Annuities

[ChEAr$]

I'm am so happy. A client's daughter emailed me (she handles mother's affairs) about estimated taxes fourth quarter
(because of humongous dividends from family corporation just received before 12/31/2012), and added that she and mother planned on seeing a "financial advisor" soon.

I vehemently advised her NOT to consider any annuities, given her mother's age. Also mentioned the big commissions inherent in such an investment.

Hopefully they will take my advice.

Just had to tell someone.

[Golden Rocket]

Fox Watching Henhouse

Harlan I agree. In our practice we encounter clients who have relied upon the advice of lawyers, bankers, brokers, insurance agents, etc. And it is all too obvious that the best interests of our clients are not the primary objective in the "advice" of all these experts.

I expect brokers, insurance agents, etc. to be paid for their work, and to make a decent living. How do you balance this with the harm done to clients in many cases?

We should be able to find honest people in the brokerage and insurance industry just like the tax preparation industry. Can measures be taken to assure people get good advice, and their advisors are paid accordingly?

[Jiggers]

Harlan, you are lucky that they contacted you in advance, or at least mentioned it.

Most of the time I hear about such stuff during the 1040 interview, just as we are finishing up and I am reviewing the 1099's.................

The clients that won't listen and will still invest in annuities, no matter the age, are looking at the promised gold mine in higher interest versus the penny interest on CD's.

[mlinderEA]

Annuities

I only recommend fee based advisers to my clients that have money. Or tell them to ask the financial person they are talking to if they have a fiduciary responsibility to them.That eliminates most people that are just sales people.

[Roberts]

I only recommend fee based advisers to my clients that have money. Or tell them to ask the financial person they are talking to if they have a fiduciary responsibility to them.That eliminates most people that are just sales people.

It may eliminate sales people but it also eliminates the cheapest option. A buy and hold strategy with a commission broker is and always has been the cheapest way to invest with a professional long term. A fee based advisor putting their clients into bonds in today's market will produce almost as much in fees as they do interest. Our local "money reporter" in the paper used to tell clients to ONLY use fee based advisers. After about a dozen emails explaining how this was a bad idea, he's finally stopped pushing the worn out advise. As a broker I can tell you, fee based accounts are their most lucrative accounts and the brokers LOVE them. Ever wonder why?

If they cut the commissions on annuities in half, 90% of variable annuity sales would disappear.
Fixed annuities are not a horrific idea - you need to separate the two when talking about them with clients.

[mlinderEA]

annuities

I said that this is for clients with money.I have recommended several clients that have over one million dollars to this one firm.They go over clients account quarterly and if clients want I am in on the telephone call.They have done very well by these clients over the last five years.The fee is 1% none of these clients would manage the accounts themselves.All had large loss carry forwards and there was a lot of trading in their accounts that they could not explain before.I still believe some times the cheapest way is not the best way if you can afford it.

[Roland Slugg]

I don't know who does his clients a greater disservice ... the CFP who sells someone an annuity or other "product" for whom it is completely inappropriate, or the tax professional who summarily rules out an entire category of investments just because he doesn't happen to like them or approve of the people who sell them.

Annuities are an excellent investment for some people. I'm not a fan of variable annuities, but I have seen clients make above average returns even with those. Fixed annuities are, for many people, an excellent choice. And contrary to the opinions expressed above, they are often a good choice for the elderly, especially those folks who do not want to risk the volatility of the stock market, including mutual funds.

In recent years I have encountered single-premium fixed annuities that pay a 10% up-front bonus and one that paid an 11% bonus ... and even pays that 11% bonus on additional funds invested for the subsequent seven years! Most fixed annuities, and perhaps all of them, allow penalty-free annual withdrawals of up to 10% of the original investment or its current value. All or most fixed annuities offer a range of investment options, and one of them is a fixed interest rate, currently running around 2.8%. That looks pretty good compared to a MM account paying 1.05% (CIT Bank) or, in most cases, less ... as little as 0.01% or 0.02% offered by most banks. Even Vanguard's MM fund is currently paying just 0.03%. 2.8% fixed won't make anybody rich, but it's still nearly 100 times that 0.03% alternative. So what if the salesman is making a commission?

Instead of immediately ruling out an entire category of investment, our clients ... especially our older clients who often really need someone's objective advice ... would be better served by an adviser with an open mind and unbiased attitude.

[DaveO]

Well said Roland

During the meltdown in 2008 those clients invested in annuities and even whole life polices slept a lot better than those invested in the market. Of course for the most part those who stayed in the market are smiling again.

One of the tricks to financial success is, "When you have won the game, stop playing". In other words once you have the principal to sustain yourself for a comfortable retirement stop risking your capital. A good quality fixed annuity can be the ideal vehicle for preservation of capital and guaranteed income.

I don't sell any financial products but I try to provide unbiased advice when asked about them.

[mlinderEA]

Annuities

I believe also that annuities are the correct product for some people.But most sales people I have found do not care if it is the correct product.Had couple redeem $150,0000 worth of HH bonds to buy an annuity.They owed a lot of taxes on the redemption plus they are both 84 years old they do not need this money to live.They both have federal pensions plus some social security.They do not spend what they have coming in.To me this was the worst type of investment and was only done so a commission could be earned.They called me yesterday that the adviser called to do another $100,000.I said that they should not.

[Burke]

I, too, do not dismiss annuities out of hand. But depending on the clients' ages, they need to think about the surrender charges for liquidating during the time period for which these are assessed. (normally 7-15 yrs). If funds are needed for long-term care, 10% per year withdrawal might not be enough. This surrender charge time frame usually applies to the bonus paid up front as well. Always treat a replacement (1035 exchange) as suspect.

[JoshinNC]

I'm not gonna bash you Harlan

I'm am so happy. A client's daughter emailed me (she handles mother's affairs) about estimated taxes fourth quarter
(because of humongous dividends from family corporation just received before 12/31/2012), and added that she and mother planned on seeing a "financial advisor" soon.

I vehemently advised her NOT to consider any annuities, given her mother's age. Also mentioned the big commissions inherent in such an investment.

Hopefully they will take my advice.

Just had to tell someone.

But please explain to me your qualms with annuities that provoked you to provide this "advise" to your client.

[Corduroy Frog]

Is this IRD?

Had couple redeem $150,0000 worth of HH bonds to buy an annuity.They owed a lot of taxes on the redemption plus they are both 84 years old they do not need this money to live.

If this couple dies and the bonds are not redeemed at the time of death, does the basis get "stepped up" or does the deferred income become "income in respect of a decedent?"

[ChEAr$]

I believe also that annuities are the correct product for some people.But most sales people I have found do not care if it is the correct product.Had couple redeem $150,0000 worth of HH bonds to buy an annuity.They owed a lot of taxes on the redemption plus they are both 84 years old they do not need this money to live.They both have federal pensions plus some social security.They do not spend what they have coming in.To me this was the worst type of investment and was only done so a commission could be earned.They called me yesterday that the adviser called to do another $100,000.I said that they should not.

And that case, Melinda, is the exact situation to which I referred in my OP.

[taxxcpa]

Unbiased attitude

Instead of immediately ruling out an entire category of investment, our clients ... especially our older clients who often really need someone's objective advice ... would be better served by an adviser with an open mind and unbiased attitude.

If you can find such an advisor....
Most "advisors" are salesmen and annuities provide good commissions.
However, I'm sure that some advisors would only advise a client
to buy an annuity that was in the client's best interest.

But....caveat emptor.

[Roberts]

I said that this is for clients with money.I have recommended several clients that have over one million dollars to this one firm.They go over clients account quarterly and if clients want I am in on the telephone call.They have done very well by these clients over the last five years.The fee is 1% none of these clients would manage the accounts themselves.All had large loss carry forwards and there was a lot of trading in their accounts that they could not explain before.I still believe some times the cheapest way is not the best way if you can afford it.

The stock market and bonds yield < 3.7% before being taxed. That means their investment advisor is charging 28% of their income.