Indexed Annuities S&P 500 WTF

[unic.consulting]

I agree and disagree with you.

The 9.1% (using your number) is not a 'front-end load', but a total net cost to the client over a 10-year period. Because it's spread out, it cannot be considered a 'front-end load'.

However, everything else, I generally agree. What does the client GET for their 1% fee per year? If I have a $1 million RIA client... what do they get for their $10,000/year working with me? And is it really WORTH $10,000?

- I can deliver an economic weather report every quarter. (That's boring and I have no control over the economy anyway.)
- I can update their retirement plan (but any fee-only advisor could charge up to $1,000 per year to update that.)
- I can verify and re-verify their beneficiary designations. (Not hard to do.)
- Ensure that their portfolio risk level is commensurate with their risk tolerance every quarter? (Not hard to do either. Just move them from a 4 down to a 3, or whatever.)
- Access to "institutional money managers" with strategic and tactical asset management strategies. Still no guarantees against losses for paying those fees.
- Ego boost that you're investing like institutions invest. (I think that's about it.)

The main thing that the investor gets... is a "pay as you go" investment relationship. You don't pay the "load" of A-shares all up front. Plus, the advisor is assured of ongoing compensation versus just 12b1 fees.

Which means that it's easier to get out of the RIA investment and only pay for the TIME you spent with that advisor. Plus, the advisor has an incentive to help (however they do it) to make sure your portfolio grows with proper recommendations and to keep the client happy. Yet, 'happiness' is not a definable or measurable barometer of success.

I keep reading articles that state that clients are happy as long as advisors continue to reach out to them with updates on a periodic basis. But, as you stated, in the RIA, that 'happiness' is rather expensive over time.

I saw an article today that talks about what clients are looking for in an advisor.

In [Investment Management Consultants Association's] Investor Sentiment Survey of 1,000 investors, 93 percent said it was "important" or "critical" that their advisor “helps them maintain a long-term investing approach,” and 83 percent wanted their advisor to help them “stay calm when the market drops.”

In addition, 80 percent of those surveyed who had $1 million or more in investable assets said it was important or critical that their advisor help them stay current on the latest tax law changes, while 63 percent off the investors surveyed said “providing access to cutting-edge investment strategies” were important or critical.

So, according to this survey at least, what we're getting paid for is a) helping our clients look at the big picture and b) educating our clients. Is that worth $10k to someone that's investing $1M?

 

[DHK]

I think it can be worth the $10k on $1m... but it also depends on what "big picture" you're using.

I think too many investment advisors rely on the charts of how various indexes and market segments have done... saying "the market always comes back".

Yet, that kind of thinking doesn't necessarily take demographics and government intervention into tax laws into account. Looking forward, I see a baby-boomer generation that will be retiring and removing money from the markets as they have their own lifestyles to fund from their investments.

This phenomenon has never been done in the history of the stock market.

So... does it make sense to "calm investors" during turbulent market volatility if and when they're taking income from deflated portfolio values? To me, it doesn't.

Which, as it has been mentioned before, it can do a great deal of good to use a combination investments/annuity approach. The annuity to provide certainty for retirement income, and the investment portfolio to "do what it should do". Plus, you can use a more aggressive allocation (and patient in the volatility) in retirement when you're not relying on that portfolio as a source of regular income.

 

[unic.consulting]

I think it can be worth the $10k on $1m... but it also depends on what "big picture" you're using.

I think too many investment advisors rely on the charts of how various indexes and market segments have done... saying "the market always comes back".

Yet, that kind of thinking doesn't necessarily take demographics and government intervention into tax laws into account. Looking forward, I see a baby-boomer generation that will be retiring and removing money from the markets as they have their own lifestyles to fund from their investments.

This phenomenon has never been done in the history of the stock market.

So... does it make sense to "calm investors" during turbulent market volatility if and when they're taking income from deflated portfolio values? To me, it doesn't.

Which, as it has been mentioned before, it can do a great deal of good to use a combination investments/annuity approach. The annuity to provide certainty for retirement income, and the investment portfolio to "do what it should do". Plus, you can use a more aggressive allocation (and patient in the volatility) in retirement when you're not relying on that portfolio as a source of regular income.

I guess it also depends on what you consider "calming" your investors. If you're talking about blowing smoke, then it absolutely doesn't make sense. But keeping them from panicking and making the situation worse is worthwhile. Something along the lines of, "yeah, this is a bad situation, but we can find ways to mitigate it."

 

[DHK]

I can agree with that.

I think the job of an advisor is to help bring rational thinking into the decision making process, rather than acting irrationally or making rash decisions.


When I sold investments, everyone says they have a "high risk tolerance" when they are looking to invest. They hear "high risk = high return" and they want a higher return.

They are liars.

What they WANT is "15% annual guaranteed returns with no risk to principal".

I used to base my hypothetical illustrations on investing in a portfolio of mutual funds in March, 2000 and following it through to the present. If they would simply "withstand" the volatility, they would've been alright.

But looking backwards is 20/20... and investors have selective memory.


Here's the other side of 'calming investors': Suppose you sell an investor some A-share mutual funds for a lump sum of capital... and 1 year later, they're nervous due to current volatility. Well, A-shares are based on a 5-year or longer investment time horizon.

If the client REALLY wants out of the investment (not just re-allocated to a money market fund... but OUT)... how do you justify it for compliance and record keeping purposes? YOU (as the registered rep) got to earn a commission in the sale of these investments... so you 'got yours', right?

Of course, you document the conversation. You go back to your original notes and remind them of their stated risk tolerance and conversations on volatility... and let them decide.

But if you end up with too much of this happening, then something may be wrong with the investment sales process... because the rep is earning A-share commissions while investors are only staying in for a short period and not weathering the volatility storm.

Therefore, it is your (implied) duty as a registered rep / investment advisor to help people get and stay invested. That's part of the agenda of 'calming investors'... for compliance, for their benefit, and to keep your own record clean and clear.


If I were a registered rep today, I wouldn't take on any investment clients that didn't have a minimum of a 5 year investment time horizon. Anything shorter than that today... they shouldn't be investing where there is a risk to their principal due to market forces beyond their control.

I would also want to work with clients through using an Investment Policy Statement - to remind clients of the investment risk tolerance and that the portfolio is (should still be) meeting that definition. This brings rationality back into the discussion... and perhaps whether they'd prefer to lower their risk factor at this time.


The compliance factor between commissioned investment sales (Series 6/7) vs fee-based investment sales (Series 65) is a HUGE factor! With fee-based investments, at least the CLIENT is in control. They can move their assets at will, rather than having their registered rep talking them into staying put.

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I think the better way to deal with investments for retirement income is to use a 'bucket' approach.

Safe Money = 1-2 years of retirement income (liquidated first)

Income Money (Bonds, etc.) = 3-5 year time horizon to feed into the 'safe money' bucket

Growth Money (stocks, etc.) = 5+ year time horizin to feed the 'income money' bucket


I believe most RIA 3rd party manager platforms would have something like this to help manage volatility, reverse dollar-cost-averaging, and bring an element of safety to retirement income planning using securities.

 

[davephx]

The registered rep has FAR more compliance issues, client forms to complete for almost anything and FINRA is highly motivated to find as many errors, no matter how minor to collect big fines to finance the average employee salary of well over $100,000/yr.

As a reg rep we get detailed home office audits annually in great detail, have annual FINRA education requirements annually plus big separate FINRA exam every 3? years. We have to do money laundering exams annually etc.

If we replace an A share we have to do a client signed worksheet showing the original cost, when bought, what we are replacing it with, the costs and a justification.

Just to open an account now takes six pages of documents with complete financial info, income, outside investments, objectives, risk tolerance, etc.

RIA's maybe are audited once maybe every 10-years and have none of these requirements. Basically just give them the SEC required disclosure brochure.

On the linked pdf about getting securities license. He must live in fantasy land that only 5% needs to be in growth into retirement and 95% in fixed products.

Where is there a fixed product that is going to generate any real return after-tax and after inflation (even at 2%) in a fixed product and fund 20+ years of retirement costs.

Today very few baby boomers have enough assets to provide for potential health care costs, maybe living to 90 yrs+, fund vacations and LTC etc. We are no longer retiring at 65 and death by 70. Today the risks of living too long far out way the risk of death too soon.

 

[DHK]

I don't know about that guy's product recommendations. I just posted it due to the long-term demographic and economic perspective.

Btw, I do like the practice of 'switch letters' as a way to document your recommendations and showing the client exactly what was recommended and why.

 

[Tahoe Ray]

We have to do money laundering exams annually etc.
.

So do all insurance agents.

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Where is there a fixed product that is going to generate any real return after-tax and after inflation (even at 2%) in a fixed product and fund 20+ years of retirement costs.
.

Indexed annuities can definitely average 4-5% over a 10 year period.

Not overly impressive for accumulation but in a distribution scenario, they can be very attractive.