Thought for the day:

“If you had to identify, in one word, the reason why the human race has not achieved, and never will achieve, its full potential, that word would be ‘meetings.”              Dave Barry

If you will read no further:

You should take a quick look at this article from Fox Business and perhaps refer it to your clients.  Ignoring this issue will not make it go away, or be less expensive.

Thought for the week:

I spent a couple of hours this Sunday morning reading “white papers” and articles on annuities and came to realize two things.  First, that I have no life; and second, that that there is no final answer in the controversy over the value of annuities in the financial planning context.  What I do find consistent is that almost every argument centers on whether or not one can do better for the client using a distribution model incorporating a managed portfolio.  In other words, the annuity ( I am referring to SPIAs) sets the bar.  If you make your living selling insurance products annuities are great.  If you make your living managing a portfolio for fees, you may seek out the position that better results can be achieved by not turning your money over to an insurance company.

Many financial planners confess their frustration with the complexity of annuities and how difficult they are to understand.  Actually the subject of annuities is a big one because the term refers to instruments that accumulate money and/or distribute it and utilize either securities or fixed interest.  Variable annuities are a subject unto themselves.  Let me only say that their true value only involves the accumulation of money.  After that (by comparison with other options) they are lacking when it’s time to take the money to spend. More on that subject some other time.

On the other hand, SPIA’s and (to a lesser degree) Index Annuities can be very straight forward.  Take money that has been accumulated for retirement and spend it on retirement.  You know that you can get the most income for your client by dividing the amount they have accumulated by the number of years they will live, taking into consideration a rate of return.  But you don’t know either of those and the insurance company does….actuarially speaking.  So when they give you a figure it is based on an assumption that your client will live to a certain average age.  Of course some will die sooner and others will live longer, but the insurance company doesn’t care because for them, it will all work out in the end.   Don’t try this at home…or in your practice.  Because you have to get it right one client at a time. No offence, but you are not that good.

Does all this mean you no longer manage their investments?  Not at all!  But your first priority is to provide the client with a secure income to support his lifestyle.  Take care of that first using the annuity.  Then manage the rest to anticipate future needs for additional income or unique opportunities or emergencies.  Since the average retired client can receive 6-8% income from a SPIA vs. 3.5% (current accepted rate) from a balanced portfolio (50/50 or 60/40) the same income can be derived from half the money and, the rest can be invested.  Everything else can be explained by Josh Ver Hoeve (800.238.8144) when he prepares a quote for you.

So what do I say to the planners that conclude that they can do better than the insurance companies?  Retirees with modest portfolios are the ones most affected by such an option and are less able to handle the risk and uncertainty….particularly as they age.   Unless you can demonstrate a significant increase in retirement lifestyle and comfort, all the math and the projections in the world won’t be sufficient to overcome the peace of mind that one has by knowing they will received that check every month as long as they live.

Bottom line, it’s not just about returns.  It’s about providing predictability employing a strategy the client can understand and with which he can be comfortable.  Do that and you have done your job.