Annuity IQ

OK, so you may have read my last post about 1035 exchanges and the article from Malcolm Berko, well, there is aftermath from this article. I just hung up with a family member, you may not know this but my entire family are all financial advisors, and she had a client who read this article and wants to follow its poor advice.

There is a history with this client, it was inherited from an unscrupulous broker, and the client felt cheated, even though the existing product fits well for her needs. I could not believe this clown, Berko, who usually gives good advice from what I have read, has given the green light for people to churn their book of business. Not to mention given investors really, really, bad advice.

In this case the client owns a Hartford L share variable annuity, it is expensive but, it is a solid annuity, and has the 7% GMWB attached to it. The client is maxing out the 7% and it is out of surrender, but it the cash value is less than the initial principal amount. The client invested $208,000 and it is now worth $196,000, she has withdrawn $60,000 or so from the contract already, so if she switched contracts she would have to take the bonus to make up the difference and to keep her income the same.

The problem is this, it is a zero gain for the client to do this. She is paying a little less than 3% a year for her current annuity, with no surrender penalties, but switching to a new bonus contract equals no gain for her. She would be going into a 9 year contract with a base M&E cost of 1.55% and would have to pay another .50% for the same benefit she has now. The average fund expense is about 1% or a little more.

When you add up all the costs the new contract is toping 3.05% and 3.25% with a death benefit. Not to mention the income will still be less than what she is getting now, even with the same exact benefit. That is crazy considering she is paying less than 3% now in the existing Hartford contract with no surrender schedule left.

Even though my family member would make a nice commission on the sale she is hesitant to allow the customer to make this move. Being an ethical advisor she asked for my opinion and told her the client should not do this, she already knew this but, she wanted to get a second opinion.

Bad advice is just bad advice and I have no idea why Mr. Berko wrote that article, but you should be very leery of following what he has written. I am afraid he has given this industry another black eye and opened a whole new can of worms for advisors and compliance personnel.

If you exchange a contract you better have a very good reason for doing so. The argument Mr. Berko laid out is just not good enough.