Annuities

[mlinderEA]

Annuties

Had a review with one client last week.Year to date profit 13.2%Five year return average 9.8%If I had enough money they would handle mine also.This lady inherited 1.5 million eight years ago first broker lost her over $300,000 in two and a half years.After doing her return I sent her to this person and she is doing very well know.You pay for what you receive in every thing you buy.

[Nashville]

Balanced Approach

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

Again, I am all in favor of this service being not biased in favor of fat commissions, but also if we strip out all conceivable loads, we will be hard pressed to find someone to service our accounts. People should be paid for their work.

For example in the above lets say someone invests $1,000,000. The yield (according to the above) is $37,000 annually, of which $10,000 is deducted to pay the salesman. But then the next year, the yield is another $37,000 without any commission and the year after that, yield of another $37,000 etc etc etc. And the investment advisor won't get ALL of that $10,000 the first year after his company sticks their thumb in the pie.

Is this advisor overpaid??

Let's assume also that the investor doesn't want to pay ANY advisor, so he goes down to his friendly bank and gets a CD paying 1.6% for 3 years. Boy he really showed that broker a thing or two didn't he?? Does he laugh all the way to the bank, or does his bank laugh at him driving home?

What am I missing??

[ChEAr$]

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

I explained it well i think in my OP. Re read it.

[John of PA]

I'm sorry, but I must say Annuties are a problem out there because many of the Financial persons are awarded hugh commissions, and thus they are very aggresive in selling them. How can the financial planner be without bias when such a large commission is being paid on the annuity. It's not thier fault, it the financial instutions that created this imbalance. Anyone considering annuties should be sure they have a financial planner that comes highly recommended and well known in the community and you should know people who are very satified with this person and has been with them a long time; also be very careful with variable annuities. I have been doing taxes a long time and without exception, the overwhelming best long-term performance of retierment funds I have seen is buy and hold blue chip stocks, which by the way, is most likely where the annuity (and mutual fund) company is going to invest the funds they are holding.

[Roberts]

What am I missing??

The 1% fee is a yearly fee. Not a one time commission. So that's $10,000 each and every year going forward.

[Roberts]

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.

On variable annuities, the upfront commission, significant insurance cost, yearly fees and surrender charges..... I agree it's hard for the 99%ers to justify that a variable annuity is the best option but it could be in certain situations. Performance of the investments is irrelevant unless we are analyzing the risks taken. More risk = more return. Some say "they returned 14% in a years - woohoo" means absolutely nothing to me. Did they have 40% of their investment dollars in high risk assets or linked to one stock like Apple? Unlikely that's going to be repeated ever again.

Fixed annuities are a different story.

[JoshinNC]

Actually, you didn't.

I explained it well i think in my OP. Re read it.

But I will address the items you brought up. Feel free to bring me more when I shoot these down.

"given her mother's age" - You didn't provide us with the mother's age, but I'll assume she's over 75. A female over age 75 has a greater than 50% likelihood to live to age 90. That's 15 years. Why is a VA particulalry a bad investment for someone with a potential 15 year time horizon?

"big commissions inherent in such an investment" - Who pays those commissions? Do they come out of the invested funds? Does the client cut a check to the advisor to pay these commissions? What is a "big commission"? Commissions are paid by the issuing insurer on VA's, not the client. The full amount of invested dollars are put into the subaccounts chosen by the client, as opposed to a load mutual fund, where the commission paid to the advisor actually is taken out of the invested amount, or as opposed to a fee based account where 1, 1.5 or even 2% EVERY YEAR is deducted from the invested amount. Client's do not pay the commissions, the insurer does, so why does the client care how much the commission is? You didn't define a "big commission". Is it 5%? 7%? 10% What is the average commission paid to a broker on a load fund with no breakpoints? It's 5.75%. If a client is in a fee based account charging 1% per year for 15 years how much have they paid their advisor? 15%.

Any more qualms Harland?

[ChEAr$]

Any more qualms Harland?

Yeah, you can't even spell my name right.

[JoshinNC]

iPad spell checked it,

Yeah, you can't even spell my name right.

Sorry!

[MRPLOW]

Rolan Slugg summed this up best, I suggest people reread his post.

Also to some of you I would be very careful giving financial advice when not licensed to do so, especially when you are acting in a professional capacity as there tax preparer/accountant, that is a very slippery slope.

[ChEAr$]

Rolan Slugg summed this up best, I suggest people reread his post.

Also to some of you I would be very careful giving financial advice when not licensed to do so, especially when you are acting in a professional capacity as there tax preparer/accountant, that is a very slippery slope.

Not in my neck of the woods. I will tell a client any time what I would do if I were in his shoes.

[Jiggers]

Not in my neck of the woods. I will tell a client any time what I would do if I were in his shoes.

Same here.

[JoshinNC]

Telling them what you would do

Same here.

and giving "investment advice" are two different things. Be careful.

[JohnH]

I'm not shy about telling them what I would do.

And I'm not too concerned about them regarding it as advice because they never do what I say anyhow. Most of the time they're just looking for validation of something they've already decided to do.

[Jiggers]

Giving advice about specific stocks, mutual funds, annuities is something I would never do. I guarantee that if I did, the stock/fund/annuity would drop in value the next day!