In Defense Of Advisors Who Sell Variable Annuities

Ted

FYI: How could my financial advisor have done this to me?” Many ask this question after they buy a variable annuity. You’ve heard that most of these products are nasty. Some say high fees burden them. Others complain that they’re inflexible.
They penalize investors who try to sell before a predetermined date.Wall Street Journal writer Matthias Rieker says that many people file complaints about variable annuity sales. Ken Fisher, writing for Forbes, recently called them “scumbag products.” But I’m going to defend the advisors selling them. Somebody has to.
Regards,
Ted
http://assetbuilder.com/andrew_hallam/in_defense_of_advisors_who_sell_variable_annuities

BobC

Fortunately a very tongue-in-cheek essay. Quite clever, actually.

We have had a number of clients who come to us with existing variable annuity contracts. If they are lucky, they have held them long enough to be free of deferred sales charges. Some have come in with 10-year surrender/deferred charges, some owned by folks who are in their 70s and 80s (yeah, real ethical salespersons). If there is no net gain, the contracts can be surrendered. If there is a gain of any size, at least they can be 1035-exchanged to a no-load product (like Jefferson National, Vanguard, or Schwab). Sadly, most are sold by bank salespersons, who know almost nothing about the products they sell, except that they are told to push them. The annual expenses can really be awful, not to mention the salespersons almost never disclose that owners can only access 10% of the principal in the first year. All who have been sold these products think otherwise.

There may be honest, ethical variable annuity salespersons out there somewhere.

msf

I trust that you don't advise Monument (Jeff Nat) policy holders to annuitize. That would convert the segregated account assets into general liabilities of the insurance company ("subject to the claims-paying ability of the insurer"), currently rated B+ by A.M. Best, C by Weiss, and unrated by anyone else. Not to mention its heritage (Conseco), and the fact that the product is not offered in NY State.

Aside from Conseco being one of the largest bankruptcies ever, it let hedge funds use the Monument VA for market timing from around 1999-2002. Then it sold off its annuity unit to Jefferson National, who continued the market timing practices (fraudulently stating in its prospectus that the annuity was not intended for market timing). That ran from Oct 2002 (when Jefferson National acquired the unit) through Sept 2003. Here's the SEC settlement.

None of this is intended to imply that I would not personally consider the Monument Annuity - but that I would know exactly what I was getting into - mostly in terms of insurer risk.

I am glad to see you list other low cost VAs, which can (in limited circumstances, for the right customers) serve a role. To the others you'd mentioned, I would add TIAA-CREF (the only low cost annuity I know of sold in NYS without fudging via a separate subsidiary), and Fidelity.

BobC

We have had particularly difficult time dealing with TIAA-CREF. They always treat client dollars as their own. The TIAA portion is very problematic to deal with, since clients rarely understand that this cannot be rolled over at retirement. It has to be annuitized or taken over a 10-year period. Unfortunately, many 403b, 457, etc participants put most of their dollars in the TIAA portion of their plan. The other issue is that if someone has worked at several different schools, churches, government entities over their career, they will have separate TIAA-CREF accounts for each entity, each with slightly different rules depending on what the entity negotiated with TIAA-CREF. Tracking these is often difficult for individuals, and the statements from TIAA-CREF are not particularly helpful, either.

Regarding your other thoughts, since most client annuity contracts are for retirement accounts (nothing like putting a tax-deferred contract inside a tax-deferred account!), we hardly ever annuitze these, always doing a rollover to Schwab or Fidelity IRA. Those few contracts that need to be kept in an annuity format can usually be dealt with in an appropriate manner. Often the client does not need the dollars for income at all, and will continue to put off taking dollars as long as they can. Others might be 1035 to an immediate fixed annuity if the rate is acceptable and the company is good. Unlike those who make a living selling annuities, we find there are many options to consider.

Jefferson National's Monument Advisor has been a godsend for fee-only companies, and it has done a very good job of working with firms to set up accounts for downloading and monitoring. The 400+ investment options are certainly more than needed and have many very good managers/funds. No commission, no surrender period, and a simple $240 annual fee are very attractive. For a $100,000 contract, this amounts to an annual 0.24%, which is similar to Vanguard and Fidelity, lower than Schwab. Truth to tell, there is no perfect annuity, just as there is no perfect investment of any kind.

msf

Bob, thanks for your comments.

Regarding TIAA - I realize you're talking about the fixed portion (TIAA traditional) - the TIAA portion also includes some variable options like TREA as well. The 10 year annuitization requirement is an issue, but strikes me as an apples and oranges comparison. TIAA Traditional is (primarily) available in employer-sponsored plans, while the other plans you mentioned (Schwab, Jeff Nat, etc.) are retail plans.

I think a more accurate comparison would use TIAA-CREF's after tax product, Intelligent VA. That doesn't offer TIAA Traditional, just as the other plans named don't offer a useful stable value alternative. Thus no issue with 10 year annuitization.

Over the long term, the fee on Jeff Nat for a $100K account may be higher than TIAA-CREF's. (TIAA-CREF charges 0.35% for ten years, then 0.10%.) But I do agree they're in the same ballpark, and significantly lower than the annuity fee of the other providers.

Statements really are a problem with TIAA. At least when they produce them. It turns out that for their brokerage accounts, they don't generate 5498s if there have been no contributions, even if the account has RMDs.

They fault Pershing for this, and I think they may be right - I took a look back at my old Vanguard IRAs; back when it still used Pershing (before about 2010) I did not seem to get 5498s. Now I do.

As you wrote, nothing is perfect.

BobC

msf, you are so right about Pershing. We used to custody some accounts there, and it was a mess. Their technology, compared to Schwab, TD, Fidelity, and others was almost pre-cambrian. Our staff was always frustrated dealing with Pershing. Their recent efforts into the RIA world still puzzle me, since truly everyone I talk to who has ever dealt with Pershing as a custodian has nothing positive to say.