Been President / CEO of a financial services company for the past 14 years. Gonna have to agree with chupee on this one. One thing I learned long ago in my profession is that most advisors don’t or won’t do the actual homework on financial tools. They simply regurgitate what they have been told by other “experts” that probably trained them.
We deal with predominantly, high net worth older, retired clients and Variable Annuity is likely to be a very good option for most. I would suggest that you advisors would not tell a client to drop their homeowners insurance when they retire. Why? Because paying an insurance premium on your home will not significantly reduce their lifestyle. Having to replace the home due to a catastrophic event would definitely change their lifestyle.
So, why would I tell a client not to insure a million dollar cash asset for both income and death benefit if appropriate… but I would tell them to insure their $300,000 house. Most advisors scoff at the fees of a VA, and I do too if the client is younger and in the accumulation stage. However, once they are near or in retirement and have built the asset… they may want to make sure that it is protected from possible catastrophic market loss. And yes, that has a cost.
But, leaving those assets unprotected, in a vehicle like a mutual fund, also has its costs. Namely – having to get much more conservative with the investment because the client is now in the distribution phase. DCA won’t help you and time to regain significant losses is not likely.
I am going to use a simple hypothetical example. A client has $300,000 in an IRA and you’re going to suggest how to help him. I realize that much more would go into the analysis but for simplicity sake lets assume liquidity is not a big issue and the client has a spouse that he would like to protect. So, tradition says mix them up in some CD’s, Bonds, Equities and hope for decent returns. Returns in this economy and in the likely future are not really good. Remember, even before the current economic issues, most analysts expect returns to diminish in the future simply due to the baby boomer effect. If the market works against your client like it did in 2000 and like it did in 2007-2009, then your client is going to have some losses in their account. Possibly some big ones! Even without losses, the market has been overall falt for the past 10 years.
If Chupee places the client in a VA with income and DB protection… let’s see what we have. We still get to manage the money within a variety of subaccounts and try to grow the money of limit the losses as best we can – just like we would in other non-VA investments. However, if the markets go bad and our client eventually runs out of market value somewhere in the future, game over if they’re in the “traditional” investments. However, Chupee’s client would have the protection of using the insurance he bought and would still get $18,000 / year of income for the rest of his life. Oh, and as a bonus, when he dies, his wife gets back the original $300,000 to invest. Hmmm.
Oh yea. One other thing. Chupee doesn’t have to be quite as conservative with the client’s allocation models since there exist an absolute guarantee that worst case… the account is worth initial value.
I absolutely hate the fees in the VA’s. As soon as a mutual fund company comes out with some kind of protection on the account values for my clients, I will never move another VA again. However, as long as that doesn’t exist… I will continue to tell my clients to pay their homeowners insurance, their car insurance and to insure, what is in most cases their largest asset… their retirement account. But hey, that’s just me. I guess I fall into that category of a mattress salesman just looking for the big commission.
Oh, one other thing. As for surrender charges and penalties of the VA. Do you really think that a client who retires with $300,000 should be taking out more than $30,000 to $36,000 a year from that asset? If not then the VA will provide plenty of income flexibility. If you think they should be taking more… then you better tell them not to live very long. Given the previous 10 years of market history… they’ll be broke in about 8 to 10 years. Your clients should be restricting their income regardless of VA regulations.
I post this with the risk of creating potential competitors if advisors change their minds. However, experience tells me that once narrow minded… likely always a narrow minded – so I’m probably safe. As for advisors like chupee and me… we’ll just keep protecting our clients!
