Annuity question and How do Amerprise agents sleep at night

[clifp]

The wife (Ann) of my best friend (Bill) passed away from cancer last week, and I flew out to see him. First thanks to suggestions many of you made on how to help in this situation. They came in handy.

There were only two bright spots in otherwise dismal situation. (The handmade get well cards from 50 of her 7th and 8th grade students were the low point). First instead of long painful death via brain and liver cancer, she had a pretty short illness and she was passed out the last week.

The other good news is I took the first step in disengaging him from his Amerprise [-]vampire[/-] agent. After Ann's parents passed away several years ago, Bill got the reasonable idea of rather than let his compulsive spending wife loose with a 6 figure amount, he'd invest it and use earning to pay for their trips.

Into this financial knowledge vacuum (Bill told me this weekend that he hadn't paid a bill in 20+ years) marched a helpful Amerprise agent. I meet the lady over a weekend anniversary celebration a couple of years ago. A nice enough person, but she had no formal training other than what Amerprise gives them and her financial IQ was pretty dismal.

I protested a couple of years ago when Bill told me the Agent invested Ann's inheritance in an annuity. Still even I was shocked to see how badly the advice they got was.

First the annuity was not just a simple SPIA, no of course not it was the insurance agents friend a variable annuity complete with choices of scores of high ER funds and god knows what performance. Then there was a 10% tax penalty for early withdrawal. I am not sure why this was true... Can somebody explain? Now I know he has withdrawn money but the value dropped from $120K to $110K.. There were more important things to worry about than money so I didn't get a chance to dig very deeply.

Bill did tell me that when he talk to the agent, she said that because of Ann's death he could get access to the entire amount penalty free. I noticed that the annuity statement did include something called a death benefit which was equal to the annuity value but did NOT include the $4k in surrender charges. Is this fairly standard?

I also notice that they had another $150K in IRA rollover also in an annuity but in Bill's name.

Bill told me he wanted to use to the money from the annuity to pay off the credit card loans and the HELOC. The one good thing the Amerprise agent did do was set up a HELOC with a reasonable 5.5% interest rate.

Investigating a bit I found that Ann had run up an 18K AMEX bill (15 % interest) and seem to be paying the minimum on it. This was in addition to using $50K of the $100 credit limit on the HELCO. I quickly paid off the AMEX bill with HELCO checks.

Bill said the agent gave them good service, but did admit that the 10% tax penalty was a mistake. I told Bill that she made at least $10K in commission (4% of $250K+) and she better give them good service. This ended the discussion.

Now I have a built in bias against Amerprise but am I over reacting to think the agent screwed many ways? A. Knowing they wanted to use the earning for annual trips. Never put them in a Variable annuity instead invested in mutual funds? B. Should not have rolled over IRA money into an annuity
C. Should have strongly advise Ann to use the HELCO to carry debt rather than carrying a non-deductible credit card balance?

If I do meet and strangle the agent, I hope I can have board members on my jury.

 

[Leonidas]

You are certainly a great friend and a class act for the support you're giving to your friend. Very admirable.

Regarding the Ameriprise rep, it's hard to say if she was malicious or ignorant. I have found many a salesperson who was completely clueless about the product they were selling. Like the guy at a electronics store years ago who explained how a CD worked "There are microchips embedded in the disc."

Then again, there are plenty of salespeople who are good at telling the truth selectively, and if you don't ask the right questions you won't get all the information you need. You just get told whatever it is they perceive you need to hear to get you to commit to the sale. It's not a lie, just part of the truth told in a flattering way. It sounds as if your friend and his wife may have not done the self-education they needed to ask the right questions.

Some wiz at Ameriprise thought up products that make Ameriprise money. Then somebody in marketing thought up a way to sell it that guaranteed Ameriprise sold a lot of the products that make them money. Then somebody created a system and a training program that made sure the sales people did all the right things to sell the stuff that made Ameriprise money. The customer's money is the target of the whole system.

Like the man said, "Where are all the customers' yachts?"

 

[FinanceDude]

First the annuity was not just a simple SPIA, no of course not it was the insurance agents friend a variable annuity complete with choices of scores of high ER funds and god knows what performance. Then there was a 10% tax penalty for early withdrawal. I am not sure why this was true... Can somebody explain?

How old is Bill?

Now I know he has withdrawn money but the value dropped from $120K to $110K.. There were more important things to worry about than money so I didn't get a chance to dig very deeply.

You said he withdrew money, but you don't know how much? His account value could have gone down to $110 from $120K if he owned stock or MF too........just pointing that out.........

Bill did tell me that when he talk to the agent, she said that because of Ann's death he could get access to the entire amount penalty free. I noticed that the annuity statement did include something called a death benefit which was equal to the annuity value but did NOT include the $4k in surrender charges. Is this fairly standard?

Generally ALL VAs allow PENALTY-FREE withdrawals to the benficiary.........

I also notice that they had another $150K in IRA rollover also in an annuity but in Bill's name.

Well, is it Bill's IRA??

A. Knowing they wanted to use the earning for annual trips.

Did Bill specifically TELL the agent he wanted this, or was this his "plan"? I am not defending the agent, but there's a big difference in how an arbitration panel would view that...........

Never put them in a Variable annuity instead invested in mutual funds?

I don't know how well you know Bill's line of thinking, but it could be he bought into the tax-deferral aspect of the annuity, and never thought his wife would die suddenly............just saying..........

B. Should not have rolled over IRA money into an annuity

There are reasons to do this, FEW though they may be...........

C. Should have strongly advise Ann to use the HELCO to carry debt rather than carrying a non-deductible credit card balance?

I don't know much about it, but based on your description, she pretty much spent what she wanted when she wanted, are you sure she would have listened, or did listen??

 

[clifp]

"Generally ALL VAs allow PENALTY-FREE withdrawals to the benficiary........"

Good that is what I thought.

Bill is 53, Ann was 54.

Based on the reasonable question you asked, I doubt he has much of case at arbitration panel. The guy is not litigious at all, so I wasn't even going there.

Trust me, I know the majority of fault lies in my Ann's spend thrift ways, and Bill's passive acceptance of this couple with his lack of interest in managing his own financial affairs.

I don't expect financial planners to tell everybody invest your money in Vanguard index funds or even DFA or American funds. But I do think they should avoid doing clearly bad things like their annuities for the clients just for the sake of bigger commission. Likewise a bit of financial education, I think should be part of the service that any financial advisor gives.

I know they met with her a couple of times a year (and they paid additional fee for the meeting) Looking at the Amex bill and tell Ann pay it off every month if need be with your HELCO check, was free advice that would have save them $1500+ a year.

I am surprised that you as what I think is an ethical FA (certainly a very knowledgeable guy) wouldn't be upset at the bad apples...

 

[chinaco]

Good work clifp.

Yes, many Life Insurance Agents are bottom feeders. They give the industry a bad name.

 

[FinanceDude]

Bill is 53, Ann was 54

Ok, on first thought the 10% would come in if they were both living, and took money out. If non-qualified monies go into an annuity, then they come under the 59 1/2 rule.......

Based on the reasonable question you asked, I doubt he has much of case at arbitration panel. The guy is not litigious at all, so I wasn't even going there.

Kind of what I thought. Plus, he just lost his spouse, litigation is the farthest thing from his mind.

Trust me, I know the majority of fault lies in my Ann's spend thrift ways, and Bill's passive acceptance of this couple with his lack of interest in managing his own financial affairs.

And you are a DARN GOOD friend for stepping in and helping, he is lucky to have a friend like you.....

I don't expect financial planners to tell everybody invest your money in Vanguard index funds or even DFA or American funds. But I do think they should avoid doing clearly bad things like their annuities for the clients just for the sake of bigger commission. Likewise a bit of financial education, I think should be part of the service that any financial advisor gives.

I respect your view on it. However, I have looked at literally hundreds if not thousands of portfolios from clients and prospects over the years, and after time has passed,it is hard to know the reasoning why folks did what they did. Maybe the advisor became "their friend" or something........

I know they met with her a couple of times a year (and they paid additional fee for the meeting) Looking at the Amex bill and tell Ann pay it off every month if need be with your HELCO check, was free advice that would have save them $1500+ a year.

I hate Ameriprise, along with their proprietary inferior products, they squeeze their clients for every drop of money. If they are a CFP, they charge "yearly retainer fees" of $1500-$5000, depending on the client. And that's just for TALKING with the rep...........

I am surprised that you as what I think is an ethical FA (certainly a very knowledgeable guy) wouldn't be upset at the bad apples...

if I came across that way, well, it was late, and I am sorry. I HATE Ameriprise! That being said, I was trying to be an objective voice. However, I do feel this Ameriprise "advisor" isn't really an advisor, but a "product person".

I am truly sorry for the mess you are involved in. Ameriprise basically is an insurance company that wants everyone to believe they are a full-service financial planning firm. The trouble with that premise is EVERY "financial plan" I have seen from them has a healthy dose of insurance products as a "solution." That to me is NOT financial planning.

If the client wanted to take money out of his account each year for trips, then the annuity is the worst possible option there is. If you can get the rep's name from your friend, or know it,go on FINRA Home Page, and look them up to see if she has any complaints against her. Also, PM if you have anything you want to discuss off the board. I will help anyway I can........

 

[Nords]

I'm sorry this all happened so quickly, Clif. It's good that you could be there-- coping with agents during a time like this, let alone with financial disarray and estate execution, is just too much to bear alone.

Helping someone of his financial "lack of proficiency" to put his files back together, let alone his life, is going to be a process that takes months rather than days. Hang in there.

If I do meet and strangle the agent, I hope I can have board members on my jury.

We'll change the venue to Texas and have REWahoo proffer the defense "Yer honor, she needed killin'".

BTW when you get back you're gonna have to teach me how to judge a college business-plan competition. I almost got invited to learn via the experiential method...

 

[Midpack]

My wife worked at Ameriprise for almost 18 months while between jobs. She was appalled at what she saw there almost daily, and this was a very large successful office (Chicago burbs). The management acted in the best interest of the office with as little regard for the client as they could get away with (and the management was financially savvy enough to know where that line was). And in turn, the FA's acted in their own best interests vs the clients. A good FA wouldn't stay and wouldn't have survived there anyway. It was so bad she would never use Ameriprise for anything - ever.

Unfortunately there seem to be many more bad FA's than good ones. Therefore if you don't know much, your more likely to get a bad one. And the irony is, if you know enough to ask questions and recognize the difference between good and bad, you probably don't need an FA at all.

 

[2B]

When I lost my job in 2002, I "interviewed" Ameriprise. They wanted a list of my "friends" that I could make a "presentation" to about the benefits of refinancing their mortgage and investing in annuities. I almost started upchucking and decided being unemployed was not the worst fate.

 

[frayne]

I'd like to think there is a special place in hell for those kind of FA parasites.

 

[2B]

I'd like to think there is a special place in hell for those kind of FA parasites.

Annuity salespeople deserve the same end. They are all very good at being selectively open and honest about their products. They feed on the emotions and seem to utter "money for life" like a religious chant. They are motivated by the one indisputable fact about annuities. They have the highest commissions and profit margins of any financial product.

My father and in-laws (and hence me and DW) were ripped off by crappy products so I have no sympathy or like for the whole industry.

There is a vocal crew on this forum that advocates annuities. I can't help but think they are shills for the industry because I've never seen an annuity offer that was any better than a poor to mediocre investment for normal people.

 

[clifp]

I'd like to think there is a special place in hell for those kind of FA parasites.

Warren Buffett dumped his Amerprise stock (AMP) this quarter. I was mildly happy to see him dump his PetroChina stocks (mostly cause of the profits, a bit cause of the somewhat tenuous connection to Darfur). However, I am ecstatic to see him bail out of this company with its toxic financial products and army of[-] drug-dealers[/-] annuity salesman.

 

[FinanceDude]

There is a vocal crew on this forum that advocates annuities. I can't help but think they are shills for the industry because I've never seen an annuity offer that was any better than a poor to mediocre investment for normal people.

Vocal crew?? You mean the one or two that think they're awesome, and the "one post wonders" we mods ban when they rant on? Hardly a "vocal crew"...............

 

[mark500]

Investigating a bit I found that Ann had run up an 18K AMEX bill (15 % interest) and seem to be paying the minimum on it. This was in addition to using $50K of the $100 credit limit on the HELCO. I quickly paid off the AMEX bill with HELCO checks.

Hmmm. Some credit card companies waive any debt on a card when the cardholder dies. I had a friend who had ALS who did what Ann did. He maxed out the cards and only paid the minimum balance each month. Sure enough, he died and the rather large debt was not collected by the credit card company.
Was that what Ann was doing?

 

[FinanceDude]

Investigating a bit I found that Ann had run up an 18K AMEX bill (15 % interest) and seem to be paying the minimum on it. This was in addition to using $50K of the $100 credit limit on the HELCO. I quickly paid off the AMEX bill with HELCO checks.

Hmmm. Some credit card companies waive any debt on a card when the cardholder dies. I had a friend who had ALS who did what Ann did. He maxed out the cards and only paid the minimum balance each month. Sure enough, he died and the rather large debt was not collected by the credit card company.
Was that what Ann was doing?

If both their names are on it, they have a right to collect. In community proprerty states, the CC companies also have a right to collect from the surviving spouse...........

 

[clifp]

Hmmm. Some credit card companies waive any debt on a card when the cardholder dies. I had a friend who had ALS who did what Ann did. He maxed out the cards and only paid the minimum balance each month. Sure enough, he died and the rather large debt was not collected by the credit card company.
Was that what Ann was doing?

Naw, this was run up over a year or two at least. I doubt the AMEX will help simply because the card is in Bill's name.

 

[RockOn]

I can't help but think they are shills for the industry because I've never seen an annuity offer that was any better than a poor to mediocre investment for normal people.

I'm not a shill but I think they are a reasonable choice for conservative retirees. IMO the withdrawal rate rivals the 4% SWR from the balanced portfolio without the risks that come from volatility. IMO the rate of return (which I see as about 6%) also rivals the expected return of a 60/40 investment but many will disagree on that. I do not understand why people think they are so bad. I'd like to hear some real logical reasons for that. I agree that one has to sort out some really bad products with high fees though.

 

[REWahoo]

...I think they are a reasonable choice for conservative retirees.

If you add "who are unable and/or unwilling to manage their own portfolios" I might agree with you.

 

[RockOn]

If you add "who are unable and/or unwilling to manage their own portfolios" I might agree with you.

Are you totally convinced you can beat a 6% rate of return by managing your own portfolio in the last 30 years or so of your life? If you are, I understand why you would not like annuities and that's fair.

 

[cute fuzzy bunny]

:

IRR isnt the best way to measure return from an annuity. Its a mediocre tool that is somewhat acceptable for comparing similar annuities to each other. It is absolutely not a useful tool to measure an annuity vs other types of investments.

And you're still doing it wrong.

For most people living an average lifespan, an annuity will pay back somewhere between 3.5 and 4.5% a year, CPI adjusted, over someone with a 30 year horizon. About the very best you'll manage is something analog to a cd ladder or a long bond ladder, minus a little bit.

If you lowball the inflation adjustment vs the actual observed average rate for the last 25 years (which you have), work in an expectation of living 7-8 years longer than average (which you have), and use an improper methodology to compare two dissimilar investments...you can get a 6% figure that has nothing to do with rates of return from a non annuity product.

By using relatively low volatility investment products I've made an average of 14% a year since the early 90's.

Thats better than 3.5%, 4%, 4.5% or the unlikely 6%.

And just to be clear, I have no issue with different investment products and have a very open mind to good ideas. I'm not thrilled with misinformation. Especially highly repetitive misinformation.

 

[RockOn]

:

IRR isnt the best way to measure return from an annuity. Its a mediocre tool that is somewhat acceptable for comparing similar annuities to each other. It is absolutely not a useful tool to measure an annuity vs other types of investments.

And you're still doing it wrong.

For most people living an average lifespan, an annuity will pay back somewhere between 3.5 and 4.5% a year, CPI adjusted, over someone with a 30 year horizon. About the very best you'll manage is something analog to a cd ladder or a long bond ladder, minus a little bit.

If you lowball the inflation adjustment vs the actual observed average rate for the last 25 years (which you have), work in an expectation of living 7-8 years longer than average (which you have), and use an improper methodology to compare two dissimilar investments...you can get a 6% figure that has nothing to do with rates of return from a non annuity product.

By using relatively low volatility investment products I've made an average of 14% a year since the early 90's.

Thats better than 3.5%, 4%, 4.5% or the unlikely 6%.

And just to be clear, I have no issue with different investment products and have a very open mind to good ideas. I'm not thrilled with misinformation. Especially highly repetitive misinformation.

You probably know what I think, with all respect you are not correct. IRR is the correct method to measure investments, especially useful for those with predictable returns. It creates apples to apples comparisons. If you know how to make make 14% a year for 18 years straight, I wouldn't be looking at annuities either, I can understand your dislike. I'm surprised you are not off sailing the Pacific. For those of us satisfied with a ~6% return for a part of our funds (or maybe even all as in my case, though I'd like 7%), annuities do accomplish that if you live about 30 years after annuitizing (mid 50's or so) and the insurance compnay stays solvent. Living to 86 is a reasonable life expectancy for planning purposes according to almost every FA I have read. I think you are the one with the highly repetitive misinformation, sorry.

By the way I did not lowball an inflation adjustment, the 6% IRR is there even if you don't take any inflation adjustment. The payments would be much higher to start. I agree I am assuming living 7-8 years longer than the tables, I think that is a reasonable thing to do, I bet you (or at least most of us) use age 86 or so in SWR calcs also. If I didn't assume the living to 86, the IRR doesn't drop to 3.5 or 4%, or 4.5% as you think, it drops to ~5.4%. I don't know about you, but I plan to live to the mid-80's, and am willing to stake my bets on that, we'll see of course.

Maybe? you are saying annuities pay a 3.5 to 4.5% real return, then you are correct. I am saying a 6% nominal return, like the annualized return that Mutual Funds advertise.

Last point, I think the return is similar to a cd ladder or long bond ladder. But without any volatility. Right now it is not possible to get 6% in those ladders, we don't know about the future, 6% has been hard to get consistently for many years. It goes up and down. With the annuity you are getting the 6% for the whole 30 years, nearly enough for my planning.

 

[cute fuzzy bunny]

IRR is the correct method to measure investments, especially useful for those with predictable returns. It creates apples to apples comparisons.

No, and no.

Insurance companies sure do talk up the use of IRR because it makes financially naive people think they're going to get a better return vs other investments.

Internal Rate of Return: A Cautionary Tale - Buyer's Guides and Special Reports - Budgeting and Planning Software - CFO.com

"For decades, finance textbooks and academics have warned that typical IRR calculations build in reinvestment assumptions that make bad projects look better and good ones look great."

"Practitioners often interpret internal rate of return as the annual equivalent return on a given investment; this easy analogy is the source of its intuitive appeal. But in fact, IRR is a true indication of a project's annual return on investment only when the project generates no interim cash flows — or when those interim cash flows really can be invested at the actual IRR.

When the calculated IRR is higher than the true reinvestment rate for interim cash flows, the measure will overestimate — sometimes very significantly — the annual equivalent return from the project. The formula assumes that the company has additional projects, with equally attractive prospects, in which to invest the interim cash flows. In this case, the calculation implicitly takes credit for these additional projects. Calculations of net present value (NPV), by contrast, generally assume only that a company can earn its cost of capital on interim cash flows, leaving any future incremental project value with those future projects."


Internal rate of return - Wikipedia, the free encyclopedia

"IRR is an indicator of the efficiency of an investment, as opposed to net present value (NPV), which indicates value or magnitude."

"As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in"

"IRR makes no assumptions about the reinvestment of the positive cash flow from a project. As a result, IRR should not be used to compare projects of different duration and with a different overall pattern of cash flows. Modified Internal Rate of Return (MIRR) provides a better indication of a project's efficiency in contributing to the firm's discounted cash flow."

 

[RockOn]

No, and no.

Insurance companies sure do talk up the use of IRR because it makes financially naive people think they're going to get a better return vs other investments.

Internal Rate of Return: A Cautionary Tale - Buyer's Guides and Special Reports - Budgeting and Planning Software - CFO.com

"For decades, finance textbooks and academics have warned that typical IRR calculations build in reinvestment assumptions that make bad projects look better and good ones look great."

"Practitioners often interpret internal rate of return as the annual equivalent return on a given investment; this easy analogy is the source of its intuitive appeal. But in fact, IRR is a true indication of a project's annual return on investment only when the project generates no interim cash flows — or when those interim cash flows really can be invested at the actual IRR.

When the calculated IRR is higher than the true reinvestment rate for interim cash flows, the measure will overestimate — sometimes very significantly — the annual equivalent return from the project. The formula assumes that the company has additional projects, with equally attractive prospects, in which to invest the interim cash flows. In this case, the calculation implicitly takes credit for these additional projects. Calculations of net present value (NPV), by contrast, generally assume only that a company can earn its cost of capital on interim cash flows, leaving any future incremental project value with those future projects."


Internal rate of return - Wikipedia, the free encyclopedia

"IRR is an indicator of the efficiency of an investment, as opposed to net present value (NPV), which indicates value or magnitude."

"As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in"

"IRR makes no assumptions about the reinvestment of the positive cash flow from a project. As a result, IRR should not be used to compare projects of different duration and with a different overall pattern of cash flows. Modified Internal Rate of Return (MIRR) provides a better indication of a project's efficiency in contributing to the firm's discounted cash flow."

Very good, I'll think about that, but for now just give it the benefit of the doubt.

Try this, I buy a 6% IRR annuity, you use a 60/40 portfolio. You make a consistent 6% annualized for 30 years. We both withdraw the same $ amount, at the same frequency, for the same number of years. What happens after 30 years and we both die. We are both worth $0. (Note: if I continue to live longer I actually still get my payments, my IRR went up! You are still broke.)

You should quote all of wikipedia:
The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment.
A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to any alternate costs of capital including an appropriate risk premium.
Mathematically the IRR is defined as any discount rate that results in a net present value of zero of a series of cash flows.
In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the project will add value for the company.

Your first link deals with "interim cash flows", I don't think it is valid in this case. I suppose it could apply in stock investing. I don't think it makes much difference in this example. The problems with IRR seem to come up when there are "reinvested" positive and negative flows, with the annuity there are only positive flows with no interim flows and no reinvestments, with the portfolio I am assuming there were only 6% yearly positive flows. I wouldn't know how to go about assuming otherwise, I don't think it would make much difference

 

[cute fuzzy bunny]

You are under the persistent mistaken impression that a person who invests 25x their annual budget with a 60/40 portfolio runs out of money after 30 years.

Once again, this is incorrect and rarely the case. The average person after 30 years has far more money, even counting inflation adjustments, than they started.

In 30 years I'll still be making good money and spending it. You'll have a CPI adjusted annuity thats lost buying power to the tune of 6% a year. After all, you insisted on the latter point so you must agree.

A 60/40 average ROI for 30 years is also a lot more than 6% annualized.

If you were a piece of capital equipment, IRR still wouldnt be the best way to measure your efficiency of investment. As a cash flow tool, its inadequate at best and misleading at worst.

You remind me of another guy that used to come around now and then who thought if a Quicken calculator spit something out, it was gospel. No nevermind about the quality of the inputs, the validity of the assumptions, or the applicability of the calculator to the problem at hand.

 

[Nords]

RockOn, you are failing to distinguish between annuities (which are appropriate for some investors) and the salesmen that harangue this board on behalf of a high-commission product. They're an extremely vocal crowd of shills and they've given the product a bad name.

Are you totally convinced you can beat a 6% rate of return by managing your own portfolio in the last 30 years or so of your life? If you are, I understand why you would not like annuities and that's fair.

I've been 12-15% APY for the last five years and I've racked up an overall record of 11% APY since 1982 (that includes money market funds and everything) so I'm happily convinced that I can make at least 6% on the compounded remains for the rest of my life.

And I'm totally convinced that I can beat any returns an insurance company hopes to achieve, since I won't be paying their expenses and subject to their regulatory requirements.

Annuities are appropriate for those who want insurance or total financial management or some form of liability shelter, but they're not appropriate for those who are seeking a market return.