For the hated CFPs here...

For those who hold the CFP…each CFA exam that you pass counts as 60 CE credits. I didn’t know this until today. It is really hard to find on their website. It more than wipes out your entire two year education requirement. Don’t let it go to waste. CFP bashing can begin…now!

so tell me why I should buy an annuity?

You should almost never buy an annuity… Huge M/E charges, low liquidity, big surrender charges, loss of step up in basis for estate purposes, gains taxed all as ordinary income upon liquidation. Very hard to justify. Could be some creditor protection though… I don’t work for commission. Not that you were serious anyway…

My firm (a fee only RIA) inherited a lot of clients with annuities (long story). Some of those contracts are just plain ugly.

Actually market forces are driving profitability out of variable annuities and even some longtime VA critics are indicating that they might be _under_priced:{C5AE8005-0C33-4D38-AC38-64A39379DC0C} I know for a fact that many issuers misprice certain contract options (guaranteed minimum withdrawal benefit (GMWB), guaranteed minimum accumulation benefit (GMAB), and guaranteed minimum income benefits (GMIB)), while others price the contract assuming suboptimal exercise by annuitants. So if you can figure out an optimal exercise policy you should definitely look at VAs. And of course this is all from a risk-neutral perspective. If your personal preference curve (see L3 LOS) makes you very risk-averse, then annuities are a *great* way to invest retirement sums.

Oh man annuities, back when i used to dable in the financial consultant/planning area, there used to be an Allianz annuity product that would pay out like 10% upfront commission, but would have surrender charges as large as 15% the first year.

They are still around ^

Darien, The author who did the 180 degree turn on VAs recently published a CFA monograph with Roger Ibbotson. Point being, he is a very serious researcher who is claiming that some VA features are underpriced and can’t be replicated at the same price using individual securities. Most VA bashers have watched Suze Orman once or twice and do not really understand the way they work. But, scandalizing costs is their trump card when they get in over their heads. Having said that, there are plenty of VAs that are not even close to worthwhile and sport preposterous fees.

The way they are sold is the biggest problem. You wouldn’t believe how many times I have seen VA used inside of IRAs with clients in an acculumation phase. The annuity isn’t inherently bad (in some cases) it is the way they are marketed. Harold Evensky (known wealth manager) has also come out lately and changed his views on annuities. At one time he never saw a reason for them. The market works. Annuities are bashed for high fees…products are desinged with lower fees and more transparency. The use of annuities is highly dependent on tax rates too. If congress decides to up the rates it gets really hard to justify even the basic features of a VA (for higher tax rate individuals). I don’t want to sound like I am bashing all VAs. I was just doing that because of the tone of the orginal reply to my post.

True story - 3/11/2000 - client (75ish) comes in to my office and under the advice of his son wants to invest $103,000 that he will be leaving to said son (at his death) into the Janus 20 fund (He was reasonably well diversified with respect to his remaining assets). After attempting to talk him out of it and explaining all the reasons why it was a bad idea I finally told him if he was going to do it at least do it within a VA, the 2% additional expenses would not be a factor if the fund continued its stellar performance and the guarantees the annuity provided would at least provide some protection to the son should the unthinkable happen. Shortly thereafter the account was worth 81,000 told him to withdraw a portion, diversify, etc. (still would have kept the death benefit in tact) but at this point the son would have none of it and wanted to keep the investment as is until it “came back” and than sell it. Rode it all the way down to $36,000.00 (gotta love those three years). Make a long story short, client died, morning of his death son called me to liquidate and received a check, not for $42000 which was the account value at the time but for $119,200.00 - the death benefit after three years on the annuity. Sometimes the benefits well exceed the costs.

Come on gents, CFP is a good designation and you know it. The problem with about 95% of the CFPs out there is that they don’t actually DO planning. They push product and then jump out of that very same product the following year when they realize chasing returns is a zero sum game and that they should spend more time looking at their clients and less time looking at PALtrack. Willy

WillyR Wrote: ------------------------------------------------------- > Come on gents, CFP is a good designation and you > know it. The problem with about 95% of the CFPs > out there is that they don’t actually DO planning. > They push product and then jump out of that very > same product the following year when they realize > chasing returns is a zero sum game and that they > should spend more time looking at their clients > and less time looking at PALtrack. > > Willy It may not have been apparent from my first post that I am a CFP certificant. I really didn’t want to bash CFPs…I felt it was unvoidable on AF (based on prior posts concerning CFPs).

It was not apparent: you were trying to sell us a solution without identifying the problem!!! Lol…sorry I’m just kidding. Willy

Thanks for the info mwvt9. I knew I would get something out of this CFA thing. It’s nice to know the CFA exams are worth continuing education for us. A few questions for all of you…they are very simple (you be the judge) CFP exam questions.

I think you’ll find most knowledgable planners see a fit for annuities. Peng Chen from Ibbotson just released a very good article on them and there was just a study released by a couple profs from Wharton that recommend the majority of assets be annuitized at retirement, a bit extreme but they make good arguments. Annuities accomplish one very important thing - they transfer longevity risk to the insurance company. The insurance company can pool that risk, an individual can not. This allows you to increase your withdrawal rate in retirement. Are there bad annuities out there? Definitely. Are there a lot of people that want to sell you bad annuities? Definitely. We tend to use SPIAs (or very similar products) for a small portion of our clients portfolio. Commissions are low. We’d definitely make more money managing the assets than annuitizing. If we’re advising a client prior to retirement (3-5 years) we’ll also use some VAs with GMWBs to reduce the risk associated with sequencing of returns and all that good stuff - a bear market just prior to or following retirement. Annuities as an accumulation vehicle don’t make a lot of sense though - make no mistake you’re paying for that insurance element, if you’re not using it, its wasted money.

The right annuity in the right place can be a great thing, the problem , atleast here in Canada, is that the insurance Co’s sell Seg Funds ( MF with death and maturity values) with 4% MER’s to people who should definitly not be using these intruments by using… you guessed it, FEAR! Being a CFP myself I can definitly say that the CFP has value but because of the lower difficulty and entrance requirments the reqwards for having the CFP alone vs the CFA alone are much smaller unless you are a super sales person.

From a corporate standpoint, I’ve seen very few people in wealth management that know what the CFA is or why one would desire it. Those that do know are usually higher up the ladder. From a branch office standpoint, most offices will now take on a Charterholder to help their sales force manage holdings and set strategy. Usually, one per office.

^ sorry, wrong thread

Geddy. Nice story, up if the account went up 50% in value, the inherited beneficiary would pay taxes. In a taxable mutual fund, the bene would get a step up in basis and would not have to pay any cap gain taxes.

Zforce, as I recall, those Janus funds turnovers were well in excess of 100%/year at the time, so not only would the client be paying cap gains each year but a majority of those gains were short term in nature. However, you bring up two excellent points as to why I feel these vehicles (VA’s) are best served in retirement accounts. 1) in a retirement account the funds are taxed as ordinary income when withdrawn and 2)there is no step up in basis at death. Outside of a retirement account the difference in tax rates for a high income investor in my opinion are too high to make a VA suitable in 99% of the situations. Why the SEC frowns on VA’s within retirement accounts but not so much outside of them has never made any sense to me.