Veritas, Sea, Somebody!

[JoshinNC]

I have a client who has an IRA held in a VA (I hate VA's). This was a rollover from a 401k plan offered through former employer. In reviewing performance I notice that the additional fees on the VA (insurance, riders, etc.) are costing them roughtly 3.65% per year, on top of the expense ratios on the funds.

Also, first word out of clients mouth is, "I'm very conservative". I look at him and tell him, "Well, your VA isn't being managed conservatively". He pays the advisor who set up the VA 1/4% each quarter to "manage" the subaccounts. He has 3 oil and gas funds, 3 real estate funds, 2 international stock funds and 1 each in financial services and health care, comprising 50% of his total investments. At age 65 I'm thinking he should be 25 - 30% in equities, with the rest in income and fixed investments, if he wishes to be conservative. He likes the 12% return he's getting, but wouldn't be able to stomach a 12% loss. Can we surrender the VA, take the value and roll it into a traditional IRA, using much more conservative investment choices? I don't deal much with VA's (because I hate them!), so I'm not sure of the possible choices.

Any help you can provide would be greatly appreciated.

[Unregistered]

How does an IRA invest in the Veteran's Administration?

[Unregistered]

How does an IRA invest in the Veteran's Administration?

I think he means Variable Administration, or maybe Veteran's Annuity.

[Snaggletoof]

Variable Annuity

Good Grief, folks, this is a Variable Annuity.

The latest concoction of the insurance industry to rip off customers by making them believe they are investing in mutual funds. They take so much off the top that the customers typically will make virtually nothing except in good years.

Actually what happens is that the insurance company (or bank) invests in a fund of the customer's choice - e.g. Fidelity Magellan. Fidelity might charge 1% admin fee. But then the insurance company sets up a phantom account for the customer, with the Megellan fund in reserve. Perfectly legal, and the phantom account is solidly backed.

However, the earnings, reinvestment, etc. is only a shrink-wrapped version of the real Magellan Fund, and is filled by only those earnings, dividends, and capital gains which are left after the insurance company rakes off 3.5% for themselves.

In a bad year, it's quite possible Magellan may only make 2.0%. Does this stop the insurance company from raking off 3.5%? Of course not! In such a year, the customer has a (1.5%) loss.

In my area, lots of insurance agents, bankers, brokers, etc. are furious with me because I take the time to explain this shell game to my customers. Next time your client wants to rollover into a VA, tell him what's really going on....

Good post, JoshinNC, and I love your position on VAs.

[sea-tax]

Well Josh and Snaggs hold your horses . I am not a huge fan of Variable Annunitties but they do serve a purpose for the right customer.

Josh as for your case. First you must look at the surrender charges and how much they are . If the client just bought the annuity then I will bet that the surrender period is like 7 years and most likely 4-6%. This may not make it feasible for a rollover. Client may want to just wait until surrender charges are up or at least lower.

What you can do is get appointed with that specific insurance company and do a change of broker dealer. This way you can help client reallocate moneis and prevent the management fee. I did this once for a long time client with a very similar situation as your client. I will point out that more likely than not you will get little to no compensation for this. But that in my opinion and in my situation was ok because it built alot of good will with client. Plus once the surrender period is up then guess what you get to save them and then you get something for your trouble.

As for the current portfolio I agree it sounds wrong for the client , but we do not know what the client said in the meeting or what his risk profile actually looked like. Also the broker may be taking a little more risk because the VA has a principal guarantee. Some of these new VA's have principa guarantees that allow the client to take on more risk then they normally would because they have the guarantee that at worst they will be able to take distributions out on the original principal invested.
Hope this helps and sorry for any mis-spellings.

[JoshinNC]

Thanks all!

I do agree with Sea-Tax that VA's are right in certain situations, but this definately isn't one of them. Holding an IRA in a VA is like wearing a poncho in a rainstorm and carrying an umbrella. The gains are already sheltered, so there is no reason to pay additonal fees to shelter them.

This is actually a 4 year product, and we only have 9 months left, so we may wait until the surrender period is up and then switch into a mutual fund based IRA. The contract does have a principal guarantee, but that is no reason to allocate the assets in a way that conflicts with the client's risk objectives.

I just went to my compliance conference yesterday, and this wasn't even addressed. I asked our compliance officer why not, and he told me "The NASD has other fish to fry, like selling B and C shares inside IRA's and the Merryl Lynch rule".

Oh well, it looks like we have to be the one's looking out for our clients, because the consumer advocates aren't screaming loud enough for everyone to hear.

I do think that we as tax professionals do have a duty to our clients, whether we are involved in the sale of investment products or not, to at least have a rudementary understanding of investment vehicles and to ask our clients about them.

[sea-tax]

Well Josh it sounds like you have it all figured out so good luck.

Question. Why would selling b or c shares inside an IRA be an issue? I mean I understand why B and C shares do not make sense for alot of investors but what does it mattter if it is an IRA or 401k or Investment account?

[Snaggletoof]

B and C shares

Sea-Tax, I guess I'll have to agree with you on this one. There may be some distaste among "purists" about the load structure, but it's really the customer's choice. And there are often situations where B or C shares would make sense.

I also understand that you sell securities coupled with your tax practice, and the distaste expressed by Josh and myself about VAs strikes at the heart of commission structure. If someone is doing the work and selling the securities, they are entitled to be compensated for it. I respect the fact that you shouldn't have to advise clients and sell them securities for free. My big complaint about the VAs is the covert nature of their revenue, even though they claim to put it in a prospectus. Over time, some of the insurance companies can earn as much revenue as the investor. That's going above and beyond what is fair to the investor.

[sea-tax]

snagg I agree there are alot of bad VA's out there and this is unfortunate, but there are some good ones as well. All I am saying is I am not willing to throw the baby out with the bath water.

Ultimately it is a decison that needs to be made between the client and the rep and hopefully the Rep is clear and upfront with the client about all fees and the sorts.

[Unregistered]

Snag, I'm securities licensed too,

But I still hate VA's. I have yet to run across the "right situtation" in practice, although there are some, in theory. Poor school teachers and other govt' employees have to invest in these things through the inherent wisdom of Congress (lobbyists and unions). I will get compensated for moving this money out of the VA and into an IRA, but will get 1/3 to 1/4 of the check I would get if I moved them into an Equity Indexed Annuity or Fixed Annuity.

I appreciate your competence in this area and am sure that you provide a great service to your clients in educating them, whether they listen to you or not.

JoshInNC

[sea-tax]

But I still hate VA's. I have yet to run across the "right situtation" in practice, although there are some, in theory. Poor school teachers and other govt' employees have to invest in these things through the inherent wisdom of Congress (lobbyists and unions). I will get compensated for moving this money out of the VA and into an IRA, but will get 1/3 to 1/4 of the check I would get if I moved them into an Equity Indexed Annuity or Fixed Annuity.

I appreciate your competence in this area and am sure that you provide a great service to your clients in educating them, whether they listen to you or not.

JoshInNC

ok josh
What about a client who is say 65 years old , with low to moderate risk propensity , who wants a guaranteed income and protection of principal.

Another example: Client has one member corp and and he is only employee with major profits say 600k net. I had this exact person and got them a 412i defined benefit plan which allowed them to sock away major money. Only catch is it has to be used with a fixed annuity.Lower the internal rate of return the more the client can sock away.

What I am trying to say is that yes there are bad annutities but there are good ones too . And I can tell you it is just not in theory, I have used them in reality.

[JoshinNC]

Yes, there are GREAT annuities,

VA's just don't happen to be one of them. I have many clients for whom I have worked out Immediate Annuities with a portion of their retirement nest egg, and they greatly appreciate the safeguarded principal and guaranteed income.

But, there is no safeguard in a VA (death benefit is a joke) nor income guarantee.

There are special circumstances where VA's make sense, but I don't run across them in my practice.

Just my opinion.

[sea-tax]

.

But, there is no safeguard in a VA (death benefit is a joke) nor income guarantee.

There are special circumstances where VA's make sense, but I don't run across them in my practice.

Just my opinion.

ok you have me with the death benefit they usual are a joke , but the income guarantee?
I realize they usually will not give you 100% of your money back when requested but they will allow you to take distributions out on the original amount invested and with the periodic stepups to new principal guarantee amounts for some clients who are unwilling to take risk in a traditional mutual fund setting and unwilling to settle for a cd paying 4% I think it is a good option .

Also you need to look at the 412i plan, you would be amazed at how much tax you can save your wealthy clients. They will think you were a like a savior.

Josh I understand your lack of interest in the va and annuity sector but I would hope for your clients sake you would at least keep an open mind. You said in reality they serve no purpose and I just wanted to prove to you that in the right situation they do and you probably have more clients than you think.

[JoshinNC]

I will look at the 412i

I've always seen them funded with life insurance, not annuities. Do you have some contacts for this type of set up you would be willing to let me hook up with?

[Joe Btfsplk]

Annuity rip-off

I would agree that a variable annuity is invariably a bad choice. An immediate payment single premium annuity might be a more reasonable investment, but only if bought when interest rates are fairly high.

As to holding stock-related investments to a very low percent, I think it depends on the investor. I invested most of my rollover IRA in stocks and stock-related ETFs. I have withdrawn a lot more than my original investment and my remaining balance is still about twice what I started with due to gains in bull markets and despite a large loss one year after the internet bubble burst.