Indexed Annuities S&P 500 WTF

[Golfnut2112]

I guess it's time to vent a little. Why do companies and agents claim that the returns on these annuities are based off the S&P 500 with no downside risk? The company takes the money and invests almost all of it into bonds with only a small amount into options. With a cap of anywhere from 2-4 percent that is hardly S&P returns. According to Morningstar the S&P 500 had the following returns as of 3/17/15, 1 year 13.89% 3 year 16.35% 5 year 14.60% and 10 year 7.95%. I have used IA's (4 to be exact) when people have absolutely no risk tolerance and trying to beat bank CD rates. Most of the time I will allocate the money into a gov't or intermediate bond funds which have vastly outperformed my IA's without the long surrender charges. I don't think I would have a problem with them if they where sold for what they are, which is a low return safe investment. I believe if they continue to use the words S&P 500 in literature they should be regulated as a security.

I had to spend over two hours with a client that was going to move $250,000 from a bond fund (which did a little over 6% last year) into an IA because he thought he can get market returns without risk. Absolutely no mention was made of the caps or LONG surrender charges. BTW the guy did not have a security license and I feel was not qualified to talk about securities like he did.

Sorry about the rant. Time to have a cold one.

 

[scagnt83]

Some of what you say is true. I see both sides of the argument. I have heard IAs pitched in a way that is totally misleading. But I have heard the same thing happen with stock brokers on how a portfolio will perform... or even worse, from VA salesman about the Income Rider "guaranteeing you x% return on your money"... of course that one happens with IAs too.

But you keep referring to low caps and long surrender charges in your posts about IAs. Which is misleading in and of itself. Like I pointed out before, there are many IAs with a 5 or 6 year surrender. There are two products with a 4 year surrender.

There are also other crediting methods than a Yearly Cap. I have 1 contract that I sold last year that uses a Spread/Participation Rate and is at 7% right now. I have another at 6% that I just reviewed with a client.

From 2012 - 2013, I had some contracts that use a Monthly Cap that had double digit returns as high as 18%.

Every IA that I have sold is in the 3%-9% range for annualized returns. Most are in the 4%-7% range.

Just like there are good mutual funds and bad mutual funds; there are good IAs and bad IAs.
I admit that the current IA market (for new sales) has pretty low Caps generally speaking. There are literally only 3 or 4 products I would sell right now.
But there are crediting methods other than the yearly cap that you always bring up. And those options exist on 5/6/7/8/9 year products.

Any product (securities or non-securities) can be mis-sold or mis-represented. Requiring an additional test is not going to fix that...
I came across a guy a few weks ago with a Pru VA with a 7% Rider. He told me that his money was guaranteed a minimum 7% return and that he could cash that 7% return out after 6 years. He even showed me a one page overview that the series 65 CFP who sold it to him gave him. It did not mention once that the 7% was only for an income account....

You cant regulate ethics.

 

[DHK]

As for the low caps, here is a partial explanation:

Is it a Great Time for Indexed Annuities? | LifeHealthPro

Q6: How has regulation changed indexed annuities since the onset of FINRA’s Notice to Members 05-50?

Moore: Regulation has transformed the fixed, indexed and variable annuities that are in your toolboxes. Most notably, the 10/10 Rule. The 10/10 rule says that annuities cannot exceed a 10-year surrender charge or a 10 percent penalty. That is restrictive on pricing! When you limit annuity surrender charges, you also limit the bonuses, compensation, and credited interest to the client! Low interest rates make it even more difficult to develop attractive annuities in a 10/10 regime. Our products are commoditized. As an expert, I find 10/10 to be uncompetitive. Who is the insurance commissioner to tell me a 16-year annuity isn’t right for me? The regulators are controlling “bad agent” behavior with a limitation to a product. It isn’t right and it takes away choices. Due to the new IIPRC regulatory group, most annuities will be 10/10.

However, you cannot invest directly in the S&P 500. Why does Dalbar say that the "Market" earned 10%... and individual investors earn only as little as 3.4%?

1. Volatility (and fear)
2. Portfolio Construction
3. Expenses and Fees
4. Taxes

All 4 of these factors affect the individual investor on an individual level and NOT on a "Market Level".

"What Happened To My Money?" - Guy Baker


This is why would be wary about comparing ANYTHING to "market performance".

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I've been finding Guy Baker's information to be very informative, yet not "slanted" in any way. Just the facts that help people make good decisions.

He is an RIA and (obviously) a top level life insurance producer.

He has a free book on this that you can request here: Download The Great Wealth Erosion | Wealth Teams Solutions

 

[RyanCO]

Every IA that I have sold is in the 3%-9% range for annualized returns. Most are in the 4%-7% range.

I don't remember why I did this, but a few weeks ago I had a stick up my butt about EIA's and decided to call a company and drag some specifics out of them regarding performance.

To make a long story short, at some point I said something like, "look, I realize you can't make any predictions on performance, but I'm certain that an annuity company is going to have general expectations on how these things are going to perform".

And, surprise of surprises, he said, "well, yeah, okay, based on the way these things are built, we figure they're probably going to average 4.5% to 5.0% or so." Finally!

I've also talked to people who were crammed into one of these things by a "professional" who led them to believe they were going to do better than that. In general, though, 4.5% to 5.0% tax-deferred isn't bad for certain portfolios.

.

 

[Golfnut2112]

You guys are right, it just gets very annoying when agents skip certain facts and it does go both ways. I have seen some VA ones also. This particular annuity had a 10 surrender charge and a 2.5 point to point cap. I need to look into some with shorter surrender charges and higher caps, but being with a BD its a PIA

 

[scagnt83]

You guys are right, it just gets very annoying when agents skip certain facts and it does go both ways. I have seen some VA ones also. This particular annuity had a 10 surrender charge and a 2.5 point to point cap. I need to look into some with shorter surrender charges and higher caps, but being with a BD its a PIA

I totally agree. I think that the whole Income Rider thing is going to have a real come to jesus moment in the next 5-10 years. Way too many agents are making misleading, or outright wrong statements about them. Or just selling them when it is not needed because it sounds good and they think it helps their chances of making a sale.

The biggest problem to me are the IMOs. Very few actually give a sh%t about the client buying the product. And way too many agents just blindly trust their IMO. 9 out of 10 times an IMO will recommend a 10 year product I have found.

Your example is perfect. Why would anyone in their right mind buy a 2.5% Capped 10y product when they could get a 6y product with a 4.5% Cap?

Of course that 10 year product likely pays 2%-3% more than the 6 year... but Im sure that had nothing to do with the recommendation


And your biggest hurdle with selling IAs is being handcuffed by your BD! Break free of your chains and go the RIA route!!

But Im glad you saved the client from making what obviously would have been a big mistake.

 

[DHK]

I'm not an expert in indexed annuities... but for now, the lowest surrender charge and highest annual pt-to-pt cap I've found is with ANICO Strategy Plus 7 FIA. 7 Years & 4.25% annual pt to pt cap.

Independent Marketing Group of American National

However, caps can change every year. And as scagnt83 said in other thread - what incentive does an annuity carrier have to increase caps on in-force business?

It IS a function of interest rates. For example: interest rates are around 3%... so they put 97% of the principal into bonds - knowing that compounding with bonds will make it "whole" after 1 year. They take the remaining 3% and buy the call options.

When interest rates rise (and the index segment is renewed), there will be more money to buy & leverage with index options. Instead of 97% growing at 3% to make it whole, it could be 95% growing at 5% to make it whole. With greater buying power, you can have higher caps. And this way, caps can increase on the same contract.

This is overly simple, but it's generally how it works.

 

[sman]

Anybody remember the ING Secure Index Seven? Minimum rate of 3% with, if I recall, a cap of 7.5%. Seven year surrender. The 3% guarantee came into play if at the end of 7 years the return wasn't at least an annualized rate of 3%.

Man I'd love to see a product like that today.

 

[Tahoe Ray]

Anybody remember the ING Secure Index Seven? Minimum rate of 3% with, if I recall, a cap of 7.5%. Seven year surrender. The 3% guarantee came into play if at the end of 7 years the return wasn't at least an annualized rate of 3%.

Man I'd love to see a product like that today.

Now it's a 9yr, with a 5% spread on a monthly average with a zero floor (I believe)....those were the days.

The upside is pretty limited, but Sagicor still has a 2% floor in the same vein.

In many cases it looks better than a MYGA...

 

[Golfnut2112]

I totally agree. I think that the whole Income Rider thing is going to have a real come to jesus moment in the next 5-10 years. Way too many agents are making misleading, or outright wrong statements about them. Or just selling them when it is not needed because it sounds good and they think it helps their chances of making a sale.

The biggest problem to me are the IMOs. Very few actually give a sh%t about the client buying the product. And way too many agents just blindly trust their IMO. 9 out of 10 times an IMO will recommend a 10 year product I have found.

Your example is perfect. Why would anyone in their right mind buy a 2.5% Capped 10y product when they could get a 6y product with a 4.5% Cap?

Of course that 10 year product likely pays 2%-3% more than the 6 year... but Im sure that had nothing to do with the recommendation


And your biggest hurdle with selling IAs is being handcuffed by your BD! Break free of your chains and go the RIA route!!

But Im glad you saved the client from making what obviously would have been a big mistake.

I plan to break free in October. I changed my BD in October 2013 and received a sign on bonus however I have to remain there for two years in order to keep it. I am really fed up with BD's in general my BD will not allow me to conduct fee based business until I pass my 66 even though they said when I signed on that I could because I am grandfathered with my state, whats more my principal does not have his and I just refuse to take it. Also I pay approx $8,500 a year in fees and insurance.

How can I break away and keep my current clients without a BD?