This article is unfair in the presentation of annuities.  
In the case of an 70 or 80 Year old, an annuity can provide return that is similar to getting 10% interest rather than 4% on CDs.  I agree there a lot of bad annuities that have excessively high fees, but there are some good ones that do not have high fees. 

Of course, it's unfair.  The "Fools" have no particular desire to be fair; they're selling their product and, like the worst of the annuity salesmen they disparage, they aren't about to let considerations of balance - or accuracy, for that matter - get in the way.

They compare buying a fully-commissioned variable annuity with income and death benefit guarantees with buying a no-load equity mutual fund.  Would they also compare purchasing the estate planning advice of an experienced estate planning attorney with buying Quicken Family Lawyer?

They discuss the RISK MANAGEMENT fees in a variable annuity as though they're drags on INVESTMENT performance, providing no additional INSURANCE benefits.  They could have considered those insurance features, assessing the benefits of transferring the risk involved in the light of the costs of doing so, but that would have cluttered up their diatribe with a lot of inconvenient facts.

I hold no brief for those who sell annuities - variable, index, or otherwise - to anyone who can fog a mirror, without regard for individual needs.  I deplore those who willfully avoid full disclosure of fees and risks or who hawk benefits (e.g.: "in this index annuity, you get the upside performance of the market with no risk!") that they know are phoney.  These folks do a lot of damage, but not more than those agents who fail to fully disclose risks or costs or who exaggerate benefits unintentionally, because they simply don't know any better.

And not more than the Fools who claim expertise and wrap themselves in consumerist sanctimony while making pronouncements that are shamefully biased and incontrovertibly false.

- John Olsen

As usual, you're right on, John.

For those who wish to read an expanded view, read Mr. Olsen's article "Guaranteed Living Benefits: Are They Worth It?" in the "Trends In Investing" supplement to the June 2008 issue of the "Journal of Financial Planning".

 BillnOrlando,

In that report by John Olsen at the  June 2008, issue of Trends in Investing (a supplement to the Journal of Financial Planning) , report titled "  Guaranteed Living Benefits: Are They Worth it?  ".    

After describing the different types of Guaranteed Living Benefits (GLBs), John ended with this:

This is the problem with deferred VAs with or without GLBs, which are pushed by unscrupulous agents (not John Olsen, of course). Taking out 3% from naive retirees who  are limited to withdraw NO more than 4% to 5% COLAd withdrawals from their portfolios , and leaving these miserable clients with only 2% to live on.  How 3% fees? 1.25% for the VA, 0.75% for the GLB, and the balance for AUM. It's probably higher given the hi expenses of the sub accounts.

Also notice that John Olsen would go to all kind of semantic manipulations in the hope that he could justify those exorbitant fees, be it  " the VA is risk management " or " it is for income", or that  " AUM  fees come from the portfolio and not from the withdrawal ", or " a GLB allows a risk averse nice lady to invest more in equity ", etc.  Everything goes with such wordage but not the proper approach, which is, IMO, a conservative portfolio of index funds annuitized 25% to 50% with a Fix SPIA.  But hey,  how could John put enough bread on the table with the meager commissions from a Fix SPIA? This is the dilemma!

In any case, I know it that John,  in his reports,  keeps questioning and warning about misuse of VAs, with or without GLBs. I also know that John is very careful NOT to misinform his clients. The problem is with other planners and agents.

Best regards.

Vig Oren, a CFP(r)

Vig:

Since you obviously know so much more than John, can you provide us links to the many articles that YOU have had published in Financial periodicals?  You no doubt are an expert so ALL the magazines must be bidding for your quality analysis.

Guaranteed income annuities are for advisors who haven't figured out what a stop order and a short sell order are. When the market goes down, that represents a money-making opportunity. If your firm doesn't let you do that, ask them why that is. The best strategy in a down market is to make money from the down market.

Dave,

With due respect, I believe that your analysis is wrong for two reasons.

1.  Guaranteed income annuities are for INCOME.   They are literally an exchange of a capital asset for an income stream.  To compare such a device with a strategy for "making money" is to miss the point entirely.

2.  Guaranteed income annuities are risk management instruments.  The buyer transfers a risk she is unwilling to retain (the possibility that the dollars under consideration willl be insufficient to ENSURE an income of at least a specified level, FOR AS LONG AS THE BUYER LIVES)  to an insurance company in exchange for a sum of money.  The insurer assumes that risk by guaranteeing the minimum income.  By contrast, the investor who employs a stop order/short sell strategy does not transfer either principal or market risk, but retains both, in the hope of profiting from the strategy.  Moreover, this strategy is about principal; it has absolutely nothing to do with income.

- John Olsen

Hi John,

Guaranteed income annuities are mostly for income for the insurance firm selling them, not the individual buying the annuity. Anyone who is worried about income from existing assets is worried about the market tanking -- which represents a money-making opportunity -- an opportunity the insurance company takes with that same money, to make money for itself, rather put it to use for the client.

Anyone who needs to park money to create an asset stream needs to hire an accountant who can cut them a regular check from their own savings account that's fed regular income from a CD ladder. What could be easier? No long-term penalties. Much cheaper, too... the tax benefits from an annuity are very questionable, due to the high fees.

What risk exists that someone is going to lose their money if the person who manages it knows what they are doing? What about money management techniques that prevent the market risk your client is worried about? I have noticed that most firms don't teach advisors to make money in the markets on their own, which is why advisors don't trust the advice of traders who do know how to handle money. It's simply easier to reach for an annuity product rather than deal with the issue at hand - which is that a firm that relies on annuities rather than hiring the talent of people who actually know how to trade is a poorly managed firm.

Dave,

According to you, if someone needs an income for life, he should hire an accountant, who will cut checks to him, coming from his own savings account "that's fed regular income from a CD ladder".

And what if the balance in that savings account and/or CD ladder is not sufficient to produce the level of income required?  For that matter, why would anyone hire an accountant simply to "cut them a regular check"?

According to you, there's no "market tanking" risk because that's a "money making opportunity".  You ask "What risk exists that someone is going to lose their money if the person who manages it knows what they are doing? What about money management techniques that prevent the market risk your client is worried about? "

Evidently, you have the answers to those questions.  Care to share them?

- John Olsen

Learn how to use the MACD zero line crossover signal on both a daily, weekly and monthly chart.

Also learn how to use a true strength index indicator alongside a commodity channel index indicator, and learn how to determine when market breadth has turned the long-term. This will happen when multiple indicators cross the zero line at the same time, on the monthly and weekly charts.

Also never buy all at once. Scale your client trades. Buy in gradually and continually build upon the winning positions and shuffle out the losing positions.

Read Jesse Livermore for scaled trading techniques. Read John Murphy for an introduction to technical analysis.

Dave, you wrote:  "Guaranteed income annuities are for advisors who haven't figured out
what a stop order and a short sell order are. When the market goes
down, that represents a money-making opportunity. If your firm doesn't
let you do that, ask them why that is. The best strategy in a down
market is to make money from the down market."

Not every advisor has so few clients to make this a possiblity.

Not every firm allows their advisors to have discretionary authority on accounts.

If you have a lot of clients (and I suggest that the best advisors have HUNDREDS of clients), and you don't have discretionary authority, that this simply wouldn't work anyway.

In money management firms (wirehouses, etc.) you would need to pass certain exams, etc., to be given that privilege.  Your liability goes up if you don't do things in the right timing, etc.

If you can do it, great for you.  I wish you well.

For others of us who have lots of clients and want to LIMIT our liabilities, this simply won't work for us as a standard business practice.

All you need is access to a fund that is traded on the same idea. Then sell your clients the fund. That would be a good contrarian fund. When the market is declining as a whole, something somewhere is also going up. Why is it so difficult to simply put your clients into that which is going up while the rest of the market is going down?

And guess who is making money as the market is going down? Somebody is on the other side of all those trades, and they are making money. Isn't it your job to make sure that person is your client?

Dave writes "Why is it so difficult to simply put your clients into that which is going up while the rest of the market is going down?"

I suppose this will sound a bit naive, Dave, but just how do you determine that the thing you're putting your client's money into is "going up"?

- John Osen

Hi John,

I have been professionally trading stocks and FOREX for several years. I build profitable trading systems based in both fundamental and technical analysis. Timing (long-term) the market using basic strategies, and also using basic money management practices, will enhance your client portfolios quite a bit. The other key is to have access to investments that will go up while the rest of the investment choices are going down.

Many wealth managers and those who manage their own funds specialize in these same skills. Many of them tell me that technical analysis is far more accurate than fundamental analysis for making consistent profits, and I also agree, based on my own experience.

Doing some basic technical analysis on a mutual fund portfolio will prevent you from losing a client when the market is diving, especially since one cannot set stop orders on a mutual fund. I'm not suggesting trading your client mutual funds -- just knowing when to avoid a catastrophe by suggesting your client move the money for safe-keeping into a money market fund, or putting the money into something that has more long-term technical and fundamental support.

So, an advisor's tendency to sell an annuity will be directly related to their ability to put the same client into a truly better portfolio. I find it usually boils down to the brokerage firm you are working with and the commission structure there.

There are countless traders who make a living off the markets full-time. How is this possible? Shouldn't financial advisors be the ones with this type of knowledge, instead of being the last? We are called "financial advisors" for a reason, right? Training tends to be in sales, but if you have clients who are making money when everyone else is losing their shirt, you won't have to the world's best salesman anymore.

Dave,

As a firm that uses Technical Analysis for our clients I will agree with you to an extent.  The limitations are on the custodian/Broker Dealer end in the products that are offered.  Limits on no transaction fee funds on some platforms can get in the way of tactical allocations.  90 day holds and early redeption fees are an issue.  Switching from fund to fund within a VA can be cumbersome across a client base.  ETF's lend themselves better to technical analysis and yes there are things going up this year.  We've been in (and out) of Transports, Gold, Energy, Commodities, Bonds, etc this year all with ETF's.  We have also used inverse funds to lock in gains on some holdings and make money on the way down.

MrC,

I will agree with you to an extent.

Everything you wrote, I agree with. I don't see any disagreement.

I am fully aware of the limitations that can exist when moving positions due to TA signals. This is why I wrote my post in the first place... to plant the idea that maybe this shouldn't be so difficult. Why does it need to be designed to be so difficult -- what's in it for the client? Why not give the customer what they need? This is directed at those who make the rules, not the FAs. The American middle class is calling out for help.

ETF's lend themselves better to technical analysis.

Depends on your technical analysis and your methodology. The coding under the hood is only as good as the trader who wrote it.

DaveM,

I find your method of money management very interesting.  Part of my problem with managing my client's money myself is the time.  How do you have time to do the money management yourself and do financial planning with your clients?

Next questions is how long have you been in managing money and do you beat index returns every year?

I'm not saying it can't be done, but I find it very difficult to believe that I can manage my client's money myself while also doing the planning and managing client relationships.  I would assume you have a staff person do the planning?

Also, how did you get started managing money this way?


thanks,
Brad

DaveM:

How lucky you are to have done what nobody else in history has been able to do, i.e. develop a successful market-beating model.

Of course, you haven't specifically made the claim in this thread that your clients are beating a low-cost policy portfolio on a risk-adjusted basis.  I suspect there's a good reason for that (i.e. they haven't).  No need to write a response unless you're willing to offer up some evidence.

- DDB