Financial Planning

[Community Manager]

[Note: This is a letter to the editor of Financial Planning magazine in response to Bob Veres' column from the May 2008 issue. It will also be printed in the June issue of Financial Planning.]


To the Editor:

I am writing in response to Bob Veres' May article, "Cheerleaders in Lab Coats." While we applaud Mr.Veres for thoroughly reviewing our paper with a skeptical eye to encourage high-quality research that benefits investors, we object to a number of Mr.Veres' assertions and what we see as a failure to understand the main point and key assumptions of the research. We understand Mr. Veres' suspicion of the insurance industry, however, we feel it's important to have an open mind and judge insurance products on their individual features and fees and the role they can play in an overall portfolio.

The Value of Longevity Insurance

The main contribution of our white paper is to introduce a new framework for thinking about lifetime income in retirement. The widespread movement from defined benefit pensions (that offer a secured income stream for life) to defined contribution plans results in longevity risk for a large number of Americans that can't necessarily be alleviated with traditional investment products alone.  Insurance products, such as immediate payout annuities and variable annuities with guaranteed minimum withdrawal benefits for life, can protect investors from running out of income.  This "longevity insurance" comes at a cost (in fact, this cost is one of the big reasons plan sponsors are moving away from DB and into DC plans).  When withdrawing from a portfolio of traditional investments, the larger the withdrawal rate and the longer an individual lives the more likely the individual is to run out of wealth and income.  We believe financial advisors and investors should consider how to protect against longevity risk and evaluate how much and what type of longevity insurance is needed. This is the point of our paper, not to argue whether variable annuities or mutual funds produce greater net wealth. Ibbotson Associates spends a great deal of time thinking about how to help investors make the complicated tradeoff between investment products and insurance products and we have published numerous papers on this topic.  

Correcting the Inaccuracies

Return assumptions:  Mr.Veres' analysis is based on one high-return period during 1979-2006, where compounded return for equities (13.46%) and bonds (8.83%) were much higher than the current consensus forecasts (9% for stocks, 5% for bonds). The problem of using only one high-return scenario is that it significantly underestimates the chance that today's retirees will run out of income. This is clearly stated in the white paper, which is why our main analysis is based on Monte Carlo simulation of 5,000 scenarios using realistic forward-looking return assumptions. Mr.Veres did not report this, and did his own calculations based on the historical high-return period.

Fee assumptions:  For variable annuities, the industry average  fees are 1.2% for M&E, 0.6% for GMWB, 0.18% for administration and distribution, and 0.97% for fund expenses, totaling 2.96%. In the white paper,  we used 3.00%. We also estimated how much of the 1.38% M&E and administrative fee is paid to advisors; our best estimate is 1%. That is why we reported an advisory fee of 1% and adjusted-M&E fee of 0.4%. All the analysis in the white paper is done using the overall 3% assumption. The average mutual fund expense is 1.37% (based on Morningstar data); the white paper used 1%, which actually favors mutual funds. Mr.Veres confused these and only reported the 0.4%, not the 3% overall fee assumption. He also failed to mention that contingent deferred sales costs only apply when the withdrawal is a lot higher than the guaranteed amount, e.g. 10%

Misleading comparisons:  Mr. Veres focuses on comparing a 100% VA+GMWB portfolio with a 100% moderate-aggressive (80% equity) mutual fund portfolio in just one historical path (1979 to 2006). By doing this, he misses the critical point of the paper, which is the role that a VA+GMWB plays within a portfolio. Our paper centers on replacing 10-20% of the fixed-income portion of a traditional investment portfolio with a VA+GMWB for life.

No mention of downside protection:  The VA+GMWB for life provides downside income protection for life at the expense of rider fees. Mr. Veres never addresses what would happen if the market performed below average for an extended period of time. To us, the downside protection for life is one of the true merits of a VA+GMWB for life.

Aggressive VA investments:  Mr.Veres claims that we give a "hidden advantage" to VAs because we assume investors allocate assets more aggressively inside the VA. Again Mr. Veres misses the point of our research. With the longevity protection of a lifetime GMWB, investors can afford to invest more aggressively, and they usually do. An article in the May/June 2008 issue of the Financial Analysts Journal ("Portfolio Choice with Puts: Evidence from Variable Annuities" by Milevsky and Kyrychenko) shows that on average investors invest 5%-30% more into equities inside a guaranteed rider. Their conclusion is "that individuals will invest more aggressively when they are granted this type of put option."

Taxes:  Mr. Veres makes a good point with regard to taxes. Taxes would certainly decrease results if applied to a nonqualified investment. However, most Americans' retirement assets are in qualified accounts such as 401(k) plans and IRAs. These assets would be taxed the same inside and outside the VA.

Not for everyone:  Throughout the white paper, we state many times that VAs with lifetime GMWB are not appropriate for every investor (e.g., investors with shorter retirement horizons or a great deal of wealth). Mr.Veres, however, fails to mention any of our caveats.

Sponsored Research

Research is at the core of Ibbotson Associates and our reputation.  Only a small portion of the research that we do is sponsored, and we make every effort to ensure that sponsorship does not affect the integrity and independent nature of our research. In fact, almost all of our research papers--sponsored or not--are submitted to peer-reviewed academic journals.  When we take on a sponsored-research project, it is written into the agreement that there are absolutely no guarantees regarding the results. Further, we always fully disclose that the research was sponsored.

Mr. Veres completely misinterpreted our white paper, took quotes out of context, and generally missed the point of our research. We encourage readers to review our paper, "Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit" in the published research section of our website,
www.ibbotson.com.

Peng Chen, Ph.D., CFA
President and CIO
Ibbotson Associates

[Marion Asnes]

Bob Veres is traveling and asked me to post this email:

Let me start my rebuttal of the rebuttal by pointing out the good things about the research. I think it was good that Ibbotson disclosed that the paper represented sponsored research right on the cover page, although I think the particulars might have been discussed more prominently than a footnote on page three. And I thought that Mr. Chen was quite open with me in my followup interview with him, candid and, when he was not happy with the nature of my questions, clear about his unhappiness. So it's a little disappointing that he says there were quotes taken out of context. It's a direct shot at my reputation, and I feel comfortable standing on my history of not distorting what I was told or twisting facts. In this profession, the facts and quotes are usually interesting enough without any twisting.

I also agree, completely, that the VA should not make up more than a small part of an overall portfolio. Of course the comparison in the white paper is between VAs and mutual funds, and any comparison will be on that part of the mutual fund portfolio that the VA is replacing. I didn't assume 100% of the portfolio; I simply compared (as the white paper did) the mutual fund vs. VA part of a client's holdings.

To say that my return assumptions were flawed is interesting, because I simply took the return assumptions from Table 1 of the white paper itself. Later, the paper does a Monte Carlo analysis, and assumes (I think correctly) that stocks will, over the long term, offer higher average annual returns than bonds. I did have a problem with the paper making this assumption, and then putting a higher weighting to stocks in the VA contract vs. a mutual fund portfolio. Maybe I'm the only one who thinks that looks like rigging the comparison in favor of the VA contract. No advisor I've ever talked with says that you should abandon prudent asset allocation principles inside a VA contract or outside; the research cited in this rebuttal is primarily from consumers, not advisor-tended portfolios, and I suspect there would be difference between the two. Maybe not.

Bigger picture, why compare VAs to mutual funds at all? The only people I have ever seen make that comparison are annuity salespeople. Mutual funds and annuities are very different products, very different tools used for very different purposes. The only reason you would try to argue that a wrench is superior to a screwdriver is if you happened to be a wrench salesperson.

It's true that my column didn't pay a lot of attention to the guarantee because I think the chances of the insurance company paying on that guarantee are not high--which goes straight to the cost issue. How likely is it that the portfolio will be totally extinguished? Once you calculate that likelihood, how much is the guarantee worth, compared with what the insurance company is charging? I did try out a variety of different return sequences, and none of them had the annuity running totally out of money (and the insurance company reaching into its pocket) over a 30-year retirement, enhanced distributions or no. Taking 5% a year out of the portfolio, even at the high water mark, is a pretty conservative distribution rate, especially when the distribution is frozen for the years between high water marks. As Bill Bengen famously pointed out, if somebody retired at the start of the Great Depression, he still could have taken 4.5% of the first year's portfolio value, and indexed that to inflation and taken increasing returns thereafter for thirty years, and still been safe.

Which brings me to the fees. I'm not sure who to believe here, but Morningstar itself says that the typical M&E cost for VA contracts is 125 basis points (see https://ibd.morningstar.com/DataDefs/VASnapshot.htm ), not 120, and as I pointed out (and the white paper correctly calculated), the GMWB fee can be 1% of the actual assets in the portfolio--or more, especially if the subaccount value goes down and it looks as if insurance is needed. But to say that this the M&E covers the advisory fee for the duration of the relationship is, well, an interesting assumption. Assume the advisor gets paid 4% up-front for recommending the annuity.  At most, that pays for four years of the advisor's efforts on behalf of the client. But the insurance company doesn't lower that 125 basis point M&E charge after four years, and the contract life is expected, in this white paper, to be 30 years or more. Who pays for the advisor's advice for the other 26 years? The Good Fairy? The mutual fund portfolio, meanwhile, is assumed to be paying 1% to the advisor each and every year. And of course the white paper ignored the impact of contingent deferred sales charges, which I happen to think are significant in those early years.

Finally, I appreciate the fact that Mr. Chen agrees that taxes can be important. But I'm a little surprised to see him recommending VA contracts inside IRA or pension funds. Only the most aggressive salespeople are pounding that particular drum.

Bottom line: I hope, as Mr. Chen does, that all advisors read the paper on the Ibbotson web site. It's a great conversation-starter, and in my opinion (possibly not shared by everybody) it shows something I doubt Mr. Chen intended: how the numbers can be adjusted to make VAs look like a superior option to the other investments on the market. Don't take my word for it; before long, your clients will be hearing from annuity salespeople who will be leaning hard on this research to support their sales activities, and I guarantee you that THEY won't be talking about using their annuities for only a small part of the client portfolio.

Bob Veres

[John L. Olsen, CLU,ChFC, AEP]

Bob Veres still seems to be missing some pivotal points in Dr. Chen's article.  For example, he writes -

"I did have a problem with the paper making this assumption, and then putting a higher weighting to stocks in the VA contract vs. a mutual fund portfolio. Maybe I'm the only one who thinks that looks like rigging the comparison in favor of the VA contract. No advisor I've ever talked with says that you should abandon prudent asset allocation principles inside a VA contract or outside; the research cited in this rebuttal is primarily from consumers, not advisor-tended portfolios, and I suspect there would be difference between the two. "

The whole point of "putting a higher weighting to stocks in the VA contract vs. a mutual fund portfolio" is that, in the VA contract, the presence of a GLB permits such additional weighting without the downside risk that would result in the absence of the GLB.

Bob asks "why compare VAs to mutual funds at all? The only people I have ever seen make that comparison are annuity salespeople."

Aw, come ON, Bob!  I don't know how many such comparisons I've seen, (dozens, certainly) but at least half, if not more, were produced by financial journalists.  Are Suzy Orman and Jane Bryant Quinn "annuity salespeople"?

As to Bob's discussion of fees, he seems not to be aware of the various commission payout arrangements available to sellers of VAs.  For example, he writes  -

"But to say that this the M&E covers the advisory fee for the duration of the relationship is, well, an interesting assumption. Assume the advisor gets paid 4% up-front for recommending the annuity.  At most, that pays for four years of the advisor's efforts on behalf of the client. But the insurance company doesn't lower that 125 basis point M&E charge after four years, and the contract life is expected, in this white paper, to be 30 years or more. Who pays for the advisor's advice for the other 26 years? The Good Fairy? But to say that this the M&E covers the advisory fee for the duration of the relationship is, well, an interesting assumption. Assume the advisor gets paid 4% up-front for recommending the annuity.  At most, that pays for four years of the advisor's efforts on behalf of the client. But the insurance company doesn't lower that 125 basis point M&E charge after four years, and the contract life is expected, in this white paper, to be 30 years or more. Who pays for the advisor's advice for the other 26 years? The Good Fairy? "

Let's look at that argument a bit closely:

Bob's statement that if the advisor is paid an up-front commission for recommending the annuity, that amount (which Bob assumes is 4%; it's often more) "pays for four years of the advisor's efforts on behalf of the client". 

No, it doesn't.  Nearly every commissionable VA pays "trail" commissions, similar to those paid by mutual fund "A" shares.

More to the point, most VA contracts offer the selling advisor an option as to commission payout.  It's true that many advisors take the "heaped up front" option, so they're compensated as if they'd sold "A" mutual fund shares.  (Who pays for those latter advisors' advice for the remainder of the advisor/client relationship, Bob - the Good Fairy?).  But many will opt for levelized payouts - where the "trail" commission is about 1%.

And that ongoing commission is paid for, not by the Good Fairy, but by the ongoing M&E charge that Bob wondered about. 

What about when the advisor elects to take his money all up front, with little or no trail?  How is that advisor being compensated for the later years of the advisory relationship?  The answer is simple:  HE GOT HIS MONEY UP FRONT!  That's what he CHOSE.

Personally, I think that's a LOUSY way to compensated an advisor for a long-term advisor/client relationship, but it's hardly unique to variable annuities.  It's how mutual funds have worked for decades.

Bob also observes "But I'm a little surprised to see him recommending VA contracts inside IRA or pension funds. Only the most aggressive salespeople are pounding that particular drum."

Well, I must be an "aggressive salesperson" then, because I frequently recommend a VA inside an IRA.  But it's NEVER a tax-related recommendation, because THERE ARE NO ADVANTAGES OR DISADVANTAGES TO USING A VA INSIDE AN IRA.  Any advantages or disadvantages have to do with suitability as an investment vehicle OR AS A RISK MANAGEMENT TOOL within that IRA account.

Not incidentally, while I have no quibble with using a VA inside an IRA or QP account - if the investment and/or risk management features make it suitable - I am not a fan of using VAs in NON-qualified accounts, unless they contain Guaranteed Living Benefits.  Why?  Because, in my opinion, the advantage of tax-deferral that variable annuities enjoy is not worth the cost for that deferral - namely: All Ordinary Income treatment of ALL distributions, plus the 72(q) penalty for early distributions. 

That is NOT the case with NON-VARIABLE annuities, because, while they get All Ordinary Income treatment too, so do those investment vehicles with which fixed annuities may be properly compared (CDs, Bonds, Bond Funds).

Why do I make an exception for VAs in NQ accounts when they contain Guaranteed Living Benefits?  Because it may well be that the risk management features outweigh the tax disadvantages.  That is quite possible where the risk tolerance of the purchaser is such that he or she would not consider a heavily equity-weighted allocation in the absence of those GLBs.

Annuities in general (with some exceptions, such as so-called "CD annuities") are not (in my view, at least) primarily investments.  They're primarily risk management tools.  This is certainly true when the annuity in question is a variable contract containing a Guaranteed Living Benefit (or, perhaps, a Guaranteed Death Benefit).


- John L. Olsen, CLU, ChFC, AEP

[Vig Oren]

withdraw

[John L. Olsen, CLU,ChFC, AEP]

Vig Goren writes "The problem is with those unscrupulous salesmen pushing unsuitable annuity products such as deferred VAs, upon naïve buyers".

Actually, the problem is with self-appointed critics who make foolish and unsubstantiated summary judgments such as the one above.

Vig has repeatedly demonstrated a palpable animus against commissionable products and those who sell them; he's also demonstrated, repeatedly, that he knows little or nothing about the things he condemns.

The "low-cost" VAs that Vig touts -

(a) do not compensate the seller, which means that either the buyer gets no advice or he must pay extra for it.  That doesn't make these contracts bad.  It just means that they cannot be compared, head-to-head, with contracts that do compensate the seller for his or her financial advice.

(b) offer limited, IF ANY, "guaranteed living benefits".  If one doesn't NEED those features, it's certainly arguable that one shouldn't pay for them, which might suggest a low-fee VA that doesn't offer them. To my mind, a better course might be to avoid buying any VA, if the purchase money is non-qualified.  I believe that the benefit of tax-deferral offered by a variable annuity is not worth the cost (All Ordinary Income treatment).   But when GLBs are added, the paradigm changes.

Commissionable VAs that include GLBs can offer RISK MANAGEMENT benefits that are arguably unobtainable elsewhere for most buyers.  Whether those RM benefits are worth the price charged is certainly arguable, and Peng Chen addressed that issue in his paper.  (So did Bob Veres in his response, but Bob made some bad assumptions and presumptions.  That said, I have a LOT of respect for Bob Veres; I simply believe he let his bias overwhelm his admirable good sense when he wrote that response).  Both Chen and Veres tried to inform us by applying original thought to the issue.

It's an approach I recommend to Vig Goren.

- John Olsen

[Amber]

"Vig has repeatedly demonstrated a palpable animus against commissionable products and those who sell them."


John:

Let us not forget that famous line from Vig...  The one about how advisory based advisors are "Ripping off" their clients.  At least Vig is equal handed in his contempe for practising advisors.

Amber

[Tad Borek]

Bob Veres' title, "Cheerleaders in Lab Coats," does raise a good question...when I see Ibbotson (an almost - though not entirely - "academic" brand pre-Morningstar) doing sponsored studies it's hard not to invoke thoughts of other industry sponsored (read: bogus) "research." An egregious example would be The Tobacco Institute. Another advisor actually called me awhile ago about some other study, the basic point being -- doesn't Ibbotson seem a little different now? So just a comment regarding Ibbotson, I wonder if they've weighed the value of that brand against doing industry-sponsored research...a phrase that some of us consider to be almost oxymoronic. There are plenty of trade associations to handle that stuff -- NAVA, etc. -- that's what they're there for. You read that, you read the ICI stuff, and you read "studies" directly from product companies, and you know the potential biases.

[Though if anyone wants to start sponsoring leather-bound annual copies of the SBBI Yearbook I think that would be a wonderful idea, send one to my address immediately and I'll shut up! =) ]

But that leads to the second point...there aren't enough hours in a day to read all the industry-sponsored research, especially about beaten to death topics in financial planning. I skim the assumptions and decide accordingly. And I'm sorry but Peng Chen's statement above implicitly seems to invalidate the case used to prove the thesis, no?:

Peng Chen writes...
"Not for everyone:  Throughout the white paper, we state many times that VAs with lifetime GMWB are not appropriate for every investor (e.g., investors with...a great deal of wealth)"

BV's column cites from the case...
"The GWMB really kicks in after the down market of 2000, when the account value drops from a 1999 high of $3.8 million...to $2.2 million at the end of 2002... the contract keeps paying what it paid in 1999: $191,578."

Say WHAT?

This isn't "a great deal of wealth?" It is to anyone who's looked at, say, the SCF data (except perhaps the speech writers for Democratic primary debates - with those $200k/year "middle class" families).

Look:
there are plenty of $3.8 retirees out there, but longevity risk isn't much of an issue for that group - think about what the term means. Talk about "longevity risk" for the early retiree with $40,000 in CDs and the concept makes some sense. And come up with the completely market-paranoid individual who just can't get past the concept of short-term volatility...to the point where they're willing to guarantee and lock in substantially larger costs during investment and, god forbid, early/unexpected liquidation, to deal with that potential volatility - and these products are a way to manage that risk. I haven't met that individual yet, but I can accept arguendo that they're out there and that this approach is at least a turnkey solution to the problem.

But build a case around $191,578 in "required" annual income and a $3.8 million portfolio, while footnoting that the approach isn't right for those "with a great deal of wealth," and you kind of lose those of us who are advisers on planet earth.

Especially when the investment mix seems to leave a lot of room for improvement ($3.8 to $2.2 in three years with only 5% withdrawals??).

Tack on that 300 basis point cost assumption (which still needs an advisor-fee of some type tacked on top of it, to provide all the other money-related advice that comes up that a rep handling that annuity typically wouldn't do) and...well I don't want to click that link to look at the paper, I have actual work to do. It would waste time, and Ibbotson would just get reinforcement about its "sponsored research" by having another download to count.

-Tad

[Tad Borek]

[Sorry for the messy formatting, that was second post via copy-paste.]

[John L. Olsen, CLU,ChFC, AEP]

Tad,

You write "Especially when the investment mix seems to leave a lot of room for improvement ($3.8 to $2.2 in three years with only 5% withdrawals??)."

The decrease in value was not the result of partial withdrawals, so much as of a massive bear market.  The GLB would have permitted the contract owner to continue taking 5% of the larger figure for life, even after the actual account balance fell 43%.

And you write "Tack on that 300 basis point cost assumption (which still needs an advisor-fee of some type tacked on top of it, to provide all the other money-related advice that comes up that a rep handling that annuity typically wouldn't do) and...well I don't want to click that link to look at the paper, I have actual work to do. It would waste time, and Ibbotson would just get reinforcement about its "sponsored research" by having another download to count."

300 BP/yr is a reasonably accurate figure for the total annual cost of a fully-commissionable VA with a GLWB, including subaccount expenses.  Some advisors will sell that contract and opt to get paid in one lump sum up front.  Others (including Yours Truly) will opt for a "C share type" payout, with a trail commission of 100 bps/yr.
There is, in EITHER scenario, no need to tack on an advisor fee.  The cost of advice is included in that figure, just as it is in the figure for the mutual fund portfolio side (where a 100 bps/yr AUM fee was assumed).

I don't like "heaped commissions" on VAs one bit.  They encourage churning.  They don't match compensation with work performed.

John Olsen

[Tad Borek]

300 BP/yr is a reasonably accurate figure for the total annual cost of a fully-commissionable VA with a GLWB, including subaccount expenses. Some advisors will sell that contract and opt to get paid in one lump
sum up front.  Others (including Yours Truly) will opt for a "C share type" payout, with a trail commission of 100 bps/yr.

There is, in EITHER scenario, no need to tack on an advisor fee.  The cost of advice is included in that figure, just as it is in the figure for the mutual fund portfolio side (where a 100 bps/yr AUM fee was assumed).

John,
This is interesting...is it fair to say that you're an exceptional case, rather than a typical one? Meaning, with respect to ongoing services and choice of trail over lump-sum.

I'd be interested to see what the typical "service mix received" is for a VA purchaser, over the life of the product...and how it compares when the agent opts for lump sum rather than trail. Then a comparison to some other approaches, whether it's RR/mutual funds, RIA/mutual funds, etc. So few VAs are annuitized, and so much VA activity is contract replacement, that the sample might not be very big -- but they're out there.

To generalize it -- I think a consumer sees a very wide range of service levels across service providers. I believe that's true both within each pay/licensing model, and among them. But my belief is that the VA+lump is likely to be a "turnkey" product with much less ongoing advice associated with it (perhaps none other than contract-related). That's certainly been the case with inbound clients, but then again, perhaps that's the reason they left the firm that sold them the VA.

So to me it's a bit of a throw-away for a study to say "well they incur the cost of the VA but they won't need to pay any advisory fees." It says to me they might have a narrow view of the expected service levels for this type of client. A lot is going to come up that will require new advice and new costs for that advice because the original agent is unwilling (or unable, because of licensing) to provide it. Seven years from now the client has a grandchild, wants to factor her into the overall mix somehow...is that agent who took the lump going to do that work, without the client incurring an additional cost not accounted for in the study? Or - last year the IRA-to-Charity opportunity was there for MRDs, if that was well into annuitization did the lump-pay agent who sold it in 1998 call and solicit that idea (even though it wouldn't lead to a dime of compensation)? These are completely routine questions to address in the context of a long-term advisory relationship for a retiree. I'm highly skeptical the typical lump-pay agent is doing that stuff -- if in fact they're even around anymore...

-Tad

[Vig Oren]

How longer would the slander by the above nasty poster be allowed on this "cleaned" website?

[Tad Borek]

Come on folks, let's stick to the topic, there's plenty here to discuss. If someone's idea doesn't hold water better to show why than try to discredit the poster....

-Tad

[John L. Olsen, CLU,ChFC, AEP]

Tad,

The sales commissions paid to the advisor/agent who sells a VA compensates that advisor for ....what?

To my mind, the answer is:  advice regarding that product, for as long as the advisor/client relationship and the annuity contract persist. 

Unfortunately, many  insurance agents who consider themselves "advisors" seem to feel otherwise.  There are those who believe that the commission is compensation for making the sale.  These folks are indistinguishable, in my mind, from the guys who hawk index annuities for everyone, make the sale and...move on.

Most real advisors aren't like that, of course.  But I've talked to more than a few advisors who believe that they're entitled to the 4-7% upfront commission for selling the VA and a new commission on a new VA to which the first one will be exchanged as soon as the surrender charge period expires.  Inappropriate 1035 exchanges have been a Priority One problem for responsible broker/dealers for years.

The problem is not only surmountible, but entirely avoidable.  An advisor may opt for a "levelized" commission arrangement similar to that of "C" mutual fund shares.  It is important to note that the cost to the client need not, and generally does not, increase if the advisor elects this compensation arrangement.

Why don't many advisors do so?  For the same reason that most insurance agents would not elect "levelized" commissions on life insurance policies if they were given the chance.  The commission paid on a life insurance - or annuity - sale must compensate the agent for all the work he or she did to get to that sale.  That means it must pay for all the activity performed, all the phone calls made, to get the three or four interview appointments necessary (for most agents) to net one sale.

There are only so many hours in the day and only so many people an agent can see in a week, and the commissions for products bought by the "closing ratio" percentage of those people must pay for everything the agent did and all of his or her expenses incurred in the process.

This situation is not unique to insurance agents.  Physicians, lawyers, architects, and fee-based financial planners must derive sufficient compensation from the fees paid by "those who buy" to keep the practice, and the practitioner, above water.

The major difference between insurance agents (qua agents) and the other professionals is that the agent is ostensibly selling a product and doesn't get paid unless somebody buys it.  The others sell their advice - really, their time - and get paid whenever they spend that time with a client.

"Heaped commissions" paid on insurance products enable the "advisor"/agent to know that, even if only three out of ten people she sees this week buy something from here, she'll make it.  The problem, of course, is that the compensation is totally unrelated to the time and energy that advisor spends with that client.

There are other, and better, ways of doing all this.  My favorite, and the one I use in my practice for many (but not all) of my engagements is Fee Offset By Commissions.

I charge $200 per hour for giving financial and estate planning advice and I expect to make that whether the client buys a product or not.  If the client does buy a product, I will credit the commissions against my advisory fee.  If the commission completely covers the hourly fee, the client owes nothing further.  If the commission exceeds the hourly fee to date, I owe that client more hours of my time until the accounts balance.  (I do not "rebate" any excess, if for no other reason than that it's illegal in Missouri).

Many of my colleagues and students tell me that they cannot work this way because "clients won't pay fees for insurance advice".  That's certainly true, in my own experience, for many consumers.  Thus, the persistence of the "pure commission" compensation model.

- John

[Vig Oren]

-Tad, I agree with your {to generalize it} and {so to me } observations. In the Bob Veres vs. Peng Chen debate, imo, we cannot add much b/c we are missing details such as: is the VA+ GMWB vs. Mutual Funds benefit  a dollar issue or a risk management one, or partially a bequest one too? If it s a $ issue then what about taxes if it s in a non-qualified plans?

However, as to the merit of combining fixed and variable SPIAs (immediate!) with a stocks and bonds withdrawal portfolio, and with life insurance, I am convinced that such FP tools are very useful for retirees. The only problems are those with agents commissions and insurer s fees which are causing hurdles such as killing mortality credits and thus making the early purchases of the SPIAs a loosing proposition. Peng Chen is an expert in this field.

Let s get Peng over here b/c I would like to get his input to the following:

First, see Peng's report here: http://www.ifid.ca/pdf_workingpapers/WP2003JUN.pdf

Assume a couple retirees at  70+  with 20% bequest motive and 2.5 risk aversion, sitting on a $800K balanced portfolio and $25K of  SS benefits but no pensions.

What about this plan:

1. For IVA they could consider the Vanguard Lifetime Income, joint life, variable payouts (i.e. choosing the funds { yourself}  and paying tax by the IRS tax-excludable-portion method, notice the low costs of less than 0.8% including mortality fee).
   


2. Add a fixed Annuity, SPIA, joint life with no riders. (Taxed also per IRS tax-exculdable- portion method).
   


3. 50% of the nest egg, could stay in a diversified stocks and bonds portfolio at 50/50 allocation. (This will take care of bequests too).
   


4. Any additional needed income,  above the SPIAs income,  would be withdrawn from the portfolio but not to exceed 5% COLAd annual WD of initial value.

Any Comments?

[Vig Oren]

junk clean- up time

[John L. Olsen, CLU,ChFC, AEP]

To those who suggest that Robinson's article is chiefly a condemnation of Guaranteed Living Benefits (including both those who read the article too quickly and those who didn't bother), that article included the following -

"Thus, although sequence-of-returns risk appears quite low, for those retirees who have the misfortune of retiring just before a prolonged bear market it is possible or perhaps even likely that GLWB riders will provide tangible value relative to a lower-cost mutual fund alternative.

...The data in the tables clearly show that investors who buy variable annuity contracts sacrifice significant long-term performance than if they invested in lower-cost mutual funds, due to the impact of expenses over time. But as noted in the "low water mark" analysis, variable annuity investors might benefit from greater psychological comfort and peace of mind during severe market downturns than mutual fund investors who do not have a lifetime income guarantee.

...Although the value of such benefits is obviously ephemeral, in taking this presumption one step further one might also surmise that the comfort afforded by the GLWB rider may make it more likely that annuity investors will remain invested in equities, whereas mutual fund investors may be more inclined to sell in panic."

- John Olsen

[Vig Oren]

clean-up time

[Vig Oren]

Calling Host, Michael E. Kitces, MSFS, CFP, CLU, ChFC, RHU, REBC

Hi Mike,

By any chances could you please summarize the PROS and CONS of utilizing VAs plus GMWBs?

Please also compare it to other options such as combinations of portfolios with fix and/or IVA SPIAs and life insurance, for attaining clients' goals in taxable and tax-deferred accounts.

Thanks.

[Tad Borek]

Vig, your request to Michael sounds like a JFP piece not a discussion board post!

Any comments from anyone on the cheerleader/lab coat aspect of this? Meaning, do you put sponsored research in the same category as any other white paper?

-Tad

[Vig Oren]

Hi -Tad, I asked Mike for his opinion on VA +GLWB  rider regardless of any white papers. I think that Mike has been recently busy on assessing  the annutization benefits of  portfolios with fix and IVA SPIAs, and wondered what's new. It would be important to me and to other retirees. I don't mind reading  about it at the JFP as an article, or here as a discussion. or in an email from Mike.  Just wondered when. As to White Papers, the last one that I have reviewed was the 1939 British Govern' Mandate on Palestine's White Paper whereby it ordered the limiting of immigration of Jews from Europe into Palestine.

As to the current issue re Nationwide Financial and Ibbotson's White Paper, it beats me why the folks at Ibbotson started the backtesting period in 1979 and Not in 1973 (as John Robinson did) or even earlier in 1929 (yes, Ibbotson has the data).  Could it have been done on purpose to slanting the results? To clear any such thoughts Ibbotson could sure supply us with spreadsheets going further back in time.

John Robinson's report is here:

http://www.fpanet.org/journal/articles/2008_Issues/jfp0508-art7.cfm

Ibbotson's White Paper is here:

http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/VA_GMWB.pdf 

[Htowner]

No knock on anyone in particular here...I can only hope to, one day,  be as smart as many of the "talking heads" appear to be.  I work mainly with school employees and see a lot of annuity programs out there, both good and bad;  I also occasionally see mutual funds and/or managed accounts in the school employees portfolio. 
What I am wondering is: where are all you "fee based" reps?  As most people know, school employees don't make a lot of money and are not particularly sophisticated when it comes to money matters so,  I can only assume that they are, for the most part ignored by the fee based community.  I think it would be a good thing for these companies to market to the middle class a bit more; however, I don't see it happening since Wealth Management is the topic of the day/week.  Each month retired school employees across the United States thank God for their annuities-A little balance in your dialogue perhaps.

[John L. Olsen, CLU,ChFC, AEP]

Chad,

I believe that, while it's reasonable to suspect that a research effort is more likely to favor the sponsor's point of view than to disfavor it, that doesn't justify dismissing the research conclusions as tainted.   (I'm not suggesting that you take that position, merely that some do.  Bob Veres implied as much).

If the conclusions of a research paper are logically sound and if the assumptions supporting those conclusions are reasonable, then does it really matter who paid for those conclusions?

- John Olsen

[Don]

Mr. Oren,
Everyone is entitled to their opinion but your statement that "more than 50% of VA investors have complained to state regulators in the recent past" is simpy beyond the pale.  Unfounded statements of this sort merely serve to reduce the gravitas of what would otherwise be a valuable discussion.

[Vig Oren]

Hi Don,

Please see this figure (of "more than 50% of VA investors have complained to state regulators in the recent past" ) in John Robinson's report by  clicking  on the link that I have provided 3 posts above. John Olsen who published an important  manifesto about these problems, a  few months ago in the JFP, should be ready to verify it. It all depends on John's mood today.
 
Don, why should I be interested to twist this fact if I am only a retired non- practicing CFP(r) trying to help retired DIYs including myself, and a few RIAs too?

BTW, I got a feeling that our Amadeos (a.k.a Mike Kitces) will soon enter some valuable input into this discussion.

p.s. Don, here is the excerpt about 50%:

A closer examination of the regulatory position suggests that many of the suitability concerns arise not from the structure of the annuity contracts, but from the manner in which they are sold to the public. According to the North American Securities Administrators Association, seniors account for 44 percent of all investor complaints received by state securities regulators, and as much as 60â??65 percent of individual state securities administratorsâ?? case loads involve complaints of fraud or misrepresentation of annuity products (including both variable and equity index annuities). As referenced earlier, the high incidence of fraud and misrepresentation in variable annuity sales can be attributed to (1) the complexity of the product, (2) the fact that fees and commissions are largely opaque to investors, and (3) the fact that many annuities pay commissions that are considerably higher than the fees or commissions on other investment products. Given the potential of variable annuity contracts with living benefit riders to address the single biggest concern of most retirees' lifetime income sustainability -- the importance of improving disclosure, eliminating conflicts of interest, and banishing unethical sales practices cannot be understated.

And here is a link to Robinson's report:

http://www.fpanet.org/journal/articles/2008_Issues/jfp0508-art7.cfm

[Vig Oren]

reference: GMWB: Paying Something for Nothing

http://www.tiaa-crefinstitute.org/research/dialogue/index.html
.
Read this report by TIAA-CREF and realize that the Ibbotson's report was indeed slanted to satisfy Nationwide Financial. Ibbotson should have known that the period chosen by them for backtesting was NOT the one to pick. So Bob Veres is (was) on the ball and any further discussion is futile. Is anyone not in agreement that the GMWBs would have been beneficial only during the 1929 crash? It happened only once in the last 70 years. Could it happen again? Are there "original thoughts" to tell that, yes,  it could happen again and this is a good reason to pay those exorbitant fees for the rider. My "yellow brick road"  approach is to consider fix and IVA  SPIAs instead of the VA + GMWB.  Buy the SPIAs after age 65 and spread the purchases over the years as you age. This will insure averaging the embedded interest rates, paying less over time, offer a change of plan option,  and insure of being alive at the time of purchase. And yes, do it at low- price annuities providers such as Fidelity, Vanguard, TIAA-CREF, Schwab, etc. Besides "joint" I would refrain from any riders as Moshe Milevsky keeps suggesting.  For bequests I would also follow Moshe's advice to go for either a safe portfolio, CDs,  or life insurance. No VA +GMWB.

P.s. Thanks Community Manager for restoring the above two posts. Frankly, after stumbling on the TIAA-CREF APR 2008 report (see link above) I know it that I am correct with my views on VAs+GMWBs.  So I emailed Mike Kitces NOT to spend time on it and also congratulated Mike on his new blog vwww.kitces.com and Newsletter. Mike replied:

Vig,

The newsletter content is only for subscribers, but the blog content (and posting comments to the blog) is free for anyone/everyone. Please pass the word along to anyone you believe might be interested!

I hope that helps!

With warm regards,

- Michael

[Tad Borek]

Please see this figure (of "more than 50% of VA investors have
complained to state regulators in the recent past" ) in John Robinson's
report by  clicking  on the link

http://www.fpanet.org/journal/articles/2008_Issues/jfp0508-art7.cfm

Vig, Robinson doesn't say anything supporting that claim and it simply isn't a valid statistic.

His statement is that "as much as" 60-65% of complaints to state regulators involve annuities - including both variable and fixed. That's a far cry from "50% of VA investors have complained to state regulators"!

-Tad

[John L. Olsen, CLU,ChFC, AEP]

Vig Goren writes "Please see this figure (of "more than 50% of VA investors have complained to state regulators in the recent past" ) in John Robinson's report by  clicking  on the link that I have provided 3 posts above. John Olsen who published an important  manifesto about these problems, a  few months ago in the JFP, should be ready to verify it. "

As Tad Borek has already pointed out,  Robinson claims that "60-65% of complaints to state regulators involve annuities - including both variable and fixed". 

That claim may or may not be true.  It would not surprise me to learn that it is true. But  does this mean that "over half of variable annuity investors have complained to state regulators"?  Of course not.  That's logically absurd.

Try this, Vig: 

Given:  Over half of the inmates of Xanadu's prisons have hair, either black or brown.

Therefore:  Over half of brown-haired Xanaduians are inmates.

Doesn't make senses, does it?  I suggest, Vig, that you spend a bit more time examining both the things you read and the conclusions you draw from them.

- John Olsen

[Vig Oren]

So what if Robinson claims that "60-65% of complaints to state regulators involve annuities - including both variable and fixed"? Is it good?
 
What about this on VAs in Robinson's report:

As referenced earlier, the high incidence of fraud and misrepresentation in variable annuity sales can be attributed to (1) the complexity of the product, (2) the fact that fees and commissions are largely opaque to investors, and (3) the fact that many annuities pay commissions that are considerably higher than the fees or commissions on other investment products. Given the potential of variable annuity contracts with living benefit riders to address the single biggest concern of most retiree s lifetime income sustainability the importance of improving disclosure, eliminating conflicts of interest, and banishing unethical sales practices cannot be understated.

Could it also be "true or not true" , and only you, John, know the answer?  So why not even one Diehard out of 5,000 agreed with your views on VAs? 

Same with the fact that  TIAA-CREF concluded that the GMWB is  Paying Something for Nothing? Is it important? Probably not and insurance agents (including J. Olsen) will continue to push VAs with GMWBs. No matter who has proven or reported what. Why give up fat commissions with trailers for years?

So what is new under the sun?

[John L. Olsen, CLU,ChFC, AEP]

Vig,

You made a statement about annuities ("over 50% of VA buyers have complained to state insurance regulators in recent years") and claimed, as substantiation for your claim, Robinson's statement about annuity complaints.  When it was demonstrated that Robinson's statement DOES NOT support yours, and that your suggestion that you and Robinson were saying the same thing is logically absurd, your response was...

"So what". 

That doesn't shock me, Vig.  You've consistently shown a contempt for both facts and logic, but I was a bit surprised that you were so candid about your contempt.

I have acknowledged, in several published articles and in many presentations to professional audiences, that there's a LOT of annuity abuse out there.  Much of it involves the sale of variable deferred annuities, though I suspect that there are at least as many questionable sales in the "equity index" arena.  I have consistently condemned the misrepresentation - both deliberate and unwitting - that is at the heart of most of these "bad sales". 

Apparently, that's not enough for you, Vig.  You want to throw out the baby with the bath water and you seem to be looking to me for validation.  Having dismissed your own falsehood with "so what?", you quote Robinson once again:

"As referenced earlier, the high incidence of fraud and misrepresentation in variable annuity sales can be attributed to (1) the complexity of the product, (2) the fact that fees and commissions are largely opaque to investors, and (3) the fact that many annuities pay commissions that are considerably higher than the fees or commissions on other investment products. Given the potential of variable annuity contracts with living benefit riders to address the single biggest concern of most retiree s lifetime income sustainability the importance of improving disclosure, eliminating conflicts of interest, and banishing unethical sales practices cannot be understated." 

You then ask "Could it also be "true or not true" , and only you, John, know the answer?  So why not even one Diehard out of 5,000 agreed with your views on VAs? "

Your first question degenerates from a legitimate query to sophomoric snideness, but I'll answer the part that deserves a response.  YES, Robinson not only could be right about the reasons for this "high incidence of fraud and misrepresentation", but, in my opinion, he IS right.  VAs are complicated - extremely complicated.  Their cost structure is difficult to understand.  ("Opaque" is a fair characterization, I believe).  They pay commissions that are often higher than those paid on mutual funds.  As you claim, Vig, to have read at least one of my articles on suitability in VAs, you will recognize that I've been saying these same things.

Your second question relies upon the typical Vig Goren tactic of presenting your own fantasy as a fact and demanding an explanation of that "fact":  Did you actually poll 5,000 individuals that met some definition of "diehard" and ascertain that only one of them agrees with my views on VAs?

Of course not.  You simply made up that "statistic", just as you always do when you need a "fact" and the real world won't supply it.   You're very good at inventing "facts" - and of granting "fact" status to claims you agree with, while ignoring or dismissing claims that challenge your notions.  Thus, you write -

"Same with the fact that  TIAA-CREF concluded that the GMWB is  Paying Something for Nothing? Is it important? Probably not and insurance agents (including J. Olsen) will continue to push VAs with GMWBs. No matter who has proven or reported what. Why give up fat commissions with trailers for years? "

Well, that study you allude to (http://www.tiaa-crefinstitute.org/research/dialogue/docs/89.pdf) deserves consideration.  I'd not seen it, (thanks for the reference, Vig) and, after skimming it, I printed it out so that I can study it closely this afternoon.  I don't make judgments about a thing - especially a report on a technically complex subject.- until I've studied it.

Will the conclusions of that study change how I view annuities - or how I sell them?  I cannot say, at this point.  I will know that after I've given the study the kind of attention it deserves, the kind of attention that any serious professional gives to something before making judgments about it.  Clearly, Vig, you are not bound by any such constraints, as you demonstrate when you declare "Probably not and insurance agents (including J. Olsen) will continue to push VAs with GMWBs. No matter who has proven or reported what.".

In your final sentence, Vig, you ask "So what is new under the sun? "

Nothing in your posted messages, Vig.  Apart from the amusement they occasionally provide, your postings are an assemblage of other people's thoughts.  When you do manage to insert something original, it demonstrates only that your contempt for practicing financial advisors, insurance agents, and insurance products is nothing compared to your contempt for fact, logic, and fair dealing.

- John Olsen

[Vig Oren]

==================================================

"Meaningless! Meaningless! Says the insurance agent, Utterly meaningless! Everything is meaningless!

What does man gain from all his labor at which he toils under the sun? Generations come and generations go, but the earth remains forever,

The sun rises and the sun sets and hurries back to where it rises,

What has been will be again, what has been done will be done again,

There is nothing new under the sun , except VAs + GWMBs."
====================================================

John Olsen, I know it (knew it) that you'll try to make tzimes from the above. But by now, you sure know it that I agree with you on MOST of your views about financial planning.  In the past, I even thanked you for those issue that I have learned from you. So please take it easy, continue your efforts to clean- up the mess in the VA selling field, and leave the Shakespearean acting to those who appreciate listening to it.  Larry Swedroe, near you in SL , as an ex New Yorker, should be interested.

[John L. Olsen, CLU,ChFC, AEP]

Vig,

You ask "John, you have yet tor reply to the following: why not even one Diehard (=Boglehead) out of more than 5,000, supported your views on the merit in  buying deferred variable annuities? Not to mentioned other insurance products. "

Are you SERIOUS??

Of COURSE, I haven't responded.  You CLAIM that not one of 5,000 persons, all of whom are unknown to me, do not "support my views".  You offer no evidence to support this alleged statistic.  You offer no indication that these anonymous individuals even know what my views are.  And you want me to explain their alleged behavior?

Assuming, purely for the sake of argument, that the "facts" you relate are truly factual, rather than Vigorish inventions, HOW WOULD I KNOW? 

Next, you proclaim that the difference between the conclusions reached by Peng Chen, of Ibbotson, and the two actuaries of TIAA-CREF, regarding the economic value of GMWBs, is due to the greater experience of TIAA-CREF with "annuities".  You miss, completely, the fact that the subject of both papers was not "annuities", but, rather, measurement of cost/benefit of a risk management tool, in the light of security market data, analyzed stochastically.   Do you really intend to suggest, on this public forum for financial advisors, that TIAA-CREF has so much more expertise in that area than Ibbotson that the latter's conclusions may be disregarded?

Earlier, Bob Veres raised the issue of bias, and you jumped on that bandwagon.  If institutional bias really is a factor we ought to consider when assessing the results of a study, is it not relevant that TIAA-CREF annuities do not contain a GMWB rider? 

I think not, but that's because I think that a serious scentific study must speak for itself.  If the facts are verifiable, the logic sound, and the assumptions reasonable, it holds water.  If not, it doesn't - regardless of what bias you or I might attribute to the authors.

Finally, you offer the following,"for the sake of being fair to the source" -

"Meaningless! Meaningless! Says the insurance agent, Utterly meaningless! Everything is meaningless!

What does man gain from all his labor at which he toils under the sun? Generations come and generations go, but the earth remains forever,

The sun rises and the sun sets and hurries back to where it rises,

What has been will be again, what has been done will be done again,

There is nothing new under the sun , except VAs + GWMBs."

What is that, Vig?  Your idea of profundity, or simply Comic Relief?

- John Olsen

[Vig Oren]

Hi John,

You asked: Do you really intend to suggest, on this public forum for financial advisors, that TIAA-CREF has so much more expertise in that area than Ibbotson that the latter's conclusions may be disregarded?

Answer: Well, is it not what Bob Veres was trying to imply? My addition to justify Bob's views was that Ibbotson has not picked the correct backtesting period, which could have been done intentionally. The TIAA-CREF report did cover more periods.

As to your note: You miss, completely, the fact that the subject of both papers was not "annuities", but, rather, measurement of cost/benefit of a risk management tool, in the light of security market data, analyzed stochastically.  

Reply; If the foundation of a house is rotten (deferred VAs annuities are rotten) why discuss the trim of the windows on that house? (BTW, has not TIAA-CREF acturaries analyzed the scurity market data  STOCHASTICALLY?)

As to you pooh poohing the two actuaries at TIAA-CREF by saying:  Next, you proclaim that the difference between the conclusions reached by Peng Chen, of Ibbotson, and the two actuaries of TIAA-CREF, regarding the economic value of GMWBs, is due to the greater experience of TIAA-CREF with "annuities". 

John, let me ask you if you understand the titles of these two actuaries? Who in your mind control the underwriting in those insurance and annuity products that your are selling, is it someone with a Ph.D. CFA designations or an actuary with FSA, MAAA? Apparently you don't know this.

More questions:

1.) Why you as an insurance agent should be taken as a non biased "original thoughts" contributor to Peng vs. Veres arguments.

2.) Why the VAs +VMWB should not be regarded as annuities?

3.) If VAs insurance is evil products which have been pushed upon the wrong clients by nasty sellers why adding the VMWB rider would change its nature?

4.) Why the following summary on VA by side observers but investment mavens are not to be taken seriously (very seriously)


"Investment Products: If It Has to Be Sold, Don't Buy It!"
By William Reichenstein and Larry Swedroe

(Published in the NOV 2007 AAII Journal)

Variable Annuities

With few exceptions, variable annuities are high-cost insurance products. They are sold by commission-hungry salesmen. They are not bought by individuals for their investment features.

A deferred variable annuity contains mutual funds in an insurance wrapper that provides tax-deferred growth and a death benefit.

[Note that we are talking here about deferred variable annuities, where someone is accumulating funds in a tax-deferred vehicle for retirement. It is not about immediate annuities (payout annuities), in which an individual buys a guaranteed stream of income for either a fixed period or for life. As will become clear, high-cost deferred annuities, including equity-indexed annuities (EIAs) discussed later, make lousy vehicles for accumulating retirement wealth. However, payout annuities often make sense as vehicles for distributing retirement wealth.]

Variable Annuity Advantages

The advantages of the variable annuity include:

• Tax-deferred growth,
  
  
  
• A death benefit,
  
  
  
• The ability to convert the annuity into a lifetime income at a later date, and
  
  
  
• Creditor protection (in some states, variable annuities provide better protection against creditor lawsuits than taxable accounts)

The tax-deferred growth feature is widely considered the annuityâ??s major advantage, and that is typically the sales pitch.

Returns are tax deferred when held in a variable annuity, while distributions from mutual funds held in taxable accounts are taxable each year. Moreover, if Mary should decide to sell Fund X and buy Fund Z, it is a nontaxable event if done in a variable annuity account, while it would be a taxable event if done in a taxable account.

Variable Annuity Disadvantages

The disadvantages of the typical variable annuity include:

• High costs,
  
  
  
• All deferred returns, including those from capital gains and dividends, are eventually taxed as ordinary income,
  
  
  
• Loss of potential to avoid taxes on capital gains by awaiting a step-up in basis at death or donating appreciated shares to charity,
  
  
  
• Inability to harvest losses to reduce taxes and loss of foreign tax credit,
  
  
  
• Early surrender fees,
  
  
  
• 10% penalty tax on withdrawals before age 591/2, and
  
  
  
• Investors must bear the credit risk of the insurance firms.
  

To   To sum up, the major advantage of the variable annuity is its tax-deferred growth, while the major disadvantage is high costs.

But do the annuity's additional costs exceed the value of tax-deferred growth?

Costs vs. Benefits: Is It Worth It?

The typical annuity has costs that exceed 2% per year, and this total ignores the annual contract fee of about $30. The insurance fee may be 1.25% per year, while the underlying mutual funds (Funds X and Y in the example) may each charge 1% for a total annual cost of 3.25%.

Surrender Charges

Another disadvantage of variable annuities is surrender charges, which tend to lock an investor into an annuity. A typical annuity allows withdrawals of up to 10% per year with no surrender fee. The surrender charge on additional withdrawals may be 7% in the contact's first year, 6% in the second year, 5% in the third year, and so on with no surrender fee for withdrawals beyond year seven.

If the insurance firm paid a sales commission of 7% to the broker then the first-year's surrender charge must be 7% to allow the insurance firm to get back the 7%. Since the annual insurance charge is usually about 1.25%, the surrender fee can decrease by 1% per year without loss to the insurance firm. In short, the surrender fee and part of the annual insurance fee is a necessary cost to cover the sales commission; it is no accident that high-commission products have high expenses with commensurately low returns.

Once an annuity's surrender period is finally complete, the salesman will often encourage the investor to exchange the original annuity for another one. The salesman gets another commission and the investor is saddled with yet another multi-year surrender penalty.

The Death Benefit

The death benefit clearly has value, but it is usually less valuable than the investor suspects. In order for the death benefit to pay off, two things must occur

1.) The value of the underlying mutual funds (the cumulative value of Funds X and Y in the example) must decline, and

2.) The investor must die.

Vanguard has a variable annuity with no death benefit. As a rider, they will sell this return-of-principal death benefit for an annual cost of 0.05%. It is safe to say that Vanguard's actuaries are not giving away this insurance. Since the typical annuity's annual insurance fee is 1.25%, it should be clear that the value of the death benefit is a trivial fraction of the insurance firm's annual fee.

Conversion

Another alleged benefit of a variable annuity is that it provides the investor with the opportunity to attain a guaranteed lifetime income.

However, you do not have to buy a deferred annuity during your accumulation years in order to have the opportunity to buy a lifetime income during your distribution years. For example, at age 50 Mary could invest in low-cost mutual funds held in taxable accounts. Then, at age 75, for example, she could exchange these funds for an immediate annuity that will pay her a lifetime income. She does not have to pay the typical annuity's exorbitant fees for the 25 years during her accumulation years in order to have the opportunity to attain a lifetime income in her distribution years. Another indication that the conversion "benefit" is oversold is that only perhaps 3% of annuity buyers take advantage of the opportunity to exchange the contract for a lifetime income; this "benefit" apparently has no value to the other 97%.

Protection Against Creditors

In some states, annuities provide better protection against creditors than taxable accounts. However, tax-deferred accounts (such as 401(k)s, Keoghs, and SEP-IRAs) and tax-exempt accounts (such as Roth IRAs and Roth 401(k)s) provide better creditor protection than annuities. A medical doctor may consider an annuity for its creditor protection, but there are likely to be cheaper forms of insurance available.

Insurer Ratings

Finally, an annuity is a contract with an insurance firm. The owner of a variable annuity must bear the credit risk of the insurance firm.

Individuals should only consider investing in annuities of insurance firms with the highest credit ratings.

When They Make Sense

Investing in a non-qualified variable annuity makes sense only if these three conditions are met:

1.) The investor has contributed all funds allowed to tax-deferred retirement accounts such as 401(k)s, 403(b)s and Keoghs and tax-exempt retirement accounts such as Roth IRAs and Roth 401(k)s.

2.) The investor wants an underlying investment in bonds, REITs, commodities, or some other tax-inefficient investment. As discussed earlier, if an investor wants an underlying investment in stocks, they should invest in a tax-efficient stock fund instead of even a low-cost variable annuity.

3.) Finally, the annuity should be one of the few low-cost ones such as those offered by TIAA-CREF and Vanguard. Since they avoid salesmen and use low-cost funds, their annual expense ratios are below 1% and they have no surrender fees.

The Variable Annuity Bottom Line

The overwhelming majority of variable annuities have high costs that exceed 2% per year. They are sold by salesmen with an eye on the commissions.

Not surprisingly, the costs of covering the commissions explain most of the product's higher costs. There are a few low-cost annuities that make sense for some investors. Not surprisingly, these low-cost choices are not sold through brokers.

Our recommendation: Since it has to be sold, don't buy it!

 

p.s.: To any one: any idea why Vanguard or TIAA-CREF do NOT offer the GMWB rider?

[John L. Olsen, CLU,ChFC, AEP]

Vig,

You write "John, am I not to be commended by you for trying to save your face at the Diehards forum after you're booted from the Bogleheads website? Was I not scarifying my good name by doing so? Shall I enter here a link to that sad conversation?"

Vig, 

I have no idea what you're talking about.  Do you?

John Olsen

[Joe Tomlinson]

I'd like to add a different perspective to this debate. I'm a planner who recommends low-cost, tax efficient index funds and ETFs and I don't believe higher-cost active management adds enough value to justify the costs. For a $1 million portfolio, I would want to keep total costs including advisory fees below 40 bp. So from my perspective, mutual funds costing 200 bp and the annuities costing 300 bp look like toxic products. I did, however, read the full study carefully. I was impressed with the analysis, but I can't really agree with the conclusions.

There are a couple of things that bother me about the GLWB benefit. First at 5% with no guaranteed inflation increases, that's equivalent to 3.5% to 4% with inflation -- a very conservative income stream. If I had a customer who wanted to take less than 4% with inflation, I'd likely recommend they just draw down investments and avoid the annuity expenses. Second, the GLWB is a hard benefit to plan with because the results are so highly variable. For example, if you take the results shown on page 15 of the Ibbotson study, and calculate ending income based on 2.5% annual inflation, the 10Th percentile income is 2.4% of the initial investment and the 90th percentile is 8.2%. Not only are the results for the GLWB highly variable, but they will be closely correlated with non-annuity investments so, for a client, overall results will be highly variable.

If I had a client looking to reduce risk, I'd likely recommend an income annuity. If I were using a non-inflation version, I could get an income stream of about 8% of the initial investment so I would be using less of the total client's investment funds to product the desired dollar income. The client would lose access to the money, but would gain the advantage of much greater mortality pooling than the GLWB provides. It's important to understand the mortality pooling tradeoff when recommending income annuities vs. deferred annuities with GLWB benefits.

I also did some detailed looking at Tables 4B, 5B, and 6B in the study and did some interpolation to try to determine how much the annuity and GLWB were contributing to results vs. just increasing the stock allocation which happens when the annuity is added. I used a total cash flow measure which adds the Total Withdrawals to the Ending Assets, and it looks to me like the higher annuity costs actually detract from total cash flow at the 50th percentile for a given stock allocation. But it is fair to point out that the GLWB does provide some downside protection at the lower percentiles. The conclusion I reach is that the GLWB provides a tradeoff -- less total cash flow but more downside protection. This is quite different from the main conclusion of the study that the GLWB delivers more income and more downside protection. It's important to look at both the Withdrawals and the Ending Assets.

I also believe that taxes are very important, particularly with my personal focus on index investing. If we did the study's comparison using tax efficient index funds with 40 bp of total charges and compared things on an after-tax basis, I think it would be clear that the annuity at 300 bp adds no value. However it could be argued that such a comparison would not be apples to apples. Perhaps the better comparison would be to use a no-load annuity like the latest Jeff Nat offering which I understand contains a GLWB. I think the results would be more favorable for adding the annuity, but after taxes, my bet is that adding the annuity would still detract from performance. 

[Joe Tomlinson]

One other item to my reply--There is a version of the GLWB I do like, which is not yet offered as a product. It's called the RCLA (Ruin Contingent Life Annuity) developed by Moshe Milevsky. Basically, it's a standalone version of the GLWB with inflation protection built in. The client could pay a modest fee for this product and then manage the rest of his or her assets in a cost efficient and tax efficient manner without having to tie assets up in an annuity. Even though this product has great potential, I think it will be a long time before it's ever offered. With insurance companies selling tons of high-fee variable annuities, they don't have much incentive to offer the less profitable (for them) RCLA.

[Vig Oren]

To those interested: a note from the Vanguard Group about GMWBs

Dear Vig (it s me),

Thank you for your e-mail to Vanguard Annuity and Insurance Services.  We
appreciate the time you have taken to write.

Vanguard is always considering ways to improve our variable annuity, and
after careful deliberation, it has been determined that we presently can
not offer a rider such as GMWB in a cost effective manner. The fees
associated with a GMWB can be high, and Vanguard is currently unable to
find a way to offer this rider at a reasonable cost to our annuity
investors. We will continue to explore the possibility of offering a living
benefit rider in the future, but at this time we do not have any further
detailed information regarding this subject.

[Community Manager1]

This message is being posted with permission on behalf of Ron Pearson.

I read the Ibbotson paper, "Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit" shortly after seeing it referenced in the financial press.  If this product was in fact a better deal for my clients, I wanted to use it.  But first I conducted my due diligence.  I was immediately disappointed by glaring assumption errors, all of which dramatically favored the VA + GWMB product.  If I could find a VA +GMWB product which only charged .4% M & A expenses (rather than the industry average 1.4% upon which the advisors I know then charge the 1% management fee), plus .6% GWMB expenses with a free annual ratchet benefit (rather than the .25% average cost) and no cap (rather than the normal 200% maximum GWMB benefit which can typically be met within 5-10 years), it might be a great product.  However, I would have to also find clients who were comfortable keeping 100% of the assets in equities because other papers ("Asset Allocation and the Transition to Income: The Importance of Product Allocation in the Retirement Risk Zone," Milevsky and Salisbury 2006) indicate that holding less than 100% in equities risks losing purchasing power to inflation.  Dr. Chen's paper purports to advocate protecting retirees' incomes, however he chose to use nominal returns rather than real returns.  My clients need inflation adjusted returns.  
 
Dr. Chen's paper did not explain why they used the low M & A expense in his paper and his belated explanation in the letter to the editor does not conform to what I see in practice.  Normal practice I have seen shows clients paying the normal 1.4% fee, then the advisor charging a 1% management fee.  I have yet to see an advisor who is managing a blend of mutual funds and Variable Annuities only charge the 1% fee only on the mutual fund portion.  Of course, these higher expenses, the missing ratchet fee and limitation (200% max) plus any analysis of the impact of clients NOT investing 100% in equities make dramatic differences in the cost/benefit equation of the Variable Anniuty + GMWB.  And we haven't even discussed taxes yet!  Dr. Chen used a footnote to explain that the Variable Annuity + GMWB were best used in tax deferred accounts.  Again, I see them in taxable accounts all the time.  How does that impact their utility?
 
If Dr. Chen and Ibbotson were really interested in furthering the knowledge in the industry, they would address these issues by correcting their paper (which every wholesaler is already using to justify product sales) and providing fiduciary advisors with some of the tradeoffs of using these products (taxable vs. tax deferred accounts, less than 100% in equities for clients who can't stomach them, real world fees etc.)  Their paper as it currently stands, along with the sponsorship, provides strong doubt about Ibbotson's independence, supports the sale of products that may or may not be appropriate for clients and leaves those with a fiduciary duty wondering about all those un-discussed tradeoffs.

Best regards,
 
Ron Pearson, CFP(r), AEP
Beach Financial Advisory Service

[John L. Olsen, CLU,ChFC, AEP]

Ron,

You write " If I could find a VA +GMWB product which only charged .4% M & A expenses (rather than the industry average 1.4% upon which the advisors I know then charge the 1% management fee)"... and "Normal practice I have seen shows clients paying the normal 1.4% fee, then the advisor charging a 1% management fee.  I have yet to see an advisor who is managing a blend of mutual funds and Variable Annuities only charge the 1% fee only on the mutual fund portion."

Are you saying that advisors you know accept BOTH the commission for selling a VA with a 1.4% annual expense load AND a 1% management fee?

Good Grief, man!  I don't know of ONE advisor who does that.  I'd be surpised to hear that any Broker/Dealer would permit it. 



- John Olsen

[JB88]

This does happen although it is prabably rare.  I have run across at least three instances where the client was sold an annuity (and the advisor collected a commission) and the advisor was managing the annuity for a fee, which was always much more than 1%.

[Ron Pearson]

John,

We should probably define some terms.  I have not seen any insurance agents collecting their trail and collecting a 1% advisory fee on top.  On the other hand the insurance agent "advisors" are generally only providing the occasional address change, beneficiary change and answers to questions.  About 20% of my clients had annuities with agents and invariably I found it difficult to impossible to get the agent to make subaccount changes to meet the client's investment polciy statement. 

On the other hand, the advisors I speak of are developing investment policy statements and integrating all of the client's assets into one cohesive plan (many, including myself, also add ongoing financial plan updates and advice), provide timely reports to the client on their progress, monitor their investments for needed changes, do tax planning, rebalance assets, and update all of the above if goals change or the situation changes.  I have seen Ameriprise, Raymond James and other independent advisors do this as part of the overall advisory support to the client for the 1% advisory fee which is in addition to the trail.  I don't believe the two types of advice are anyway near the same.

The paper we are all commenting on recommends using VA + GMWB as 20% to 40% of an overall portfolio.  Have you seen advisors as defined in my last paragraph who only charge the 1% fee on the mutual funds and NOT the VA?

[John L. Olsen, CLU,ChFC, AEP]

Ron,

I agree that clarification is in order, and that it is important to distinguish between the compensation arrangement chosen by an insurance agent and the arrangement chosen by an advisor holding himself out as a "financial planner" who provides ongoing portfolio management and planning functions.

I agree that the insurance agent  generally doesn't charge an advisory fee on top of the annuity commission. In every jurisdiction I'm familiar with, he cannot do so legally.

I was not referring to "insurance agents" in my previous message, but to financial planners - including, specifically, those advisors who "are developing investment policy statements and integrating all of the client's assets into one cohesive plan, also adding ongoing financial plan updates and advice, providing timely reports to the client on their progress, monitoring their investments for needed changes, doing tax planning, rebalancing assets, and updating all of the above if goals change or the situation changes."

You say "I have seen Ameriprise, Raymond James and other independent advisors do this as part of the overall advisory support to the client for the 1% advisory fee which is in addition to the trail."

You specify "the trail", when referring to the VA commission.  What of the first year SELLING commission, which can be 20-30 times larger than the annual trail for most VA contracts?  Are you suggesting that these advisors do not receive a selling commission?

If so, then I believe that their accepting a trail commission from a VA, in addition to their AUM fee, is no different from their accepting a trail 12(b)(1) fee from a mutual fund, in addition to their AUM fee.

But the advisor who accepts both a first-year selling commission (typically 5-7% for VAs) and an AUM fee is, in my judgment, abusing the client.  The same is true, in my judgment, of an advisor who accepts a levelized sellng commission (e.g.: 2% of account balance in year 1, 1% per year thereafter) AND an AUM fee FOR THOSE VA ASSETS.

You ask "Have you seen advisors as defined in my last paragraph who only charge the 1% fee on the mutual funds and NOT the VA? "

Yes.  A LOT of advisors I know work this way.  So do I.





In my practice, I have a number of clients holding VAs I sold (and for which I was paid a selling commission) who have advisory accounts on which I am paid a % of AUM.  Those advisory accounts NEVER contain those annuities.  I would not permit that.  Not incidentally, neither would my present or previous Broker/Dealer.

Why?  Because I believe that the commission paid for selling a VA is compensation for selling AND MANAGING that asset.  That's true whether the selling commission is heaped up front in one year or levelized .  If an advisor accepts that fee, he's been paid for selling the contract AND FOR PROVIDING ONGOING MANAGEMENT OF IT.  If that advisor believes that 6% in year one, followed by 25 bps/year (a typical commission arrangement) isn't sufficient to compensate him for his ongoing advisory work, he can recommend a VA with no selling commission and be compensated by a % of those assets, each year, just as he is for his advice regarding the client's other assets.

- John Olsen

[Ron Pearson]

John,

I am glad to hear that there are advisors practicing as you say, even if that's not what I have seen (three instances).  I can see where financial advisors using commissioned VAs would want more compensation for the extra services vs. what they could get just by selling the VA like an insurance agent.  I have also seen brokers who sell "C" share funds while providing none of the extra services a financial advisor performs.  I wish someone would do a survey of Fee Based advisors to document what they are really doing.  That could be tied to a survey of the equity percentages in advisor sold VA+GMWB's.  As I discussed, anything less than 100% in equities risks the client losing purchasing power of their money. 

Let's take a case where you have a client with a 60/40 porfolio and the VA + GMWB makes up all of the 40$ "bond" allocation.  If the VA is invested 100% in equities, do you code that as a bond in your investment policy and reporting software? 

Why do you think both Vanguard and TIAA CREF have decided that GMWB options are not cost effective for clients?  I see Ameritas just came out with a GMWB option for their No Load VA.

[John L. Olsen, CLU,ChFC, AEP]

Ron,

I can only reiterate that just about every professional advisor I know who sells VAs AND manages money on an AUM basis works the way I do - that is, we either use a commissionable VA and DO NOT include that VA in our AUM arrangement or we use a non-commissionable VA and do include it.  Not only would I not accept an AUM fee for an asset on which I'd already received a first year selling commission, but my B/D wouldn't let me accept it.  It's "double dipping", Ron, and, in my judgment, it's WRONG!

As to your hypothetical case, I'm afraid I don't know what you're describing.  How can money held in a VA be "invested 100% in equities" also "make up all of the $40K 'bond' allocation"?  I would certainly NEVER call a 100% equity position a "bond", whether that position was hedged with a GMWB or not - because it's an equity position, not a bond position, and will behave  more nearly like an equity position.

I THINK that what you're getting at is that an equity-funded VA that is hedged, on the downside, by a GMWB, will perform SOMEWHAT differently from an unhedged equity position and you're asking how I would describe that hedged position to a portfolio reporting software program. 

If that's what you're asking, it's a darned good question.  How does one describe something with an upside like an equity account with a damper on it and a downside like a fixed annuity?  I REALLY DON'T KNOW.   First, I don't know what sort of name you'd give it (certainly, not a bond, in my opinion, but what WOULD we call it?) and, second, I don't know how I'd model its projected performance stochastically.  (Not incidentally, I've been talking to some people at a very well-known planning software outfit about this very challenge).

But I will say this:  I will not forego recommending something that appears to be both profitable to and suitable for my client just because I cannot model it in my reporting software with acceptable rigor.

I appreciate your contributions to this discussion.  I see that Bob Veres has included your initial contribution to the Ibbotson-Veres-Chen controversy in his current "Inside Information".  I rather wish he'd included my response to his response to Dr. Chen (I sent him a copy by email), but, hey, it's HIS newsletter.

Best regards,

John Olsen

[Ron Pearson]

John,

The paper suggested replacing 20% to 40% of the bond part of a portfolio with the VA +GMWB.  Thus, if we and the client decided on a 60% stock/40% bond split and the VA +GMWB is being used as the surrogate for the bonds (due to the guarantee), it would make sense to treat the VA +GMWB as a bond in rebalancing and reporting, even though it is nominally invested 100% in equities.  These are things that drive fiduciaries crazy.  Obviously, since VA +GMWB's are widely used in the fee based community, this question should have been answered long ago and general practices accepted in the community.  The fact that is hasn't tells me once again that the fee based community is not doing the rigorous investment policy statement first, then choosing the assets to implement each asset class in the IPS that is normal practice for fiduciaries (and expected by the SEC).. 

I would also opine that few of these VA +GMWB's are actually invested 100% in equities and many are in taxable accounts (personal observation); two things that cost the client tax dollars and loss of  purchasing power.  Yet, every wholesaler out there is, I'm sure, touting the Ibbotson paper as proof that VA + GMWBs outperform mutual fund portfolios while reducing risk (with no comment made on the paper's shortcomings). 

Finally, do the annuities you use have no caps on growth of the guaranteed account and no fees for ratchets?  Those are assumptions Ibbotson made and the cost of the ratchet and the cap on the guarantee make a big difference in outcomes.

Best regards,

Ron

[John L. Olsen, CLU,ChFC, AEP]

Ron,

1.  I don't see any sense in coding a VA with a GLB as a bond, because f the subaccounts chosen are equities, then the VA will perform like an equity investment (albeit with a higher than usual expense ratio).  The guarantees provided by the GLB don't make the underlying investments perform, on the UPSIDE, any differently (apart from the impact of the roughly 60 bps/yr expense of the GLB).

2.  I tell my clients and my students that funding a VA with bonds is generally a bad idea, UNLESS you're using a strategy such as having 2 VAs, one funded with bonds and the other with equities, because you're focusing on the guaranteed DEATH benefit and you can get a higher death benefit with two VAs than with one, when one contract has a loss (that would, in a single VA, be netted out against the gain in the other allocation).  One of the biggest benefits to a GLB is the opportunity for a risk-averse investor to allocate more aggressively than she would without the GLB guarantees.  I believe that putting a GLB in a VA that is heavily funded with bonds amounts to overinsurance.

3.  Many VAs  MIGHT increase the current GLB charge upon resetting the protected value to the then-higher account balance.  (Some WILL increase the charge from the current to the guaranteed; others will increase only to the "then current" charge for that rider).  Most VAs put a cap on the protected value, but not all of them.  All other things being equal, no cap is better than a cap.  However, there are always other factors to consider.

- John Olsen

[Ron Pearson]

John,

I guess what I was asking with the bond question is, say a client's risk tolerance points to a 60/40 portfolio and you use the VA with all equities as the replacement for the 40% in bonds, then the client has a 100% stock portfolio.  You know that 40% of the client's money is protected like a bond, but I would think the SEC would have difficulty with a 70 yr old client invested 100% in equities for their whole portfolio, especially if you generated an Investment Policy Statement that showed their risk tolerance indicated a 60/40 portfolio.  Or, do people put all the equities in the VA and put bonds in the other accounts to get to the 60/40 mix?  Wouldn't that be "over insuring" the portfolio?  That's certainly not what Ibbotson modeled.

Secondly, as you indicated, there are caps on most GLBs.  This was ignored in the Ibbotson paper.  My analysis shows the cap being hit within 7 - 10 years and this significantly reduces the utility of the GLB. 

I spoke to two fee based planners this morning.  One operates as you do, not counting the VA for assets mgmt fees; and in fact only uses VAs in selected cases and only for about 30% of assets.  The other operates as I suggested adding the mgmt fee to the VA commission.  Two different broker dealers, two different treatments.

I am going to check out the Ameritas VA that now has a GLB option (selectable at any time and only charged after selected).  I still see many issues to be evaluated for due diligence purposes before actually using a VA w/ GLB.  Sadly, the Ibbotson paper has generated more heat than light.  It could have done so much more to advance the knowledge base in financial planning, but ends up only advancing the sales process for VAs.

Ron

[John L. Olsen, CLU,ChFC, AEP]

Ron,

The main problem with this scenario, as I see it, isn't how to model the VA+GLB to suit the results of a risk tolerance questionnaire.  It's letting a risk tolerance questionnaire produce a model that drives the planning process.  I HATE traditional risk tolerance questionnaires because they have us making the client's behavior fit a model developed by some typically unknowable algorithym applied by what is typically a short list of questions that we try,  never sucessfully, to fit to the individual desires and needs of a human being.

I realize the need for an IPS and for some method that we can point to when we're asked how we developed the IPS.  But the darned tools shouldn't control the process to the point where we have to ask our client to accomodate herself to the results of the tools - or, worse, to respond to the questions other than how she would have without our "coaching" - because we know that the questionnaire will use her "natural responses" to the questions to produce an allocation that doesn't really fit the client's individual needs.

A VA fully invested in equity subaccounts that includes a Guaranteed Living Benefit is a combination of an equity investment with a guaranteed minimum income stream.  Now, one way of "coding" that is to consider it part equity, part deferred non-variable annuity (with respect to the guaranteed income level).  Or you could call it part equity, part bond.  Either way, you're trying to make what exists in the Real World fit an ARTIFICIAL model.

Are we financial planners, employing the best tools we can devise to meet the needs of our human clients, or mere servants of the tools that are supposed to be serving us?

- John Olsen

[Tom Hamlin]

Dear Bob,

Short Response:

 

1)       Tax assumptions too high, e.g. Rule 90-15 = retirees w/ 90k of AGI are paying just 15% in Federal Taxes not 35%. Now it's 92k-15% tax in 2008. Fewer than 3% of retirees have an AGI above 92k.

2)       This is why I prefer GMIBs to GMWBs or GLWBs and that is because you CAN ANNUITIZE and the ability to be able to annuitize is a good if not great advantage

3)       Almost all of these annuity hater stories never take into consideration what the average investor does with great consistency, i.e. buy high – sell low and that most people will never average 11% or more in the market over an extended period of time because they will at some point "Think" they know what is going to happen and sell low or buy high thus reducing their returns closer to the 3% to 4% that Dalbar says investors average versus the 11% to 12% over 20 years rolling that the market usually achieves left untouched

4)       At the end of the day I can always run examples of how my net worth will be higher, my income more and my estate larger if I don't have to spend $20,000 per year on various insurances, e.g. home, umbrella, business, cars, boat, contents, life, health, portfolio etc… BUT what if something does happen???! What if there is an illness, accident, fire, death, market crash? What will that do to my portfolio? And in the meantime even if nothing ever happens (which of course it will as certain at the markets will go up and DOWN) I'll always worry that something could or will and that detracts directly from ones peace of mind and that creates stress and stress = unhappiness, illness and ultimately DEATH

5)       At the end of the day all people want from life is peace of mind and financial independence and for most people attempting to find that in retirement through investing in equities is like someone with arachnophobia trying to get a good night's sleep in a pit full of spiders