Annuity Recomendation

[iceco1d]

The returns account for loads, 12b-1s, the whole 9 yards. I wasn't recommending ABALX, I was simply pointing out the absurdity of "poor clients, down 50%, can't retire now!" Even a simple strategy (like buying ABALX) did much better than that, and even a caveman could do that.

So I think I'll elect to keep my mouth open.

 

[scagnt83]

AAA corp bonds do have the ability to outperform an IA, just as stocks do.


But LFGs description of "more safe" "more liquid" "higher income ability" isnt exactly true.


-Safety-

First off, SGA caps average around $250k on a national basis.


Are you allowed to say your bond yields are guaranteed?
Are you allowed to say your clients principle is guaranteed with a AAA bond?

Is the Promisor of the Note required by regulations to allocate a set % of every dollar to a General Account that is heavy in Treasuries? Or is it all subject to the corporations operational risk?


Sure, bonds are safer than the stock market... but ask GM bond holders how that AAA rating worked out...


CBs dont compare to IAs when it comes to risk because IAs guarantee your principle.

Treasuries are the only thing that compares risk wise.



-Liquidity-

Sure you can ladder Bonds, but the same can be done with IAs with an extra 10% liquidity.

And lets not forget that the longer the Maturity on a Bond the higher the risk is.



-Higher Income Payout-

Are you aware that the average AAA Corp Bond portfolio from 1926-2009 at a 5% withdrawal rate had only a 64% chance of success based on a 30 year retirement?

At 6% it goes down to a 42% chance of success.

Now I realize that your clients are not in 100% bonds, and there are lots of other variables; but it still makes a good point, AAA Bonds are not without risk.

And I will assume that you know IAs can 100% Guarantee 5%-8% for life while still allowing for liquidity...




And even more important, I believe in having a retirement plan strategy that my clients can understand.
Bonds are complicated.
Very few retirees understand Bonds themselves, much less the theory behind their brokers investment strategy.

Some say its not for them to understand, its for the advisor. But clients want a strategy they can comprehend.
And a client deserves to understand whats going on with their life savings.
Investing directly in bonds usually should be for the more sophisticated investor.


Bonds are not "bad", and certainly can be good.
But the risk of bonds is downplayed a lot, and there is a lot more risk to them than an outright default.
- - - - - - - - - - - - - - - - - -

The fact of the matter is that there are investment strategies that are GUARANTEED to outperform a FIA.

GUARANTEED??? Really?? And it would be legal for you to put that in writing???


Nothing is guaranteed to beat anything unless its a contractual guarantee.
- - - - - - - - - - - - - - - - - -

If someone wanted to, they could buy bonds and index call options, cut out the insurance company and the insurance agent, and make more money.

There are other investment strategies that can offer guarantees (such as stock portfolios that utilize put options), structured notes and other products. The list goes on.

Those are not guarantees, they are hedges. There is a very big difference.


By cutting out the company/agent the client is taking on all the risk and putting their principle at stake... very poor analogy.

The whole point of an IA is to eliminate risk.
- - - - - - - - - - - - - - - - - -

Ethics are found from within, not what licenses you carry.
- - - - - - - - - - - - - - - - - -

This we can definitely agree on!

 

[iceco1d]

Scag - If an investor puts their bond money in treasuries and GNMA's, their principle is guaranteed far better than at an insurance company. If you want to talk about early surrender, I'll take interest rate risk over surrender charges + MVAs any day of the week.

Put 92% of your portfolio in Treasuries & GNMA bonds. Buy index calls with the rest. Tell me it's not guaranteed to maturity. Tell me it won't yield better than a FIA.

It's the same **** under the hood, without the insurer, and without the agent.

Now for Joe Smith with $25K to invest, they can't do this, and they can't get an RIA to do it for them either, so it's not an option.

Again, I was just pointing out that there is no magic to a FIA. I wasn't recommending that Joe Blow go build their own.

 

[Bobrobb]

Scag - If an investor puts their bond money in treasuries and GNMA's, their principle is guaranteed far better than at an insurance company. If you want to talk about early surrender, I'll take interest rate risk over surrender charges + MVAs any day of the week.

Put 92% of your portfolio in Treasuries & GNMA bonds. Buy index calls with the rest. Tell me it's not guaranteed to maturity. Tell me it won't yield better than a FIA.

It's the same **** under the hood, without the insurer, and without the agent.

Now for Joe Smith with $25K to invest, they can't do this, and they can't get an RIA to do it for them either, so it's not an option.

Again, I was just pointing out that there is no magic to a FIA. I wasn't recommending that Joe Blow go build their own.

Couldn't an insurance company give me a better participation rate than your 8%?

 

[iceco1d]

Couldn't an insurance company give me a better participation rate than your 8%?

No. It's not mathematically possible. The insurance company is doing the same thing with the premiums (buying bonds and calls). The difference is the insurer has to pay the agent, the insurer has to make money, the insurer has to pay to market the FIA, etc. so they have a lot more cost than someone building one themselves.

Pooled risk is something that we cannot replicate individually. FIAs have very little to do with pooled risk.

PS - The 8% isn't the participation rate, it's just how much I recommended you use to buy calls with. Call contracts are for 100 shares of stock. So you can get a lot more equity participation with a lot less money, than actually buying stocks. That's why anyone that's really a baller when it comes to trading is doing so in options, not stocks. Anyone day trading stocks is a small time fool. People with real strategies do so in the options market to take advantage of the 100x leverage you get.

 

[scagnt83]

Tell me it's not guaranteed to maturity. Tell me it won't yield better than a FIA.

It's the same **** under the hood, without the insurer, and without the agent.
.

Its not guaranteed to maturity, it can be called.

No one on earth can know if it will yield better than an FIA, way too many variables involved; its pure conjecture and speculation.



You need to brush up on GNMAs. One of the biggest risks of GNMAs is called Structural Risk.

In otherwords its the risk of mortgages being paid off early, usually through refinancing.


Also, an investor who invests in GNMAs is committing to a possible 20 to 30 year investment term.


GNMAs might not carry the risk of default that a AAA Bond has, but AAAs carry less risk in other areas.
- - - - - - - - - - - - - - - - - -

It's the same **** under the hood, without the insurer, and without the agent.

Now for Joe Smith with $25K to invest, they can't do this, and they can't get an RIA to do it for them either, so it's not an option.

Again, I was just pointing out that there is no magic to a FIA. I wasn't recommending that Joe Blow go build their own.

Thats the thing, it isnt.

I do understand what you are trying to say. That the internal mechanics of investing the $ inside an IA can be replicated in a way.

But the internal mechanics are trivial to an IA.

Your method might guarantee the majority of principle, but it gives you none of the advantages of an IA. This is what most brokers just dont get... but once explained, clients most definitely do.

 

[iceco1d]

You're wrong. You're LONG the call option. A call option cannot be "called." The stock it's written on can be called (and index options are settled in cash, not the underlying asset). Even if it were an option on a stock, the insurer owns the option and has full rights to exercise or not. It cannot be called.

You're correct about GNMAs being paid off early, but that's not a risk to principle. GNMAs can be purchased in the secondary market like any other security, much closer to maturity.

The mechanics to a FIA are not trivial. You want to use interest rate risk as a reason not to buy, but a FIA has a heavy surrender charge which is going to be worse than interest rate risk on a treasury with a duration less than 10.

The being "called away" comment is not all accurate in the context of creating a FIA.
- - - - - - - - - - - - - - - - - -
So here's an example with $100K.

Put $83,000 into a 10 year Treasury Note at 1.90% (current yield). $83K @ 1.9% for 10 years = $100K.

So after 10 years, you are GUARANTEE by the US GOVERNMENT to get your money back.

On the remaining $17,000, you buy at the money index call options on the S&P 500, or whatever index you want. They cannot get called, you own them and the right to exercise them. If the market goes up, you exercise them for a profit. If the market stays the same or goes down, your calls expire worthless, and you get your $100K back at the end of the 10 years.

If you want a "minimum guaranteed rate" of return, put say, $85K or $90K in the 10 year notes, that will give you more than $100K after the 10 years.

Now, if you want your money back early in the FIA, you pay a surrender charge (as much as 10 or 12% on a 10 year product). In the Treasury, you MAY or MAY NOT have a surrender charge, depending on if interest rates have gone up since you purchased them (which can be measured by duration, which with low interest rates, is quite high right now).

 

[scagnt83]

You're wrong. You're LONG the call option. A call option cannot be "called." ).

I was speaking of the Bond being paid off early

 

[iceco1d]

Fair enough. That aside, if you use a 10 year Treasury, like in my example above, the bond cannot be called.

 

[bobson]

I'm slightly younger and I'm buying the longest term FIA I can. They provide they best options for growth. I could buy a one year but the upside potential isn't there.

I don't have to worry about interest rate risk, I don't have to worry about calls and puts, I don't have to worry about market risk, and any of that other bs. I'm saving for retirement.

I'm not going to hit a homerun but I'm going to hit singles all the dang time.