Helping a friend

[Scuba]

Just out of curiosity, who is the issuing insurer?

Allianz

 

[Scuba]

I really doubt that the annuity gives no consideration in exchange for the 2% gains cap. The consideration may not be a good value, but I doubt that the answer will be something simple like "by assigning you all the losses and limiting your gains to 2% we make more money." Scuba needs to research a little deeper to determine what the consideration is that her friend will receive in return for the 2% gains cap so it can be discussed at the meeting and is not a total surprise.



Of course, if in fact Scuba's friend was told there was some of downside protection and there is none of any sort, then we have a serious legal issue which will likely require professional help to resolve.

I agree, as I said I don’t understand the downside protection and certainly the annuity owner doesn’t. Will know more after the appointment.

 

[OldShooter]

Allianz

IIRC they were in some legal trouble and there was a consent decree, relating to annuity sales. You might want to do a little research.

 

[Scuba]

IIRC they were in some legal trouble and there was a consent decree, relating to annuity sales. You might want to do a little research.

Ok thanks

 

[Scuba]

Ok thanks

Apparently Allianz has been challenged in 43 states, including CA, with class action lawsuits for deceptive marketing of the annuities. I will mention this to my friend although she may not want to join the class. She should at least know about this. Thanks.

 

[Scuba]

Update - I went to the appointment with my friend and her annuity advisor today. I was pleasantly surprised by two things - the advisor was very knowledgeable about how the product worked and answered all of my questions, and she is a fiduciary financial advisor who also handles other types of investment accounts. This made me feel a bit better. She claims her fees for selling my friend this product are 0.65%/year, while she charges 1%/year for asset management if my friend had instead just hired her to manage a portfolio.

I had mentioned before that I didn't really understand the downside protection seeing the negative returns but the limited positive upside. However, what I did not understand until today is that although her annual statements show negative returns in percentage terms, in actuality her account dollar value was not reduced for the negative returns; instead she just earned zero while the market actually gained, in some cases significantly. I also got a better understanding of the guaranteed minimum value - it is 85% of her principal less withdrawals, so her maximum loss is 15%.

The fact remains that there is a pretty low cap on returns so it is very possible she will earn somewhere between zero and 4% over time on this investment. That has definitely been the case the last 5 years - her IRR is 3.39% while the market returns have been MUCH higher. Personally, this annuity would not be something I'd consider. However for a person with relatively low risk tolerance and an age of 74, I suppose there are worse options out there. She is sourcing her RMD's from this account, so part of the reason she is risk-averse within this account is that she doesn't want to have to withdraw from a declining account.

Bottom line, she decided to stick with it for another year and see how it goes. The annuity rep recommended continuing with the "monthly sum" method. In good years, her capped return under this method will significantly exceed the annual method. In bad years, she won't make much either way.

Thanks again to all on this forum who helped me better understand this type of "investment." I still think my friend would be better off in a balanced fund or a mix of two ETF's (stock/fixed income); however the volatility would be greater and only she can decide if she is willing to have more volatility to get greater returns.

One comment my friend made to me that many on this forum can probably relate to is that she feels she has everything she needs and so taking more risk to make more money isn't really necessary fo her. Very different than my attitude - with inflation and other uncertainties, I'd rather take more risk for a better long-term outcome - but then again, I'm 16 years younger and have higher risk tolerance, obviously.

 

[CardsFan]

One comment my friend made to me that many on this forum can probably relate to is that she feels she has everything she needs and so taking more risk to make more money isn't really necessary fo her. Very different than my attitude - with inflation and other uncertainties, I'd rather take more risk for a better long-term outcome - but then again, I'm 16 years younger and have higher risk tolerance, obviously.

I have heard this sentiment several times from a friend. Between their pensions and SS, they have more income than they spend. They have some investments (401k, IRA, inherited after tax account) that they likely will never need, but are there "just in case". His preference is to just preserve value. While I might disagree, I can understand.

 

[jazz4cash]

OP
Nice job helping your friend. Glad I was wrong about the FA not being knowledgeable about the product.

 

[phil1ben]

Update - She claims her fees for selling my friend this product are 0.65%/year, while she charges 1%/year for asset management if my friend had instead just hired her to manage a portfolio.

Those may be her annual fees once the annuity is in place. Did she also disclose how much she was paid at the inception of the annuity which is usually a percentage of the principal deposit?

 

[Scuba]

Those may be her annual fees once the annuity is in place. Did she also disclose how much she was paid at the inception of the annuity which is usually a percentage of the principal deposit?

She said it was 0.65% at time of purchase, and also annually.

 

[Scuba]

OP
Nice job helping your friend. Glad I was wrong about the FA not being knowledgeable about the product.

Thanks. Yes, I was surprised how much she knew about it and the financial markets in general.

 

[Scuba]

I have heard this sentiment several times from a friend. Between their pensions and SS, they have more income than they spend. They have some investments (401k, IRA, inherited after tax account) that they likely will never need, but are there "just in case". His preference is to just preserve value. While I might disagree, I can understand.

Me too.

 

[target2019]

[snipped content]

Thanks again to all on this forum who helped me better understand this type of "investment." I still think my friend would be better off in a balanced fund or a mix of two ETF's (stock/fixed income); however the volatility would be greater and only she can decide if she is willing to have more volatility to get greater returns.

One comment my friend made to me that many on this forum can probably relate to is that she feels she has everything she needs and so taking more risk to make more money isn't really necessary fo her. Very different than my attitude - with inflation and other uncertainties, I'd rather take more risk for a better long-term outcome - but then again, I'm 16 years younger and have higher risk tolerance, obviously.

I enjoyed reading about your mission, and hearing how it turned out. Once a product is sold, I feel the tendency is for the buyer to follow the path of least resistance. Remember that many years of product design and sale development go into a product. The message of low risk is very calming for some, and your friend is drawn to this.

Still, you did the right thing, and others benefit from the way you approached this. Thanks.

 

[Trooper]

Thanks. Yes, I was surprised how much she knew about it and the financial markets in general.

I'm a little late to this thread but just wanted to say that it was nice of you to help a friend through this process - it appears that you spent a lot of time on it.

The only thing I would have asked the annuity advisor is why she invested an IRA inside of the VA. The IRA already offers tax deferral, thereby negating one of the annuity's main benefits.

 

[Scuba]

Thanks to all who participated in this thread. Apparently prior to this annuity my friend had this money invested in a variable annuity that was inside of an IRA. She said that many of her fellow teachers had done the same.

I learned a fair bit helping my friend. I’m not too surprised she decided to stick with this for now, and I suppose given her age and risk tolerance, it’s not a horrible choice. She has some muni bonds and CD’s that she wants to consider doing something else with, so I will introduce her to my Fidelity guy and perhaps he can help her get a bit of growth with these funds.

I think really risk averse people sometimes don’t appreciate inflation risk. As long as their balance stays the same as when they started many years ago, they feel ok.