Client Solication Letter

[davephx]

DHR Response (have always enjoyed your good comments on various topics)

I envy your only 6-page disclosure statement. We are required to use one drafted by securities attorneys (Form CRS) which is about 50 pages! In addition, I have to send prospects/clients Part 2A of Form ADV for my RIA.

Well put as to "tools". As in my long reply to Allen everything is based on clients' objectives, risk tolerance, time horizon, and personal comfort with whatever product solutions/tools are suggested.

Lucky for insurance-only agents, The NAIC model - kind of suggestions for states) is nothing like the best-interest requirements we on the securities side have with Form CRS, etc.

 

[Allen Trent]

I can say "I'll never recommend a VA... because (other than fee-based VAs), I'm no longer registered to sell them." Of course, I can back up why that is.

That is slightly different than the post I was responding to saying ne won't use a VA or FIA for guaranteed income & will only use equities instead. I have not seen anything solely in equities that guarantees X for income. Instead, he should say ""I don't accept clients that need or will need a guaranteed income in the future as I only focus on accumulation needs"

 

[Allen Trent]

Allen Response: I only recommend equities with a balance of various risks; growth, value, etc. for the long-term growth not for the protection side of portfolios. I only recommend mutual funds with detailed outside analyst reports (Morningstar etc.) looking at historic Alpha relative to Beta, expenses, and many other factors. On every recommendation, my RIA (actually just me) does an extensive advisory report with 2-5 pages of details, discussion, often analysis of top holdings, etc. In my last audit - two days with 2 AZ Securities auditors (routine every few years) they praised my reports and issued totally clean audits of both my RIA and as an OSJ on the brokerage side. I also have annual audits by the broker-dealer - actually yesterday looking at documentation for best-interest, suitability, the zillions of forms we have to do all the time, etc.

I agree I should not have used the term "never" since I did recommend some VA's pre the major changes after 2008 limiting sub-account choices vs some of the historically high growth options some VA's had along with the now unheard of downside grantees - not today's buffers, etc.

If I want "safety" I would use a fixed annuity or immediate annuity if needed totally secure income. My clients typically have over $1m with me - mostly because they have had good growth over the many years with me and are not looking for "safety of principal" since they can wait out a market decline.

Instead of "buffers" I prefer to on the growth side use far less costly carefully selected based on historical risk/reward equity funds diversified by managers, growth/value etc. If you want a "buffer" use option funds or a fixed annuity. Obviously, it all depends on the client's objective, risk tolerance, and timing of when will need the funds.

If they were a different type of client I might recommend fixed or immediate annuities but since they are based on interest rates the last few years have been some of the worst times in history with such low rates that are the base for both types of annuities.

I have done lots of modeling related to indexed annuities and have three problems.

1) While no one should liquidate before the surrender period, how often do reps point on the MVA that many indexed annuities have which if expected interest rates go up, could substantially increase the surrender cost. I am sure you all here do if you sold MVA products - Market Value Adjustment based on interest rates.

2) While past performance does not assure future results, historically I would challenge that a good Option fund will beat most annuities with minor downside risk. This is one "participate yet protect" suggestions I make to clients. Use covered call options and puts not naked. The idea is if the equity portion of a portfolio is in a decline and a client needs funds instead of locking in a loss in equities, this is historically far less risk and there is no surrender period - is immediately liquid.

3) With today's historically low participation rates (due to low-interest rates) all you need is a few down or no gain years of the index the participation rate is based on to have a far lower return after the surrender period - maybe closer to a CD rate.

All the insurance company is doing is matching their own bond maturities to protect principal and options to provide the participation at least basically. And of course, they make a hidden profit never disclosed.

Again if a client's objective was the safety of principal I would do more fixed or immediate annuities but as previously mentioned this is about the worst time in about the last 40 years to do them. Obviously, the high payout rate from immediate' s is mostly return of principal and the real return rate is maybe 1%.

I usually do not recommend bonds, although in some cases maybe high yields with short durations. Obviously, municipals have the highest interest rate risk next to zero-coupon bonds. Today's 10 yr Treasury 1.8% rate many believe would be 3.5%-4% if there wasn't the trillions of Fed bond-buying that is about to be reversed. If interest rates are allowed to normalize bond investors could face huge losses (unless held to maturity but still the opportunity cost lost). As folks probably know, for every 1% increase in interest rates the loss is about equal to a bond's duration. A 10 year Treasury has about a 7-year duration so it would lose about 7% in value for each 1% increase in interest rates - other factors equal.

I tend to be a detail nerd. Obviously, these are my opinions and I respect those that may disagree.

BTW am looking for potentially good reps if want to be on the security side But the licensing costs, required E&O insurance (never had a claim or customer complaint in about 40 years of paying premiums), and affiliation fees are huge compared to the insurance side, or the cost of just being an RIA.

Love it. Agree with every single last point.

Great stuff

 

[Tahoe Ray]

1) While no one should liquidate before the surrender period, how often do reps point on the MVA that many indexed annuities have which if expected interest rates go up, could substantially increase the surrender cost. I am sure you all here do if you sold MVA products - Market Value Adjustment based on interest rates.

You have to point that out but if the clients have any potential of incurring surrenders, they shouldn't put those assets in an annuity in the first place.

It's a reason why most carriers won't accept a large percentage of a client's assets into an annuity.

I agree with most of your post, but middle-market affluent (1-2 million in retirement assets) typically don't have the leverage to replicate what an indexed annuity can do. Carriers get institutional access whereas the average joe cannot. Nor do they want to manage the risk like a carrier does (and most advisors don't want to deal with that either).

CD<MYGA<Indexed. And we have 5 year MYGAs at 3% right now (anticipating rising rates) so the indexed carriers have reacted in concert (using more aggressive indices, better par/spreads/caps, etc.).

 

[davephx]

You have to point that out but if the clients have any potential of incurring surrenders, they shouldn't put those assets in an annuity in the first place.

I agree with most of your post, but middle-market affluent (1-2 million in retirement assets) typically don't have the leverage to replicate what an indexed annuity can do.

I agree MVA not relevant if hold to surrender. I don't think I have every had a client early surrender.

For $1-2m typical client of mine they only do $100k or so into a fixed annuity (last one over a year ago). They are growth investors but want to have the option of not having to liquidate equities in a 2008 type down market. The idea is if their equity holdings are down 20% (like a 2008 situation) would they want to lock in that loss if they need money or pay a surrender fee of far less to cash in an annuity. Fortunately none have had to make that choice since didn't need cash in like the 2008 Great Recession.

 

[DHK]

I agree MVA not relevant if hold to surrender. I don't think I have every had a client early surrender.

One small benefit for being in California... every annuity I've seen doesn't have an MVA requirement. They just don't apply.

There may be exceptions, but it's one of the things I look at, and every one doesn't have MVA requirements in California.

 

[davephx]

I monitor lots of comparative rates and often they are quoted with and without MVA - rates are of course lower for non-MVA contracts since the insurance company has a higher risk it can't pass on via the MVA. And in some states i.e. I believe AK, CA, PA and UT, MVAs can not be used at least in some annuities.

One company is increasing rates on 5-year MYGA to 2.8% with MVA and 2.6% without.

 

[Tahoe Ray]

One company is increasing rates on 5-year MYGA to 2.8% with MVA and 2.6% without.

I don't understand this being an issue.

Don't buy a MYGA if you have liquidation needs prior to surrender.

Also, don't break a CD inside of its terms.

Don't surrender a B share mutual fund either.

There are penalties for most financial products if you break them early...so don't put all of your eggs in one basket.

 

[Allen Trent]

I don't understand this being an issue.

Don't buy a MYGA if you have liquidation needs prior to surrender.

Also, don't break a CD inside of its terms.

Don't surrender a B share mutual fund either.

There are penalties for most financial products if you break them early...so don't put all of your eggs in one basket.

Agree, but what is the surrender schedule for then? Especially when a personay only get back 92 cents on the Dollar solely from the surrender schedule.

A CD & B share don't have near as severe of a surrender charge as MYGA, especially today when MYGA commissions are so much lower than the past. Was also told the surrender charge was to recover commission & cost to buy the matching investments

 

[Tahoe Ray]

Agree, but what is the surrender schedule for then? Especially when a personay only get back 92 cents on the Dollar solely from the surrender schedule.

A CD & B share don't have near as severe of a surrender charge as MYGA, especially today when MYGA commissions are so much lower than the past. Was also told the surrender charge was to recover commission & cost to buy the matching investments

The CD and B share are your money (technically), the MYGA is the insurance company's money until redeemed.

As you know, MVA is a way for MYGAs (and FIAs) to offer much more competitive rates than they otherwise could w/ just surrenders (which are used for what you pointed out, but since the carriers don't want to predict what rates will do 5-7 years in the future, it is also a way for them not to take interest rate risk).

I just don't see it being an issue.