Bring On The Annuities

[sman]

You assume a little much there DHK. I never said age = risk tolerance.

Look, you guys want to sell annuities to 20-somethings, be my guest. I'll stick with a well balanced mutual fund or etf portfolio for my 20-somethings. If they don't want to be in the market at that age, they can go buy an annuity from one of you guys.

Age does not equal risk tolerance. To assume so, is naive.

Knowing your clients and your products is the best way to serve them.

It also depends on your approach to planning.

I find most investment advisors use a "top down" approach.
- For example: You want by x year.

I'd rather do a "bottom up" approach.
- You have dollars. We can put them here and guarantee your principal and a minimum amount of growth... or we can put them here and see what happens?

It just depends on the approach you use.

 

[scagnt83]

The problem with comparing a balanced portfolio to an annuity (at least when concerning young people) is that most young people do not have enough money to properly diversify their portfolio with individual securities.

You can invest in various funds, but of course for anything decent you usually get hammered on fees. (excluding etfs of course)

I will not argue that a properly designed portfolio (of individual securities) over 40 years should outperform a FIA, and definitely outperform a FA.
But the number of people with a properly designed portfolio of individual securities is few and far between.


And as pointed out already, its all about what a client wants and what they are comfortable with.

But if you look at the average investor, they will not yield too much more with MFs than they would with an FIA once you tack on the fees to the MFs. And there are lots of 30 somethings that would gladly sacrifice the possibility of a percent or two, for the security of knowing they will never suffer a loss (especially at an inopportune time...)


Also, with securities; you really need to be more of an active investor. They are not the type of investment that you can just sit back for the next 40 years and not worry about it.
While I dont reccomend doing that for annuities either, it would be much more acceptable to do this with a FIA vs a portfolio of stocks.
And what percentage of average investors have the dicipline to review their holdings on even a yearly basis, much less a bi yearly or quarterly basis...? Not many.

But again, as usual, it just depends on the client.

 

[sman]

In your mind it's gambling so what's the point of even having this conversation. I happen to disagree since many companies pay dividends and have done so for multiple decades.

I guess people like Warren Buffet are good gamblers.

Buying and selling securities in any form is a gamble. To think otherwise is out of touch with reality. Call it what you want - it's all about return on their money and if you can't consistently provide that return, you're gambling with their money (Nothing wrong with it if they want to gamble).

 

[DHK]

Let's point out a couple of things here (and no, I'm not arguing which is better or worse).

- One of the annuities I offer has a "return of premium" rider where you can get ALL your principal back without a surrender charge! So, if you really DID need access, the client CAN get at it. There's simply a reduction in the guaranteed rate for that rider.

- Modern Portfolio Theory is more "ancient" today. The fundamentals of investing have changed. One of my favorite funds, CAIBX had some awesome MPT stats before 2008. Low risk, high return... coupled well with CWGIX for a "portfolio" allocation.

Today, strategic allocation is dead. You can't "set it and forget it". A more tactical allocation management & allocation is required. Much more active management in order to preserve the portfolio and (hopefully) have some GAINS each year. At a minimum, automatic rebalancing should happen every quarter. Of course, such tactical asset management is typically found only on RIA, fee-based platforms and not with mutual fund companies.

Every year you have a gain, is a year closer to your goal. Every year you have a LOSS, you are at least 2 years behind your goals. One to get back to zero and another one to make up for lost time.

The problem I have is that every year you have a gain, you are COMPOUNDING your risks into the next year. If you gain 10%, then 15%, then 8%, you've gained 33%. Now, you lose 25%. The % numbers don't look so bad... until you realize that you've lost the majority of your gains have just vanished. If you had started with $100,000... it would've grown to $136,620 before your loss. Once you lose 25%, you're down to $102,465 after 4 years.

The only way to avoid those kinds of losses, besides having discretionary authority on accounts... is to use a tactical asset allocation strategy where the goal is to preserve the portfolio and maximize gains at the same time.

The other part, is to ensure that you always have an Investment Policy Statement. This is to remind the client what they said they were comfortable with... and protect YOU the investment advisor.

I've had more than a few nervous investors who just weren't worth the trouble anymore. Time is better spent prospecting for new business, than trying to justify your past recommendations and avoid a complaint with your firm &/or FINRA.

That was what life has taught me. Everyone is different.

 

[Franz Kafka]

Would you buy this?

Consider what it did from around '63 to around '83 for 20 years.

Consider what kind of stiff angle it has been on since '83 to '00.

Consider what it's been doing since '00.

Show it to your prospects and ask em what they think.

Dow Jones Industrial Average (1900 - Present Monthly) - Charting Tools - StockCharts.com

JMO

 

[DHK]

If you're suggesting that the market will grow to astronomical levels... I'd love to believe it.

I'd have to wonder what demographic data would support such a huge increase in the DJIA... unless it's all government spending!

 

[scagnt83]

Another point to make is that very few funds actually mimic the performance of the indexes.

In actuality, the majority of MFs have underperformed the S&P over the past 10-20 years.
Yes, I am well aware that there are plenty that have topped it; but the fact still remains that the majority of MFs are complete crap and the average investor has no clue what is good and whats bad.


And DHK makes an excellent point about averages. (I can show you funds with a 10% average return over 20 years, but a 3% actual return over those 20 years.)
Take a look at what most MFs ACTUAL RETURN is over the past 20 years and they look even more dismal as a whole.

Dont get me wrong, I am a believer in the market. But its not for everybody (unlike what most stock brokers & investment companies want us to think); and in actuality, very few people who are currently in the market have the financial foundation to make it a suitable investment for them imo. (how many people in the market do you think have 3 months of living expenses in the bank, proper LI/DI/HI, and solid fixed assets..... definitely not the majority)

 

[0b1kanobee]

Would you buy this?

Consider what it did from around '63 to around '83 for 20 years.

Consider what kind of stiff angle it has been on since '83 to '00.

Consider what it's been doing since '00.

Show it to your prospects and ask em what they think.

Dow Jones Industrial Average (1900 - Present Monthly) - Charting Tools - StockCharts.com

JMO

I don't exactly know what you are asking/saying but I could take that same chart and show a line going only upward with no downside, unless you consider zero your downside.

I always feel it is timing. When do you plan on exiting? Because if you are in the market and you are ready to get off, coparing it to a building, you want to get off somewhere between the middle to the roof. A good annuity will allow that to happen all the time. Being in the market, you may end up getting off, only to find out you are in the basement so you must continue to ride in the elevator in order to get off on a floor which will bring you as close to your desired arrival point.

I sometimes ask people if they would rather be on an escalator or in an elevator. Escalator going up slowly but nonetheless going up or elevator going up and down and never really knowing when retirement is going to be on the other side.

I'll ask someone if they ever got in an elevator to go up or down and when inside the elevator it just went the opposite way they wanted it to go and how did that make them feel?

There are many different ways to use that analogy and a few others as well.

 

[sman]

Well you guys have all convinced me. I am preparing a letter to all of my clients who have money in the market and advising them that we need to immediately move their money to an index annuity.

I may need all of you to help me explain to them how the gains they've realized over the past decade aren't real and that they would have been better off in an index annuity (show me an index annuity that averaged 8% since the beginning of 2001).

The one difference in what I'm saying and what many of you are saying is that I am not speaking out against annuities as you are against the market. I have no problem with annuities when used properly. Many of my clients have annuities, but only when it fits what they want their money to do. You've all convinced yourselves that the market is a terrible place to be.

For some reason it appears many of you think EVERYONE lost 40% in 2008. The majority of my clients lost no more than 8% in 2008 and some actually had a positive return. Why I'm even continuing this is beyond me. You all have your one size fits all product and you're happy with it. If your clients are happy, then great. Have fun with the whole square peg round hole thing while I offer options to the client.

Would you buy this?

Consider what it did from around '63 to around '83 for 20 years.

Consider what kind of stiff angle it has been on since '83 to '00.

Consider what it's been doing since '00.

Show it to your prospects and ask em what they think.

Dow Jones Industrial Average (1900 - Present Monthly) - Charting Tools - StockCharts.com

JMO

 

[DHK]

sman,

Don't get your panties in a bunch. This is a discussion on Index Annuities vs the Market.

Now, if you have clients whom you've helped them get a positive return - FANTASTIC! You must do some things DIFFERENTLY than 95% of all other advisors out there!

Not all advisors are equipped, nor sell in a manner than can help their clients earn positive returns when the general market is not doing well.

As I had said before, without discretionary authority or a tactical asset allocation... it's hard for a Series 6 advisor to manage mutual funds this way. It's not profitable for them to call every single client to make an allocation change... so they don't.

We are all in business for ourselves. Our #1 job is to manage our time and resources to help us all earn a PROFIT. That's a profit TODAY and TOMORROW. Managing portfolios (on a non-fee basis) limits our profitability on our time.

If you can do it all and make a profit... again, that's great! You're one of the few. Hopefully, you're an RIA (I can't remember) so you can advise your clients on their 401(k) allocation as well.

BTW, if we were totally "against the market"... why would we have the interest linked to a market index?

I'm against LOSSES. I don't like losses, so I don't get them. I may not have the 100% gain... but I'll never lose what I put in or the interest that is credited every year.

What I like about annuities is that it's "set it and forget it". You review the account once a year with the client. No nervous phone calls, no nervous emails, no market losses. If the client doesn't want it... great! I hope they find an advisor like you, sman - who uses proper strategies to allocate their funds, minimize downside risks and capture upside swings of the market.