Alternative to CD's - Not an Annuity

[sman]

I wanted to share an idea that I have had some success with in moving CD money. As most of you know, fixed annuity rates are in the toilet along with CD rates. Since the annuity rates are so poor right now and there's no great place to move CD money, I have approached several of my clients with an alternative that they have been very receptive to.

I have been recommending the Franklin Templeton Georgia Tax-Free Income Fund. Since my clients are in Georgia, the dividends from this fund are free of federal and state taxation. I have been recommending the C-Share so as to avoid any up front sales charge and not lock the client in for an extended period of time. The current dividend yield on this fund is 3.67%. Assuming a 15% federal tax bracket and a 6% state tax bracket, that's a taxable equivalent yield of 4.65%. Find some wealthier folks and the taxable equivalent only increases.

With 12-month CD rates below 2%, once the client understands how the fund operates and the ability to avoid taxation on the dividends, they have been eager to move money. Even the most conservative of clients have been willing to put some money in this fund.

For those of you with a securities license, you may want to look at tax-free municipal bonds as a CD alternative. This is solely for non-qualified money as municipal bonds aren't allowed to be use for qualified accounts.

While you won't get rich doing this, it does move the money from the bank to you and opens the door for future investments.

Just some food for thought.

 

[Death Cab For Tootie]

So, you normally take risk-free money and put it at risk? I guess it's viable if the client understands their principal could go down, but in my experience they have very short memories.

How about some par WL with PUAs as a CD alternative? Similar concept except their 'principal' can't go down.

 

[VolAgent]

So, you normally take risk-free money and put it at risk? I guess it's viable if the client understands their principal could go down, but in my experience they have very short memories.

How about some par WL with PUAs as a CD alternative? Similar concept except their 'principal' can't go down.

Except they will spend years getting out of surrender and recouping all the initial loads. As much as I like WL, that idea is just as bad as the muni fund, just for a different reason. The OP was looking at a short-term, liquid solution.

There is a reason CDs are paying so little, its rather risk free. Even if the bank goes under, the FDIC guarantees the money to a limit.

If you are going to throw out WL, might as well look at a VA with riders. Again, it has problems, you've just got to pick your poison.

 

[BNTRS]

Why scoff at annuity rates? Most are better than say a 5 year CD, and you don't have to be locked in. Here's one thing I believe strongly to be true: interest rates are at a level we'll probably not see again in our life time. Based on that, sure it sucks now, and for the next year I likely won't see too much growth, but if I'm looking to preserve principal, fixed annuities without guaranteed periods will be fine vehicles during the recovery.

The WL idea alternatively is a great idea, especially for companies offering a single premium policy (yeah it's a MEC I know, but the tax treatment is the same as an annuity, and the death benefit is better). Now it's absolutely correct to state it's not a suitable recommendation to someone who plans on taking all of the money out in a year or two, but WL surrender charges are virtually non existent (in the UL sense) and I can get a bond-like yield without the risk of losing money, and it's another vehicle that will benefit from higher interest rates in a recovering economy.

Muni bonds, I don't know. The risk involved is higher. They are usually dependable, but I have a certain connection with the Central New York area, and I saw what happened to the Rochester Muni fund. Thankfully I had no clients who owned it.

 

[sman]

If you can read and comprehend, you will see that I said, "Once the client understands how the fund operates" AND "Even the most conservative of clients have been willing to put some money in this fund".

In addition, check out the fund and look at it's history. Even in the worst of time (last year) it was down 5.80%. However, the dividend continued to be paid. Since they have the same number of shares, the dividend amount didn't change even though the value on paper went down. And for what it's worth, it has recovered nicely this year.

Now to your advice. Are you serious? How quickly do you think someone could recover their money in a WL policy? Let's say they want to invest $20k from their CD, when will they see a positive return on their investment? And is that positive return tax-free?

And just how is it a "similar concept" as you stated? There is nothing similar at all. One method is liquid and the other isn't. Granted, if the goal is to leave money to a beneficiary that could be more than the contribution, then your idea may work. But that isn't the purpose of my original post.

Thanks for playing though.

So, you normally take risk-free money and put it at risk? I guess it's viable if the client understands their principal could go down, but in my experience they have very short memories.

How about some par WL with PUAs as a CD alternative? Similar concept except their 'principal' can't go down.

 

[HarryRenard]

If you can read and comprehend, you will see that I said, "Once the client understands how the fund operates" AND "Even the most conservative of clients have been willing to put some money in this fund".

Clients always "understand" when things are good, the problem is when selective memory sets in, when times aren't so good.
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Why scoff at annuity rates? Most are better than say a 5 year CD, and you don't have to be locked in.

You are right.
Maybe its the comissions (being scoffed) not the interest rates.

I havent had to many complaints sure i'd rather be selling 2001's rates but this will do.

 

[sman]

Hey Vol, explain how the muni fund is a bad idea. Keep in mind, no one is recommending a person put all their assets in a muni fund. Many CD investors are looking for something better than the 1%-2% on one-year CD's. If you can show them something that doesn't tie up their money and gives them a relatively safe alternative and a potentially higher tax-free return, they will listen.

Just because you and the others don't like the idea doesn't make it a bad one.

Except they will spend years getting out of surrender and recouping all the initial loads. As much as I like WL, that idea is just as bad as the muni fund, just for a different reason. The OP was looking at a short-term, liquid solution.

There is a reason CDs are paying so little, its rather risk free. Even if the bank goes under, the FDIC guarantees the money to a limit.

If you are going to throw out WL, might as well look at a VA with riders. Again, it has problems, you've just got to pick your poison.

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I'm scoffing because the rates are too low for me to lock someone in for a long period. And if you think a carrier will drastically raise their rates on flexible premium annuities once the rates change, you're dreaming. They will have people locked in for 5-7 years and won't have a huge incentive to meet market rates for the existing book of business.

Don't get me wrong. I don't mind selling fixed annuities. I'm just getting the, "I don't want to tie my money up for more than 12-months, because I think rates are going up" statement from many clients and prospects.

As for your comment about the Rochester muni fund (not sure if you're talking about a municipal bond or a bond fund, two different animals). Also, not all bond funds are created equal. All I can say is do your due diligence and if it's a fit for your client, then make the sale.

The Franklin Templeton Georgia Tax-Free Income Fund has been in operation since 09/01/1987 (the Class A share). Over that period of time it has had 3 down years, with the worst being last year at (5.34%). It has an average return of 5.96% over the lifetime of the fund (that's a taxable equivalent of 8.64% for those in a 25% federal and 6% state tax bracket). For someone to call this a risky investment is nothing more than a scare tactic.

You stick with your annuities and I'll do both. I present both options to the client and educate them on the risk involved in both the muni fund AND the annuity. The difference in what I'm doing and what you are doing is that if and when annuity rates go back up I will be able to move my client to the annuity if they desire.

Why scoff at annuity rates? Most are better than say a 5 year CD, and you don't have to be locked in. Here's one thing I believe strongly to be true: interest rates are at a level we'll probably not see again in our life time. Based on that, sure it sucks now, and for the next year I likely won't see too much growth, but if I'm looking to preserve principal, fixed annuities without guaranteed periods will be fine vehicles during the recovery.

The WL idea alternatively is a great idea, especially for companies offering a single premium policy (yeah it's a MEC I know, but the tax treatment is the same as an annuity, and the death benefit is better). Now it's absolutely correct to state it's not a suitable recommendation to someone who plans on taking all of the money out in a year or two, but WL surrender charges are virtually non existent (in the UL sense) and I can get a bond-like yield without the risk of losing money, and it's another vehicle that will benefit from higher interest rates in a recovering economy.

Muni bonds, I don't know. The risk involved is higher. They are usually dependable, but I have a certain connection with the Central New York area, and I saw what happened to the Rochester Muni fund. Thankfully I had no clients who owned it.

 

[Death Cab For Tootie]

If you can read and comprehend, you will see that I said, "Once the client understands how the fund operates" AND "Even the most conservative of clients have been willing to put some money in this fund".

Fair enough.

In addition, check out the fund and look at it's history. Even in the worst of time (last year) it was down 5.80%. However, the dividend continued to be paid. Since they have the same number of shares, the dividend amount didn't change even though the value on paper went down. And for what it's worth, it has recovered nicely this year.

As long as the client knows their account balance can go down (which doesn't happen with WL or a CD), go nuts.

Now to your advice. Are you serious? How quickly do you think someone could recover their money in a WL policy? Let's say they want to invest $20k from their CD, when will they see a positive return on their investment? And is that positive return tax-free?

When you add a Paid Up Addition rider to the policy as a way to put a lump sum in, some of the initial premium will go to the insurance, most will go in a liquid, tax-deferred, creditor-protected bucket.

And just how is it a "similar concept" as you stated? There is nothing similar at all. One method is liquid and the other isn't. Granted, if the goal is to leave money to a beneficiary that could be more than the contribution, then your idea may work. But that isn't the purpose of my original post.

Thanks for playing though.

If you know anything about how WL works, you'll see how my method offers liquidity AND will not go down in value. I'm not saying it's the only way to go, because you really didn't give enough information to offer the best recommendation. However, if you took the time to learn more about it, you would see it could be valid.

 

[sman]

Harry,

That's why you document, document, document.

And no, it's not the commissions being scoffed. Commissions are better on an annuity than a C-Share of a mutual fund. In addition, as I stated earlier, I sell annuities as well. I have no problem with annuities. But when my clients and prospects started turning their noses up at the rates for a 3 or 4 year annuity (which are getting harder and harder to find), I had to come up with an alternative. I never recommend a large portion of the CD investor's money be put in the muni fund. For example, just had a client who I have invested nearly $400k in annuities for contact me about a CD that is renewing. It's $40k. He stated he didn't want to go more than 12 months, but the credit union was only paying 1.85% on the CD. When I explained the muni fund idea and went over the details he said he felt comfortable investing this amount in the fund. My average muni fund client has been putting 10%-20% of their non-qualified assets in this fund instead of a CD or annuity.

I just thought I'd give some folks here an idea that has been working for me. Apparently I've stepped on some toes or offended some people. I'll refrain from sharing ideas in the future. There seem to be a lot of "experts" on these boards.

Clients always "understand" when things are good, the problem is when selective memory sets in, when times aren't so good.
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You are right.
Maybe its the comissions (being scoffed) not the interest rates.

I havent had to many complaints sure i'd rather be selling 2001's rates but this will do.

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Cabbie,

I've been in the insurance business for over 20-years. I know very well how WL works. And it's not a fit for the short term investor. You may can fit the square peg in the round hole, but that's not the way I do business.

If you know anything about how WL works, you'll see how my method offers liquidity AND will not go down in value. I'm not saying it's the only way to go, because you really didn't give enough information to offer the best recommendation. However, if you took the time to learn more about it, you would see it could be valid.

 

[padthaiforlunch]

I just thought I'd give some folks here an idea that has been working for me. Apparently I've stepped on some toes or offended some people. I'll refrain from sharing ideas in the future. There seem to be a lot of "experts" on these boards.

Now, now. Just because people like to discuss doesn't mean you should shut up and stop sharing ideas. It took some discussion for you to fully explain who and why you are doing to for. Your last post is more explanatory than your first.

Please continue to contribute!