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Every part of me hesitates to agitate this hornets nest, but I just
can't resist.
As Cal said (if I understood him correctly), the commission is not
deducted from the investors account. If $100k were the initial
investment, V's wife will see $100k show up in her account, not
$93,400. That said, I acknowledge there is no free lunch. The
commission is recouped via the expenses charged annually to the
account. Obviously without the commissions, the annual expenses could
be lowered. But all the same, the investor will not see that
commission directly deducted from the opening account balance as
implied here.
There are also no "loads" on variable annuity subaccounts in the sense
that some here lead us to believe. Even in variable annuities, one can
buy and sell subaccounts as often as they like without paying loads
(neither front-end or back) or incurring capital gains. [The exception
is that a trading fee is levied if one trades so frequently it
constitutes "day trading"]. The "load" and "no-load" status of
annuities are slang terms that refers to the surrender charge incurred
if the investors tries to surrender the annuity. Almost every major
annuity company offers both load and no-load annuities. Unlike mutual
fund loads, an investor does not pay a commission to buy or sell the
annuity subaccounts.
To be fair, this PacLife annuity may be totally worthless. I haven't
investigated, we don't know many details about the investors
situation, and frankly many VAs just plain suck. My comments were just
towards annuity misconceptions in general.
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One more thing...
Annuities, particularly variable, earn their worth through the
secondary guarantees they offer. It troubles me that I've never heard
them mentioned or discussed here. These guarantees make up such a
significant part of variable annuities that I don't see how a
meaningful conversation could be had without their being mentioned,
yet it's done constantly. Even more troublesome is that I've heard
"pop culture investment gurus" go so far as to dismiss these
guarantees because they are "too complicated for the average investors
to understand". How insulting! The fact is that the complaints that
are constantly made against variable annuities WERE valid. The
insurance companies realized that and changed their products to become
more competitive. An increasing number of VAs no longer do the things
we so regularly criticize them of doing.
Here's an exercise I used to use with clients:
Pretend you could go back in time to 1966 (exactly 40 years ago when I
used to use this example). Now suppose you took $10k with you and you
had the choice of investing in an S&P500 mutual fund or the S&P 500
subaccount of a Variable Annuity with a 6% secondary guarantee. The
S&P fund has 0.18% fees, but the annuity charges 3%!!! Which account
would have had more?
Surprisingly, in this simple back-test the VA account would be 4 times
larger than the mutual fund!
Why? Because even though the VA has higher annual fees, it also
guarantees that your account will go up by no less than 6% every year.
When the S&P earns 12%, the VA is only going to make 9%. But when the
S&P falls 26% (like it would have in 1974) the annuity's secondary
guarantee credits 6%. That's how resoundingly important the secondary
guarantees are.
Of course one could argue that secondary guarantees didn't exist 40
years ago, but the main point was to show that over a statistically
significant period of time things other than AVERAGE annual return
became increasingly important. I encourage all to better famiarize
themselves with MODERN variable annuities before attacking them.
*sorry for the rant, but I have had a few clients recently thank me
for their annuities because they retired shortly before the tech
bubble burst and they would be in dire trouble now if it weren't for
the guarantees. Try to tell them that the annuity was an overpriced
scam.
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"kastnna" <k...@a...org> wrote
> Annuities, particularly variable, earn their worth through
> the
> secondary guarantees they offer.
snip for brevity but all comments read
> Why? Because even though the VA has higher annual fees, it
> also
> guarantees that your account will go up by no less than 6%
> every year.
> When the S&P earns 12%, the VA is only going to make 9%.
> But when the
> S&P falls 26% (like it would have in 1974) the annuity's
> secondary
> guarantee credits 6%. That's how resoundingly important
> the secondary
> guarantees are.
Could you please give a link to an annuity company that has
such a guarantee?
Can you say what happens, generally speaking, to the annuity
when the client dies?
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On 2008-04-04 13:44:17 -0700, kastnna <k...@a...org> said:
> Here's an exercise I used to use with clients:
> Pretend you could go back in time to 1966 (exactly 40 years ago when I
> used to use this example). Now suppose you took $10k with you and you
> had the choice of investing in an S&P500 mutual fund or the S&P 500
> subaccount of a Variable Annuity with a 6% secondary guarantee. The
> S&P fund has 0.18% fees, but the annuity charges 3%!!! Which account
> would have had more?
>
> Surprisingly, in this simple back-test the VA account would be 4 times
> larger than the mutual fund!
It is well known that the past returns of financial products depends a
lot on the starting dates and ending dates chosen for examples like
this. Would the advantage of the secondary guarantee be as noticeable
if, say, you began in 1956 and ended in 1996. or began in 1980 and
ended in 2005, and so on? In examples like this it would be helpful to
know the broad picture showing the whole range of possible starting
dates and ending dates. That would give an indication of the actual
probabillities that an investor would make out better one way or the
other.
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On Sat, 29 Mar 2008 04:50:11 -0500, "Cal" <c...@c...net>
wrote:
>
>
>>
>>
>> If I were you, I would not pay much attention to the financial
>> stability of that particular company, nor to the "may lose money"
>> disclaimer, but instead would focus on that extraordinary $6600 in
>> commissions and ask for convincing evidence that the monetary return
>> from the annuity would justify such an expense.
>
> Lets clear up a few points here. That alleged $6,600 in commision is
> NOT the same as a commssion payable on the purchase of a stock ! ! ! !
>
> It is a commission paid to the seller by the Carrier, from thier General Funds.
> It is NOT DEUCTED from from the purchase price...................
> Instead, normally, the entire amount is credited to the Cash Value Account.
> and earnes a stipulated (good or bad) Interest Rate.
> The ONLY way that one can LOSE money on the purchase purchase of ANY
> Annuity, is to surrender that Annuity EARLY. Thier is a Surrender Charge, very
> similar to one found on the issue of any CD.......................
>
>
Did that 6600 grow on a tree? It comes out of profits generated by
the annuity for the company selling it. It's not a matter of losing
money. It's that the buyer could make $6600 dollars MORE if the
commission didn't exist.
Thumper
>
>
>Of course, that
>> evidence will not be forthcoming. She might hear something like "But
>> this is an excellent fund. It has done great in the past ...", etc.,
>> etc. But how many thousands of times has that been said.
>
>
> MOST (but not all) Annuities are INTERST EARNING instruments, and
> are NOT invested in any fund. Therefore there are NO "Up's & Down's."
>
>The chances
>> are that she would come out far better by leaving the money where it
>> is. The fact is that by moving the funds into a new product with a
>> $6600 cost just for making the move, she would be taking a risk and a
>> gamble far larger than the gamble that the new fund, or any fund, "may
>> lose money" because of market fluctuations.
>
>
>
> As I have stated above, GENERALY speaking there is NO COST involved
> in the purchase of an ANNUITY....................
>
>
> Cal Lester CLU
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>> Lets clear up a few points here. That alleged $6,600 in commision is
>> NOT the same as a commssion payable on the purchase of a stock ! ! ! !
>>
>> It is a commission paid to the seller by the Carrier, from thier
>> General Funds.
>> It is NOT DEUCTED from from the purchase price...................
>> Instead, normally, the entire amount is credited to the Cash Value
>> Account.
>> and earnes a stipulated (good or bad) Interest Rate.
>> The ONLY way that one can LOSE money on the purchase purchase of ANY
>> Annuity, is to surrender that Annuity EARLY. Thier is a Surrender
>> Charge, very
>> similar to one found on the issue of any CD.......................
>>
>>
> Did that 6600 grow on a tree? It comes out of profits generated by
> the annuity for the company selling it. It's not a matter of losing
> money. It's that the buyer could make $6600 dollars MORE if the
> commission didn't exist.
> Thumper
Apparently you have not been reading the thread. It was already explained
that
any commissions paid to the seller come out of the general fund of the
carrier,
NOT out of the investment of the buyer.
The comparison was made of a purchase of a Mutual Fund of $10,000, FROM
WHICH
the commission IS deducted, and the remaining balance is the only amount
INVESTED.
In the case of the purchase of the Annuity, the entire amount is placed in
the Cash Value
Account, and earns the stipulated interest from DAY 1.
Cal Lester CLU
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"Cal" <c...@c...net> wrote:
> It was already explained that
>any commissions paid to the seller come out of the general fund of the
>carrier, NOT out of the investment of the buyer.
>
>The comparison was made of a purchase of a Mutual Fund of $10,000, FROM
>WHICH the commission IS deducted, and the remaining balance is the only amount
>INVESTED.
>
>In the case of the purchase of the Annuity, the entire amount is placed in
>the Cash Value
>Account, and earns the stipulated interest from DAY 1.
The fact remains that the purchaser is paying for it, directly or indirectly.
What you are saying is that annuities bury the cost deeper in the fine print
than mutual funds.
Almost any (all that I know of) investment products that are sold by a
commissioned sales force are high cost products. Someone is paying for those
fancy suits and shiny shoes. Guess who.
-- Doug
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On 2008-04-06 13:25:52 -0700, Douglas Johnson <p...@c...com> said:
> The fact remains that the purchaser is paying for it, directly or indirectly.
> What you are saying is that annuities bury the cost deeper in the fine print
> than mutual funds.
>
> Almost any (all that I know of) investment products that are sold by a
> commissioned sales force are high cost products. Someone is paying for those
> fancy suits and shiny shoes. Guess who.
That certainly is true. Actually, the OP said specifically that his
wife would have to pay a $6600 commission on the deal. That doesn't
look to me like some indirect cost borne by the company that is buried
in the company's financial records. It looks more like he knows that a
commission of that specific dollar amount has to be paid to a sales
person.
In any case it seems like a large amount considering that she is
nearing retirement and already has a long-standing retirement plan in
place.
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"Douglas Johnson" <p...@c...com> wrote
> The fact remains that the purchaser is paying for it,
> directly or indirectly.
> What you are saying is that annuities bury the cost deeper
> in the fine print
> than mutual funds.
>
> Almost any (all that I know of) investment products that
> are sold by a
> commissioned sales force are high cost products. Someone
> is paying for those
> fancy suits and shiny shoes. Guess who.
But is it fair to call an annuity just an investment
product? Or is it more of an insurance product? The
insurance provided being (in general) predictable income for
the rest of one's life.
I draw the distinction because one could make the same
argument about, say, life insurance. Life insurance could be
said to be high cost, with a potentially low bang for one's
buck, too, if one forgets that the main product being
purchased is peace of mind.
I do protest fine print and preying on the less educated
with such products. But for some, annuities are a good
choice.
Elle
Disclaimer: I am an individual investor in and owner of
stocks, bonds, CDs etc. (but no annuities) of over two
decades. I own some insurance company stock but otherwise do
not sell annuities. I urge caution in the purchase of
annuities in particular.
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"Elle" <h...@s...net> wrote:
>"Douglas Johnson" <p...@c...com> wrote
>> Almost any (all that I know of) investment products that
>> are sold by a
>> commissioned sales force are high cost products. Someone
>> is paying for those
>> fancy suits and shiny shoes. Guess who.
>
>
>But is it fair to call an annuity just an investment
>product? Or is it more of an insurance product? The
>insurance provided being (in general) predictable income for
>the rest of one's life.
I agree that a fixed annuity is an insurance product. But from what the original
poster wrote:
>On Mar 28, 2:13 pm, V <v...@a...com> wrote:
> My wife has a broker acquaintance that wants her to invest her
> retirement fund (all of it) in a Pacific Life annuity. The annuity is
> supposed to double your money in 10 years or sooner. I noticed on the
> cover of the Pacific Life brochure that it states "may lose money"
It sounds like a variable annuity, which I would consider an investment product.
>I draw the distinction because one could make the same
>argument about, say, life insurance. Life insurance could be
>said to be high cost, with a potentially low bang for one's
>buck, too, if one forgets that the main product being
>purchased is peace of mind.
However, I'll go on to suggest that insurance products sold by a commissioned
sales force tend to be high cost as well. They could still deliver a valuable
product. If the sales person is good, they might deliver high service.
Commissioned sales force may be the only distribution channel for the product,
so you are stuck with the high costs, but they are still high cost. Someone
pays for the fancy suits and shiny shoes.
-- Doug
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