Indexed Annuities S&P 500 WTF

[EAJoe]

Uh... it's NOT a 2% monthly point to point cap.

Here is the product description:
Independent Marketing Group of American National

Please read this carefully: Total Sum Performance with a Monthly Cap

How does it work?

Let's look at the brochure here: http://img.anicoweb.com/cs/groups/p...ents/webcontent/10618_asiaplus10_brochure.pdf



What does that really mean?

Suppose you actually earn 2% each month (maximum 24% per year)... but in October, the index takes a dive of 30%. How much is credited to your annuity?

Zero. (24%- 30% = -6, but negative interest is never credited)

This is NOT a "2% monthly point to point cap" as you keep alluding to, but a monthly sum strategy that credits interest annually.


Run some illustrations comparing annual caps versus the 2% monthly averaging strategy and you'll see that it doesn't lock in monthly gains.

I'm well aware how of how it works. A single bad month can wipe out your entire year, but it also has the highest potential for gains. It's not the best option in a volatile market, but it absolutely has the highest potential for accumulation in the right market.

Edit: ANICO calls the strategy "Total Sum Performance with a Monthly Cap" and American Equity calls it "Monthly Point to Point with a Cap," hence my language. Same strategy, different names.

 

[DHK]

Understanding the product and communicating it properly are two different things.

When you say "monthly point to point" it alludes to the idea that you lock in your gains every month, versus being more specific about a monthly sum averaging strategy.

I might be splitting hairs on this (I have a tendency to do that from time to time), but I suppose I expect more precise wording from a forum sponsor.

 

[EAJoe]

Understanding the product and communicating it properly are two different things.

When you say "monthly point to point" it alludes to the idea that you lock in your gains every month, versus being more specific about a monthly sum averaging strategy.

I might be splitting hairs on this (I have a tendency to do that from time to time), but I suppose I expect more precise wording from a forum sponsor.

See my edit above, I'm using American Equity's language, not ANICO's, and I'm discussing this strategy with financial professionals, not consumers.

Different carriers have different names for it, but the most common I've seen is "Monthly Point to Point With a Cap." American Equity, F&G, Athene, Equitrust, Legacy, and Phoenix all use this language, or a very similar variation, e.g. Equitrust's description - "Monthly Cap Index Account."

I can definitely see how this language would confuse some people, but it's pretty common knowledge that there's no floor on each month's performance with this strategy.

Edit: If there's any place for splitting hairs, this is definitely it :-)

 

[DHK]

It's true that this is a forum for financial professionals... but many annuity agents don't understand these things as they should... let alone the consumers (or agents that pose as consumers) that do come here, read stuff, and start to try to ask questions.

 

[EAJoe]

It's true that this is a forum for financial professionals... but many annuity agents don't understand these things as they should... let alone the consumers (or agents that pose as consumers) that do come here, read stuff, and start to try to ask questions.

You're absolutely right. It's easy to assume that certain concepts are understood by most people on here, but there's a ton of agents out there that don't even fully understand the concepts and strategies they're selling. This is one of the big reasons I see the regulations for FIA sales getting much tighter in the next few years.

 

[scagnt83]

Understanding the product and communicating it properly are two different things.

When you say "monthly point to point" it alludes to the idea that you lock in your gains every month, versus being more specific about a monthly sum averaging strategy.

I might be splitting hairs on this (I have a tendency to do that from time to time), but I suppose I expect more precise wording from a forum sponsor.

I disagree. The common phrase for that indexing method is Monthly Point to Point Cap. A few carriers call it Monthly Sum and then Anico has their own unique name.

He was just using the most common phrase that is used by the majority of the carriers.

And since we are agents there should be no need to "communicate properly" when using common industry jargon among other agents. If they want to sell an IA then they should research the indexing methods. Hell, most states will require them to take product specific training before selling a product... which would fully explain all the crediting methods of that product.

We cant be expected to give full explanations for commonly used phrases in every post. jmo

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I'm well aware how of how it works. A single bad month can wipe out your entire year, but it also has the highest potential for gains. It's not the best option in a volatile market, but it absolutely has the highest potential for accumulation in the right market.

Are you putting people in that option right now? It sucked last year, but rocked the year before. Basically in a true bull market it does well, but when there is a volatile up market not so well. Obviously you wont take a lose if you choose it... just curious what you options you are using right now.

Personally, I think the PR method on the Choice 6 is very strong.

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Ya ASIA is fine. I still think Choice is better whether it be 6 or 10

Id agree with the 6. Shorter surrender the better these days. Yields are already starting to rise.

 

[EAJoe]

I disagree. The common phrase for that indexing method is Monthly Point to Point Cap. A few carriers call it Monthly Sum and then Anico has their own unique name.

He was just using the most common phrase that is used by the majority of the carriers.

And since we are agents there should be no need to "communicate properly" when using common industry jargon among other agents. If they want to sell an IA then they should research the indexing methods. Hell, most states will require them to take product specific training before selling a product... which would fully explain all the crediting methods of that product.

We cant be expected to give full explanations for commonly used phrases in every post. jmo

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Are you putting people in that option right now? It sucked last year, but rocked the year before. Basically in a true bull market it does well, but when there is a volatile up market not so well. Obviously you wont take a lose if you choose it... just curious what you options you are using right now.

Personally, I think the PR method on the Choice 6 is very strong.

It depends on the client. If they seem to understand the strategy well, and are comfortable with a greater chance of zero returns in exchange for a higher upside potential, we've been doing 30-50% in the monthly strategy. I like the volatility controlled index with AE a lot right now, as well as the performance method with ANICO.

We're supposed to get the caps/rates/spreads for the new Guggenheim FIA TriVysta later today. If they're as strong as we're expecting, this is going to be one of the hottest products on the market for both growth and income. The CROCI index from Deutsche Bank and the Morgan Stanley index are almost like having managed funds inside of an FIA.

There's no monthly point to point (monthly sum) option on any of the indexes, but the CROCI index has volatility controlled 1 year point to point with a spread, volatility controlled 2 year point to point with a PR, and a non volatility controlled 5 year point to point with a PR.

The Morgan Stanley index has a 1, 2, and 5 year point to point with a PR.

The income account gets a 10% bonus, and is credited dollar for dollar whatever you earn in your account value for the year, plus a guaranteed 4% for 20 years. The .90% annual fee is calculated on the account value, subtracted from the account value.

The best feature of this income rider is that it keeps rolling up at the indexed credit + 4% annually even after income is turned on, greatly improving your odds at getting increasing lifetime income.

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One of the things about the monthly point to point that really needs to be considered is that contracts issued even a week apart can give very different returns.

This is the credit rate history for an AE Bonus Gold contract issued 5/5/2011 - http://i.imgur.com/uCcSYKr.png

And this is the credit rate history for the same product issued on 5/12/2011 - http://i.imgur.com/G35pVzW.png

 

[davephx]

Convert them all over to a Fee based model. I know of some guys that have done it and do not use a BD at all.

I am a bit late on this but going the RIA model usually screws the client.

A 1% annual wrap or fee only planner fee = a 9.1% front end load on a class A mutual fund over 10-years assuming no increase in value. Far more costly if assets go up.

A 9.1% load would violate FINRA rules. And one time loads (same as a bid/ask spread when buy stocks or bonds) for large clients can be reduced by breakpoints. I do not have traders as clients but long-term investors.

I give investment advice as a RIA with fiduciary responsibility. To mean that means implementation of recommendations via the B/D route which in my view and math (I have a CPA background) is in the best interest of my client not a wrap or RIA fee.

FINRA is now going after dual registered b/d's having to justify the fees of wrap accounts if there is lack of trading. Even worse if RIA fees include money market or cash accounts.

The NY AG really came down hard on this years ago when showing the huge costs of fee-only accounts over time vs if implemented via the brokerage side.

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What I don't think has been mentioned is the S&P index does not include dividends with a Indexed product.

The advantage of an IA is you never have to make up losses in down markets due to the reset on an annual pt-to-pt. I would never use the monthy as someone mentioned down months can easily wipe out gains.

Annual pt-to-pt I am getting interested in again with S&P500 pt-pt with 5% cap with a bailout such as at 3% and a 100% return or premium guarantee if you ever want to totally get out even in yr 1 with no surrender. (GA product on a 10 yr period).

I never use riders especially the income since if held to maturity I can usually find a SPIA with a much better payout unless the account value is really bad. and the 7% "pretend" account is so misleading unless you explain it right. I don't think its worth it and there is so much already to explain to fully understand the product and be clear what the result is even if the S&P500 has losses every year for all 10 years, when a 1% minimum annual guaranteed return still gives a decent result.

Also like accelerated LTC or terminal illness included at no fee. So get a clean IA with no expensive riders.

Sadly the old days of 9-10% caps are gone. I have an old policy on a client that is past the 10 year surrender but still geting I believe 6% which is better than I can do with a new policy (AIG old American whatits name). But other companies don't have as good history on these old policies on keeping the caps higher than what is currently available.

 

[DHK]

I am a bit late on this but going the RIA model usually screws the client.

A 1% annual wrap or fee only planner fee = a 9.1% front end load on a class A mutual fund over 10-years assuming no increase in value. Far more costly if assets go up.

A 9.1% load would violate FINRA rules. And one time loads (same as a bid/ask spread when buy stocks or bonds) for large clients can be reduced by breakpoints. I do not have traders as clients but long-term investors.

I agree and disagree with you.

The 9.1% (using your number) is not a 'front-end load', but a total net cost to the client over a 10-year period. Because it's spread out, it cannot be considered a 'front-end load'.

However, everything else, I generally agree. What does the client GET for their 1% fee per year? If I have a $1 million RIA client... what do they get for their $10,000/year working with me? And is it really WORTH $10,000?

- I can deliver an economic weather report every quarter. (That's boring and I have no control over the economy anyway.)
- I can update their retirement plan (but any fee-only advisor could charge up to $1,000 per year to update that.)
- I can verify and re-verify their beneficiary designations. (Not hard to do.)
- Ensure that their portfolio risk level is commensurate with their risk tolerance every quarter? (Not hard to do either. Just move them from a 4 down to a 3, or whatever.)
- Access to "institutional money managers" with strategic and tactical asset management strategies. Still no guarantees against losses for paying those fees.
- Ego boost that you're investing like institutions invest. (I think that's about it.)

The main thing that the investor gets... is a "pay as you go" investment relationship. You don't pay the "load" of A-shares all up front. Plus, the advisor is assured of ongoing compensation versus just 12b1 fees.

Which means that it's easier to get out of the RIA investment and only pay for the TIME you spent with that advisor. Plus, the advisor has an incentive to help (however they do it) to make sure your portfolio grows with proper recommendations and to keep the client happy. Yet, 'happiness' is not a definable or measurable barometer of success.

I keep reading articles that state that clients are happy as long as advisors continue to reach out to them with updates on a periodic basis. But, as you stated, in the RIA, that 'happiness' is rather expensive over time.

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What I don't think has been mentioned is the S&P index does not include dividends with a Indexed product.

The advantage of an IA is you never have to make up losses in down markets due to the reset on an annual pt-to-pt. I would never use the monthy as someone mentioned down months can easily wipe out gains.

Annual pt-to-pt I am getting interested in again with S&P500 pt-pt with 5% cap with a bailout such as at 3% and a 100% return or premium guarantee if you ever want to totally get out even in yr 1 with no surrender. (GA product on a 10 yr period).

I never use riders especially the income since if held to maturity I can usually find a SPIA with a much better payout unless the account value is really bad. and the 7% "pretend" account is so misleading unless you explain it right. I don't think its worth it and there is so much already to explain to fully understand the product and be clear what the result is even if the S&P500 has losses every year for all 10 years, when a 1% minimum annual guaranteed return still gives a decent result.

Also like accelerated LTC or terminal illness included at no fee. So get a clean IA with no expensive riders.

Sadly the old days of 9-10% caps are gone. I have an old policy on a client that is past the 10 year surrender but still geting I believe 6% which is better than I can do with a new policy (AIG old American whatits name). But other companies don't have as good history on these old policies on keeping the caps higher than what is currently available.

Again, I agree with you. Dividends are a privilege only for those that OWN the underlying portfolio, not options on it.

The 7% "pretend" account... is a pension value. You cannot raid a pension for the cash and keep the benefits. Let it grow at 7% for up to 10 years, or you're ready to 'trigger' the lifetime income benefits. But if you raid it, you lose it. You only get the net cash account value after surrender charges and MVAs.

 

[davephx]

DHK makes good points as always

Sadly "front-end load" is often used even in Morningstar evaluation reports. Or "sales charge". The problem of course is you don't know the time period to spread it over. Hopefully a long time to either stay in the fund or exchange if needed to another fund of the same share class in the same fund family.

In presenting public total return charts it is required to show it with "load" over each time period presented including year-to-date and one year. Usually done in a separate chart in addition to just change in net asset value without the load applied.

Your what does the investor get and who not that hard to do is great. I provide updates especially whenever Morningstar does an updated analysis report or quarterly reviews from the fund manager (some funds do really good at this, others not so much). I am looking for the good observations not just the raw data.

At least if an RIA charging a asset based fee should at least have investments in institutional class or "load waived" fund choices.

The situation was similar to what I called the "killer B's" when there were more B share options. There was a lot of concern from FINRA and many fund families either completely stopped offering them or at least had them convert to A shares after 6-7 years.

At a investment conference was interesting to hear a broker explaining to a young lady new to the business showing how much more money she could make if she was an RIA with asset base fees. Of course, because the client is paying more! That isn't fiduciary duty in my view, unless you are providing extra services as DHK suggested that have the extra value.

Clients are happy as long as either a broker or RIA reaches out and provides info and is available to make them "happy".

On the brokerage side is easy to get out cheaply like RIA - just find another broker you like and transfer assets in kind. Don't have to change unless a good reason to.

I maybe go overboard on the 7% "pretend" account since it as you say only a pension value. But often I find you can simply exchange into a good SPIA even with a lower account value and get a better payout. Of course it depends how well the account value did vs the 7%.

Back before 2008 when in my view there were some good VAs often the locked in highest anniversary values were more beneficial than the income riders. I don't believe any VA's offer that today and in most cases the sub account choices are terrible in my view, not to mention the costs of the policy and sub accounts.

I wrote quite a few pre 2008 VA's with good sub accounts until they started deleting them and then policies forced you into more bond allocations so you could never recover a loss. Fortunately no one had to liquidate in the decline and now are doing well with what few good equity choices remain. My philosophy was to be aggressive because we had the high water mark or 7% guarantees. However, no one took the guarantees since account values became higher.