Who knows, but we think it may be time to start looking at these investments with your play money and take a little risk. This can be done either through individual equities with high exposure to this risk, but you would be better off looking at some funds that have these investments. Again, this would be for the people who can afford to loose money if they do not pan out and one should seek the council of a qualified financial advisor before making any investment. One also must remember that the crisis is not over and there may be better buying opportunities ahead.

While we are somewhat critical of immediate annuities and, more to the point, their restrictions we do see value for the product. When these products are used in conjunction with an asset allocated portfolio they can and do significantly reduce risk.

Immediate annuities have a reputation about them as being very inflexible and lack the ability to keep up with inflation. While that is true of older products newer products offer some flexibility. Many immediate annuities have inflation protection riders now, where the payments can increase by 3 or 5% a year, and many newer products have cash refunds to the beneficiaries so the insurance carrier will not keep all of the money when the owner passes away. These new features have increased interest in the old immediate annuity and sales have been very strong over the previous 12 months.

As the Baby Boomer generation retires we expect to see an increase in annual sales for the next few years. The problem with most of the products sold is that investors do not shop around for the most competitive immediate annuity rate. There are several websites dedicated to find the best rate for you, like Immediate Annuity Solutions, but few investors are using these valuable sites. Instead they settle for whatever their financial advisor or insurance agent recommends.

Because of this we highly recommend that you shop for an immediate annuity before just settling. After all these are a lifetime commitment so use the resources that we have available. We like ImmediateAnnuitySolutions.com, but will add more sites as we find them.

Monday June 16, 6:00 am ET

RESTON, Va.–(BUSINESS WIRE)–NAVA, the Association for Insured Retirement Solutions, announced today first quarter results for the variable annuity industry. The combined net assets of U.S. variable annuities decreased 6.0% to $1.40 trillion at the end of the first quarter, as compared with the end of the fourth quarter of 2007. Net assets increased by 0.5% relative to the first quarter one year ago.

Table 1. variable annuity Net Assets

(Dollars in Millions) 3/31/08 12/31/07 3/31/07

Total Net Assets $1,396,576 $1,485,202 $1,389,880

Source: Morningstar, Inc.

variable annuity total sales, also known as premium flows, for the first quarter was $41.6 billion, a 1.7% increase from the first quarter of 2007. First quarter net sales, also known as net flows, of $7.2 billion showed an increase of 12.3% from first quarter 2007 net sales of $6.4 billion. The mix in premiums for the first quarter showed that 64.2% of the total sales were in qualified plans and 35.8% in non-qualified plans.

Table 2. variable annuity Total Sales1

Quarter Ended

(Dollars in Millions) 3/31/08 3/31/07

Total Net Asset $41,644.0 $40,949.8

Net Sales $7,215.5 $6,425.5

Source: Morningstar, Inc.

Table 3. Quarterly variable annuity Total Sales & Net Sales

Quarter Ended

($ Millions) 3/31/08 12/31/07 9/30/07 6/30/07 3/31/07
Total Sales $41,644.9 $47,828.5 $46,215.8 $47,253.6 $40,949.8
Net Sales $7,215.5 $8,912.3 $9,375.0 $8,669.8 $6,425.5

Net Sales as % of total sales 17.3% 18.6% 20.3% 18.3% 15.7%

Source: Morningstar, Inc.

The mix of net assets by investment objective showed that $783.5 billion, or 56.1% of $1,396.6 billion total assets, was held in equity accounts. This is a decrease of 6.1% as compared with the first quarter of 2007 when $834.0 billion, or 60.0%, was held in equity accounts. The mix also shows that $262.9 billion, or 18.8% of assets, was held in fixed accounts.

Table 4. variable annuity Assets by Asset Class

(As a percent of total assets) 3/31/08 3/31/07

Equity 56.1 % 60.0 %
Fixed Accounts 18.8 18.6
Balanced 12.1 10.6
Bonds 9.6 8.2
Money Market 3.4 2.6

Source: Morningstar, Inc.

About annuities — With the decline in availability of employer sponsored pension plans and proposed changes to Social Security, an annuity is an integral component of a retirement plan. It is a long-term retirement investment vehicle offering a combination of insurance benefits, guaranteed lifetime income payments and tax-deferred savings. variable annuities allow individuals to invest in a variety of underlying fixed and equity funds, and provide returns based on the performance of these funds. Only annuities protect retirement assets against market volatility and guarantee retirement income that cannot be outlived.

About NAVA — NAVA, the Association for Insured Retirement Solutions, is a non-profit trade association located in suburban Washington D.C. NAVA provides a variety of services to the industry including educational forums, research, and conferences aimed at furthering the development and understanding of fixed and variable annuities, income annuities and variable life insurance.

1 Total Sales (also called total premium flows) represents the sum of new sales (all first-time buyers of a contract, including inter- and intra-company exchanges) and additional premiums from existing contract owners. Net Sales (also called net flows) represents Total Sales minus surrenders, withdrawals, inter- and intra-company exchanges, and benefit payments.

While there are some good fee-based planners in the world we find it rather odd that everyone just assumes that they are the best choice for everyone. The selling point of the fee-based planner is the fact that they do not collect commissions from product sales and therefore they must be unbiased. While this seems reasonable enough to the average person are these advisors really the way to go?

The idea that a person can be unbiased just because they do not collect a commission from product sales, but collect a fee no matter what you buy, is ridiculous. Every time you read an article and the author was asked a question they tend to always recommend that you speak to a fee-based planner before you make that investment. Now, here is the problem, fee-based advisors are still earning commissions, sorry, I mean fee, for the amount of money that is invested, or my favorite, they get paid $200 an hour for their time.

By the time the average person gets done with a fee-based planner they end up paying way more than any sales load or CDSC on a regular broker sold mutual fund.

Here’s an example:

A client wishes to invest $100,000 and a commissioned broker recommends an A share mutual fund with a load of 4.25%, or $4,250 in commissions. That is all the client pays, besides annual expenses, in commissions. Now if the same client went to a fee-based planner they would recommend index funds and then slap on a 1.5% annual fee for their services. Assuming the investor holds the mutual fund for 5 years, not an unreasonable assumption, then the fee based planner would have made $7,500 in fees as compared to the $4,250 the commissioned broker would have made. What is worse is the fact that the planner probably did recommend index funds and they still have the stones to charge a fee, seriously, a trained monkey can pick an index fund. Based on this assumption, which is very fair and reasonable, it is pretty clear that at the end of the day everyone gets paid.

By the way, even if the commissioned broker sold the investor an annuity they would have only made a 6.5% commission or $6,500 from the investment which is still far less than the fees the planner charged. It is really odd that all of these magazines talk about high commissioned annuities and mutual funds while the fee-based planners get a free ride because they do not collect a commission, but charge a fee. The average fee-based planner client is paying the same amount of money per year as the variable annuity client, roughly, with no guarantees or tax deferral.

Just because someone charges a fee instead of a commission it does not make them smarter or any less human. Well, may be they are smarter as they know by chargeing fees they will make more money over the long-term, but none the less they are still sales people. We do not care how people choose to make a living, but just be honest about it and the media should be ashamed of themselves for not recognizing the obvious.

One last note, I recently read an article by Humberto Cruz who quoted a fee-based planner who said that any variable annuity that guarantees the client their money back sounds “fishy” to him. This is the other problem with both the media and the fee-based planners, they have no idea how variable annuities work and what the living benefits ultimately do. If that planner who Mr. Cruz quoted did not understand what a guaranteed minimum accumulation benefit was then he should not have even commented on it.

These guys are relentless with their misinformation, especially on annuities. It is a miracle that they are still in business, especially with all of the bad advice they give. In their recent article titled “Are Annuities Ever Not Stupid?” they really show their stupidity.

First, they say: “An annuity is a contract between you and (usually) an insurance company”, emphasis added. The last time we checked all annuities were issued by an insurance company. We know we are going out on a limb here, but since all we do is annuity work, we are pretty sure that statement is just plain wrong. The thing is they mention Fidelity and Vanguard as Annuity options at the end of the article, are they suggesting that their annuities are not issued by insurance companies? They are by the way.

Second, they recommend all equity stocks as a reasonable alternative to an annuity. Talk about comparing apples-to-oranges stocks and annuities should NEVER be compared as a similar investment. variable annuities do offer equity investments, but they are mutual funds, generally speaking, and diversified while stocks are not unless you buy many different stocks.

Third, they say equity indexed annuities are ugly, well we kind of agree with them, but the facts are still a bit dubious in their statement as they lay into fees on indexed annuities. Generally, there are no fees, perhaps an asset charge or a spread, but most offer straight participation rates.

Fourth, variable annuities are bad! There is a shocking statement for you. Here is what I find interesting, before they said that they had this blurb: “You’d think investors would avoid these products. Yet no less an eminence than retirement whiz John Greaney, a regular Fool contributor and former engineer who successfully retired at age 38, has said repeatedly that under some circumstances, one type of annuity can be a useful component of your overall retirement strategy. Writing in the March 2005 issue of the Fool’s Rule Your Retirement newsletter, Greaney showed how adding a lifetime income Annuity to your retirement portfolio can help ensure that you don’t outlive your retirement savings.”

Now, first off the day we listen to an engineer about retirement is the day we should all start letting our pets drive us to work, come on that is just plain stupid. If we were building a bridge then I may consult with John, but not when we are investing our money. Second, right in this statement they illustrate a variable annuity. An equity investment with a lifetime income component, what do you think living benefits are with equity sub-accounts? Thats right an equity portfolio with a lifetime income component.

Finally, lifetime income annuities sometimes make sense, i.e. immediate annuities. While immediate annuities do make sense for many investors, they do have significant drawbacks which the author so blatantly glossed over. He then recommends Fidelity and Vanguard, not that they are bad annuities, but what is the deal, did T. Rowe Price not buy enough advertising to get mentioned by the Fool? For a website that says to always shop around they certainly do make the same annuity recommendations rather frequently, therefore their recommendations have to be dismissed as they are hypocritical.

If you are going to bash a product at least know something about them, do not use sound bites from a decade ago. Worst of all they described a variable annuity in one portion, a more risky version individual equities and and immediate annuity, and then said they stink in the next. If you do not understand what or how a product works then do not talk about it. Otherwise you simply sound, well, foolish.

I am sure you have seen the news or at least heard about what is going on. It appears that oil has appreciated over the past year at an astounding rate. Well there is nothing like beating a dead horse so we figured we would talk about what is going on and the impact it will have on our economy.

Those who think that prices are going to come back down, I am sorry but you will be waiting for a long time. The problem is not so much supply and demand as it is speculators who are driving up the price of oil because of the weak dollar and increased demand. To think that demand will stay the same is absolutely ridiculous. According to the experts we are at the breaking point for the consumer, or close to it. Many experts predicted that consumers cannot handle $4.15 a gallon fuel…and they are right.

Americans are people who build themselves upon debt. We get big expensive cars, houses and electronic toys. Unfortunately no one actually pays with cash and more, they charge it. When someone charges their fuel or expensive toy they rarely think of the bill that is coming next, from the credit card company. What does this have to do with the price of oil, plenty. Americans are now charging the gas that they use in their big SUV’s for the demanding terrain of New York City. With the credit mess still in full swing, and it is, this is the next big thing to hit the economy.

While the Fed can print money to their hearts delights what they cannot do, for the consumer at least, is create more credit. As home equity loans sputter out borrowers will continue to use their credit for purchasing power, but a larger chunk of that purchasing power will go towards fuel. As credit lines are reached we will then see demand come down even more than it has already.

The other major problem we have is the fundamental demand for oil is high, but the supply is exceeding demand in most cases. OPEC is planning a meeting with consumer nations to make this point, OPEC for crying out loud. These are the guys making a trillion dollars a year on oil and they are saying this isn’t right? By no means am I a rocket scientist, but that tells me that the price is unwarranted.

Unfortunately $150 a barrel oil is coming and prices will never be below $3 a gallon again. Once oil companies get a taste of these obscene profits they tend to like them. Plus with China and India following in the USA’s mistakes by building an oil based economy we will see future demand spike even higher. Sadly if some of the oil projections are correct we could see the supply of oil dwindle in our lifetime - it is projected that by 2013 oil production will plateau and then decline - and $4 gallons will be the good old days. The increased demand from China and India will dwarf our reduction in oil consumption and will drive prices higher.

My point is things will not change because the industry has broken us in to higher gas prices, since Katrina. We went from saying; “$2.50 a gallon! Are you Nuts!” to “$2.50 a gallon is a STEAL!” and that number has moved, now $3 a gallon is a steal and a recent memory to. So, I foresee a double whammy coming in the near future, higher gas prices and the credit crisis spreading directly to the consumers because of their credit card debt. Makes you wonder if the Fed will give us 2% loans to make it….oh yeah thats only for the people that matter, big business. Think smaller cars and happy thoughts and it just may all go away.

Annuity IQ has been put in an awkward position since we launched nearly 3 years ago. We are committed to not sell annuities to the public, but we are inundated with consumer requests for annuity quotes. After much debate and discussion we decided to continue to not sell annuity products. However, to help consumers we have teamed up with a firm that will provide annuity quotes to those interested. The page can be found here: Free annuity and life insurance quotes

While we are not in any way connected with the firm providing the quotes it is a better way for consumers to compare and shop for annuity products. The firm we have teamed up with is also there to help financial advisers in their quest to grow their business. advisers can now receive qualified leads to help grow their business and improve the lives of investors. To sign-up and start receiving leads financial consultants should go here: Annuity Leads

The goal is to help both the consumer and the financial adviser and lessen our burden of turning would be annuity buyers and lead seeking advisers away. Through our new relationship we can help both parties and continue doing what we do best, review and rate variable annuity contracts. However, we are in the process of launching our very own trusted adviser network were financial professionals can go through a rigorous review and list their services and website from Annuity IQ. The projected launch date for the directory is 5 days, if not sooner, more to come in the near future.

ING decided to make some changes to its LifePay Plus living benefit after a recent upgrade just issued last summer. The new benefit was revamped last week and Annuity IQ is working on updating the information as soon as we receive the prospectus.

This is just one reason why we exist as the industry constantly upgrades and changes its benefits and contract information. It is next to impossible for advisers to keep on top of these changes and consumers stand little or no chance of ever understanding how these benefits work.

Through Annuity IQ we have helped well over 1500 people to understand and compare living benefits on variable annuity contracts. We continue to serve advisers and the public and are in the process of updating our site and the way our information is presented. Keep checking back!

For years The Hartford’s Director variable annuity was the rock of the variable annuity industry. For almost a decade it was the best selling broker sold variable Annuity product, behind TIAA-CREF. Last week that legacy came to an end as the Director variable annuity ceased to exist for new investors and was folded into the Hartford Leaders product.

The Hartford’s Planco division once boasted that the Director product will always be the best selling variable annuity with the Leaders product a close second. Sadly, they were the last to see that the writing was on the walls years ago and single managed variable annuity products were irrelevant. In 2005 they tried to turn the ill fated Director Annuity around by introducing a multi-managed approach, they added some 55 different sub-accounts from various managers.

What they did not count on was that their success with the Hartford Leaders product would undo what they were trying to accomplish. The Leaders variable annuity had 4 main fund families that went deep, offering many sub-accounts from each manager. All of the fund families were top shelf names, American Funds, Franklin, MFS and AIM which are among the top selling fund families in the advisor arena. The Director annuity though went for the shallow and wide, offering many Hartford sub-accounts but only a smattering of other money managers.

The Leaders annuity saw huge growth, from nothing in 2000 to $10 billion or so in recent years. That success, in our opinion, tainted the efforts of the Director product. Also, the other issue was saturation of the marketplace with both the Leaders and the Director wholesalers covering the same advisors. It was total overkill.

It was no surprise that the Director failed, it was too little too late.

Do to the reaction from our comments on the Dateline NBC story, “Tricks of The Trade”, where they performed an expose of equity index annuity sales we feel that our position needs to be clarified. While Annuity IQ likes annuities, immediate, traditional fixed and specifically variable annuities we do feel that equity index annuities have little place for most investors. Below we will further explain our position.

Surrender Schedule:

While the annuity surrender schedule needs to be taken into consideration it must not be the only litmus test for any investment. if the surrender schedule fits the needs of the investor then it is a non-issue. However, some contracts should not be available to older, say above the age of 70, for some clients, specifically surrender schedules that surpass 10 years.

While there is liquidity for most annuity products while they are in the surrender period we feel that contracts that have surrender schedules longer than 10 years is a bit excessive.This is especially true for investors who are older than 70 as the contract will not mature until they are at least 80. Also, with contracts with surrender schedules longer than 10 years we often see the first few years penalty, above the free out amount, in excess of 10% which would invade principal.

Caps:

A cap is set by the insurance company and it dictates the maximum amount the contract owner may recieve in any particular year. If the annual cap is 10%, for example, then the investor will never see more than a 10% gain for that year, even if the index the annuity is pegged to sees returns of much higher. This is a way for the insurance company to hedge its risk and to make a profit from the product, that is not a bad thing by the way.

Most of the popular equity index annuity products have caps, either annual, monthly or for the term of the contract. These caps can move on an annual basis and many caps that start out high often move lower on contract anniversaries the longer the contract is held. That is not to say the caps will always go down, but like fixed annuities that seems to be the trend.

Bonus:

Many of the popular equity index annuities have bonuses attached to them to entice investors. The bonus will be credited to the purchase payment amount and can be as high as 16%. While these bonuses seem attractive one has to ask himself why the insurance company would give someone a 16% bump for money invested.

The answer is because it is highly profitable for the insurance company. While they pay you that huge bonus they often times have a vesting schedule and very long surrender schedules. There may also be lower caps, a spread (where the insurance company will take a certain percentage of the earnings) or some other fee attached to it.

Some of the more disturbing things about these miracle 16% products is the fact that the insurance company may force you to annuitize the contract after the surrender schedule in order to realize the benefits of the bonus and the earnings in the contract. While annuitization can be a good thing, forced annuitization is not. Also if the contract has a 10 year surrender schedule and you have to annuitize the contract you could own this product for a very long time or forever.

Monthly Averaging:

Monthly averaging is where the insurance company will average the previous 12 months returns for the index the annuity is pegged against in order to determine your rate of return. Monthly averaging will reduce your rate of return, it says this right in the sales material. Some people pitch the monthly averaging as a way to reduce volatility, but that is not true, it only reduces what you will earn.

If you combine monthly averaging with a cap or a spread then your return will be severely reduced, that is a mathematical fact. if the contract offers a point-to-point annual ratchet chances are it will be better for the investor.

Dividends of The Index:

Many of the popular equity index annuities sold have their rate of return pegged to the S&P 500. The problem is that about 35 - 40% of the S&P 500’s rate of return is derived from dividends and, to our knowledge, no equity index product in the market includes dividends in their returns. The reason that dividends are not included is because the insurance carrier buys options on the S&P 500 and does not actually own the index and options do not include dividends.

This means that the investor is already starting out behind the eight ball. If dividends are not included, there is a cap and monthly averaging then the rate of return may only be slightly better than a fixed annuity product.

All of these moving parts individually put the investor at a loss, but combined it proves the product to be ineffective. While there are some great equity index products available they are not always sought after. Generally the better products pay less commission versus the bad products that usually pay higher commissions.

Odds are that the products being attacked by Dateline are the bad higher commission paying products, but they never actually showed what exact product was being singled out. That is the real problem, the media never truly identifies the product that is the worst and they simply group all products in the same class.

While we do not like equity index annuities and think the Dateline story had some merits, we also feel that they did not show any of the positive things that the product can do. The good products are hard to find, but they do exist and one must do their own research to find the best product for their needs.