State Farm Agents to Stop Selling VAs and MFs Due to DOL

[scagnt83]

Actually I looked briefly on my phone and did not realize that. Since that is an indexed fund with that high of an expense, yeah it sucks. .

I had a feeling you missed that part. lol

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I never compared index annuities to equities because it's apples to oranges, they are more comparable to bonds but you can thank insurance companies and some agents for misleading people thinking they are going to get market returns.I do sell indexed annuities, in matter of fact I just got the info on Ohio National's new one coming out on October 3rd and all ready have people in mind that it would be appropriate for.
I really believe indexed annuities should pay a 1% level commission and not have a surrender period longer than 5 or 6 years max.

I havent seen ONs new product yet. You have the same issue with IAs as I do... long surrender charges/bad comp structure/low caps/misleading marketing by IMOs.


I would blame the IMOs more than the insurance carriers. The carriers are not perfect, but the IMOs promote IAs in the same light as equities in much worse ways than any carriers ever has.


And I think you are already getting your wish. Lots of products now offer a flat 1% for the life of the contract as an option. Most of my favorite products are around 4.25% street and 5-7 years long. There are a couple of decent 10 year products that I would use in an income rider situation. But the 7 year products have better rates than the 10 year products do right now for many of them. Thank the pending inverse rate curve for that... but also its just the general direction the industry is headed.


But the argument against the flat 1% is that it adversely affects those with small accounts. Would you take on a new client with just $40k when you get paid just 1%?
I wouldnt because $400 is not worth the time and liability you take on. But for $1500 I might take on the client.

Its the same as the comp debate surrounding the DOL ruling. It wont impact those with large accounts... but mom and pop who have an extra $40k to invest suddenly have a lot less options than they did before.


Do you feel that Mutual Funds should pay a flat 1% too?

 

[Golfnut2112]

I had a feeling you missed that part. lol

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I havent seen ONs new product yet. You have the same issue with IAs as I do... long surrender charges/bad comp structure/low caps/misleading marketing by IMOs.


I would blame the IMOs more than the insurance carriers. The carriers are not perfect, but the IMOs promote IAs in the same light as equities in much worse ways than any carriers ever has.


And I think you are already getting your wish. Lots of products now offer a flat 1% for the life of the contract as an option. Most of my favorite products are around 4.25% street and 5-7 years long. There are a couple of decent 10 year products that I would use in an income rider situation. But the 7 year products have better rates than the 10 year products do right now for many of them. Thank the pending inverse rate curve for that... but also its just the general direction the industry is headed.


But the argument against the flat 1% is that it adversely affects those with small accounts. Would you take on a new client with just $40k when you get paid just 1%?
I wouldnt because $400 is not worth the time and liability you take on. But for $1500 I might take on the client.

Its the same as the comp debate surrounding the DOL ruling. It wont impact those with large accounts... but mom and pop who have an extra $40k to invest suddenly have a lot less options than they did before.


Do you feel that Mutual Funds should pay a flat 1% too?

The big problem with the 1% is that new agents would have a very hard time meeting their bills. If they limited comp on indexed annuities they should also do it for mutual funds.
The new Ohio National IA can only be sold thru broker dealers and has either a 7 or 10 year surrender. The have 3 indexes and the only one I remember off hand is a S&P annual point to point with a 5% cap. The fixed bucket I believe pays 2.5%

 

[scagnt83]

The big problem with the 1% is that new agents would have a very hard time meeting their bills..

That is true. But it will affect customers (or potential customers as well). Agents would just no longer take on clients with less than $100k or $200k. Many would have a minimum of $400k-$500k. Just like RIAs do.

Those with less than $100k will be left with an 800 number and robo-advisor as their only option.

 

[bobson]

That is true. But it will affect customers (or potential customers as well). Agents would just no longer take on clients with less than $100k or $200k. Many would have a minimum of $400k-$500k. Just like RIAs do.

Those with less than $100k will be left with an 800 number and robo-advisor as their only option.

And most of those people won't do it on their own. At least State Farm was able to convince people to start saving and investing for their future.

 

[Golfnut2112]

That is true. But it will affect customers (or potential customers as well). Agents would just no longer take on clients with less than $100k or $200k. Many would have a minimum of $400k-$500k. Just like RIAs do.

Those with less than $100k will be left with an 800 number and robo-advisor as their only option.

That's so true!! I have a meeting Thursday night with a lady that has around $300,000 with Merrill Lynch and her broker no longer wants her and is turning her account over to a house account which means the only service she will get is from an 800 number. The sad part is she worked in the same office as him for 12 years as a secretary. I probably will not make any up front money since I'm just

 

[DHK]

The client with an expensive index fund will likely be much further ahead than the same client sold an actively managed fund.

I would suggest that you have never had a risk tolerance discussion with clients.

There are only two benchmarks to compare investments to:
1) Risk-free rate (such as treasuries and bank CDs)
2) A comparable benchmark

Most people tend to OVERESTIMATE their risk tolerance. Take a look at the newest Financial Capability study conducted by FINRA.

http://www.usfinancialcapability.org/downloads/NFCS_2015_Report_Natl_Findings.pdf

On page 19, it shows that 21% of people are "willing to take risks". However, in the 2012 study, only 17% said they were "willing to take risks" and that was higher from 2009 when only 12% of people were "willing to take risks".

What can we deduct from this? When the markets are high, people are willing to take risks... and what they really end up doing is "buying high, and selling low".


So, when you are a broker or investment advisor, it's your job to truly ascertain your client's risk profile and recommend investments in line with their risk tolerance... not with where you think they will make the most return.

You are far more likely to be sued for an unsuitable recommendation due to risk tolerance than if you didn't earn the most.


The other side of this whole discussion, isn't just in picking the portfolio allocation, but in KEEPING the client invested during turbulent times. However, that's far easier when you have had a proper risk tolerance discussion, and can show how the portfolio you chose has lower volatility (hopefully) compared to the benchmark.

Even the DOL isn't requiring an advisor to "pick the best investment". Only that they pick appropriate investments for their clients based on their objectives, and I would add 'risk tolerance' for that.

Picking investments is about balancing these three areas:
- Risk (in relation to benchmark and risk-free rates)
- Return (in relation to benchmark and risk-free rates)
- Costs of the investment (compared to other comparable investments); (Keep in mind that RIAs are charging for ongoing advice and for their duty as fiduciaries and should not be confused with the costs of the investment management - especially done by 3rd parties. While these costs can reach a combined total of 2-2.5%, they are paying for different things and different standards of care.)

Our DUTY - particularly under a BICE or fiduciary obligation - would be to do the best we can with a moderate cost structure. Well, in my opinion, picking an index fund with a HIGH cost structure is lazy and irresponsible.

Compared to what? Compared to other no-load index funds, and even compared to lower-risk, better performing ACTIVELY managed funds.

Two funds I have liked - CAIBX and CWGIX. Both of these funds were turbulent in 2008, but didn't go as far down as the benchmark indexes did. They had lower beta statistics than the index as well as higher alphas compared to their benchmark indexes.

Portfolio construction is a big part of a fiduciary duty. If you're going to be paid for doing it, one should have an idea how.

 

[MW Agent]

I would suggest that you have never had a risk tolerance discussion with clients.

There are only two benchmarks to compare investments to:
1) Risk-free rate (such as treasuries and bank CDs)
2) A comparable benchmark

Most people tend to OVERESTIMATE their risk tolerance. Take a look at the newest Financial Capability study conducted by FINRA.

http://www.usfinancialcapability.org/downloads/NFCS_2015_Report_Natl_Findings.pdf

On page 19, it shows that 21% of people are "willing to take risks". However, in the 2012 study, only 17% said they were "willing to take risks" and that was higher from 2009 when only 12% of people were "willing to take risks".

What can we deduct from this? When the markets are high, people are willing to take risks... and what they really end up doing is "buying high, and selling low".


So, when you are a broker or investment advisor, it's your job to truly ascertain your client's risk profile and recommend investments in line with their risk tolerance... not with where you think they will make the most return.

You are far more likely to be sued for an unsuitable recommendation due to risk tolerance than if you didn't earn the most.


The other side of this whole discussion, isn't just in picking the portfolio allocation, but in KEEPING the client invested during turbulent times. However, that's far easier when you have had a proper risk tolerance discussion, and can show how the portfolio you chose has lower volatility (hopefully) compared to the benchmark.

Even the DOL isn't requiring an advisor to "pick the best investment". Only that they pick appropriate investments for their clients based on their objectives, and I would add 'risk tolerance' for that.

Picking investments is about balancing these three areas:
- Risk (in relation to benchmark and risk-free rates)
- Return (in relation to benchmark and risk-free rates)
- Costs of the investment (compared to other comparable investments); (Keep in mind that RIAs are charging for ongoing advice and for their duty as fiduciaries and should not be confused with the costs of the investment management - especially done by 3rd parties. While these costs can reach a combined total of 2-2.5%, they are paying for different things and different standards of care.)

Our DUTY - particularly under a BICE or fiduciary obligation - would be to do the best we can with a moderate cost structure. Well, in my opinion, picking an index fund with a HIGH cost structure is lazy and irresponsible.

Compared to what? Compared to other no-load index funds, and even compared to lower-risk, better performing ACTIVELY managed funds.

Two funds I have liked - CAIBX and CWGIX. Both of these funds were turbulent in 2008, but didn't go as far down as the benchmark indexes did. They had lower beta statistics than the index as well as higher alphas compared to their benchmark indexes.

Portfolio construction is a big part of a fiduciary duty. If you're going to be paid for doing it, one should have an idea how.

I don't see how any of this impacts the statement I made. Even the State Farm more expensive index fund would have statistically done much better than the majority of the actively managed funds with a similar risk tolerance.

Re to bolded portion: You can cherry pick a few exceptions from the past, but your odds of picking the winners across multiple asset classes over time is a losing effort.

 

[62doddst]

DHK, you're being a little tough on SF mutual funds. First, SF mutual funds are 95% tax qualified sales that are sold with A shares, not B shares. Yes, the B share operation expenses are high (1.36) , but very few pay it. The A share OP for the S&P 500 Index is .56 > 100K and .66 < 100K. Additionally, SF sales charge and breakpoints are very competitive for load funds. Can someone go to E*TRADE and buy funds, yes, but very few people have the ability and confidence to do. That is not the SF customer. If I invest 100K in SF 500 Index I will pay a 3% onetime sales charge with SF and .56 ongoing OP expense. If I buy a 500 index thru a RIA, I will probably pay a lower OP, but I will pay a 1%+ ongoing wrap fee. Do that math! I will pay the 3% upfront every time. If someone has the knowledge, interest and time to do their own investing you and I would be out of the MF business. Most people need our help, thank goodness. Also, SF has a $1000 min investment and $50 smackers afterwards. SF has/had it's place!

PS: I'm not a SF agent or RR!