Calling all lowly, hacksawed, retail FA's

Insert link to prospectus.

Its a really important question. ohai gets it.

Why are you selling an annuity to investment clients? How is this going to help them, as opposed to investing the money in a portfolio of equities and fixed income? Are you planing on using annuities for all your clients, only some clients, one off clients?

Again, coming back to my earlier point…how does selling annuities fit in to your overall servicing on client accounts? On Investment Strategy for example: do you plan to use annuities as part of AM / cash flow planning for each client?

Here is what I would think about: (How are you managing client investment portfolios? Are you going to have a consistent process for all client portfolios, then adjust asset mix based on client risk tolerence? What style: active, or passive, or combination ? Individual stocks, use EFTs, MFs, managed solutions?)

This business is based on your relationship - (thats why they would follow an Advisor).

One may not actively push annuities but there are plenty of mom & pop client’s that just don’t have the stomack to face another 2007-2008 like market period and will take the high cost/low return’s of the insurance company products over the unknown performance of an investment portfolio.

I think you have to have some annuity products you know and like in your bag of tricks.

^Ideally, every client is a has a million dollars in investable assets, and my net (after the RIA takes their chunk) is a half-percent.

They wouldn’t complain about their account, nor would they ask any questions about performance. They would just shut up, do what I told them, and sign on the dotted line.

They would understand that markets drop occasionally, but that it’s only temporary.

I would spend approximately five minutes per year with them when I deliver their tax return. That’s when I would say, “Hey, everything’s good. I’m gonna rebalance your account tomorrow.”

They would happily pay their tax prep fees immediately and not bitch about their bill. They would be more or less oblivious to the 50 bps that I’m charging them on their million, and if they did notice it, they would just say, “Well, that’s the price you pay for a good professional.”

I don’t know if that answers your question, but that’s the dream land I’m currently living in.

In practice, CDM is right. There are some people that refuse to buy any investment that’s not guaranteed a return, and a lot of annuities can offer that (albeit at a cost). Some of them offer the standard 5% yearly step-up, and some of them offer market + 5%. Even if you subtract out a 2% management fee, that still beats a 2% government bond fund that still has market risk.

Plus, add in the fact that none of the income is taxable until it is withdrawn, and you have…an unlimited non-deductible IRA. Unlimited tax deferral, asset protection, and lifetime income. Sounds hard to beat.

^ That’s my experience too.

in Canada, maximum return on 75%/100% guaranteed VAs is approximately ~3.5% assuming very aggressive positioning and very high long-term equity returns (10% real). seems pretty crappy to put someone into something for 30 years thats only going to get them a ~2% real return when they have a long time horizon. VAs have never made sense for any of our clients.

i get the risk taking capacity issue though. for some, a VA is an absolute necessary. as such, we put 70-80% in guaranteed stuff and play around with 20-30%. that way you at least get the 3.5% and save about 1-2% annually in insurance and external management fees. you’re always better off saving this completely unnecessary 1-2% additional fee.

Let me also add–there’s a VA out there that I just got the material on that’s the most bare-bones VA you can get. No guarantees. No living benefits. No death benefits. No GMWB, no GRIB, no nothing. All you get is the performance of the subaccounts for a flat 1% fee. (Of course, you always have the option to annuitize. But exercising is for athletes, not annuities.)

When you think about it, that’s not any different than a nondeductible IRA in a managed account for a 1% fee, except you don’t have income limitations or RMD. You also don’t have taxes on dividends, interest, or capital gains. I’m not sure who WOULDN’T want this, considering they have excess non-qualified money and want tax deferral and liability protection, all for the same price you would pay in a wrap account.

Sarcasm right? All gains and dividends taxed at ordinary rates when withdrawn. Money locked-up unless you pay a penalty to the good old feds and add the 1% fee for the privilege.

And in regard to the “fee-based” model, the term was invented to confuse the consumer. That should tell you all you need to know about the ethical ramifications.

I am skeptical of the value of annuities, given how opaque and illiquid these products are. Investors only have access to a one-way market and I don’t even know how an issuer would disclose the “fair value” of such a product. The market for annuities could be systematically over priced because of this.

Of course, the one unique benefit of annuities is that they are a hedge for your life span, provided that you purchase lifetime coverage. Perhaps the utility of this feature outweighs the costs from illiquidity or lack of transparency.

i haven’t run a tax analysis on VAs in the U.S. as of yet because our firm is not insurance licensed in the U.S. but i would imagine the benefit of tax deferral is mostly eliminated by the higher tax rate on VA income versus dividends and capital gains.

if you’re looking for tax deferral to maximize estate value it seems a whole life insurance contract would be better. i see the only VAs that make any sense (i.e. death benefits, GWMB, etc) as being far too expensive but i’m an independent and we try to keep fees as low as possible and can do asset allocation and stock picking in house.

What ohai said. Many of the actual bonds in the Agg are sitting in a vault somewhere and aren’t traded. You can’t replicate the Agg without using synthetics. That’s fine, I’m not against that on principle. However, the tracking error of fixed income ETFs are something worth keeping an eye on. Plus, most 3-star core bond funds outperform indexed bond funds/ETFs looking over longer time periods, 5-10 years. In an asset category where fees are a huge portion of where you’ll fall in peer rankings, that’s highly unusual.

Put simply, you buy SPY and you’re going to get S&P 500 returns less fees give-or-take a few bps. You buy AGG and it’s not at all odd to find calendar year returns 100 bps over or under the Barclays Agg. That’s a pretty clear indicator your indexed fund is broken…or at least inefficient.

^ Thanks