I’m not a big fan of annuities. They’re often laden in fees and promises that most people don’t understand, and worse, often get glazed over by a broker eager to sell a product that often pays them one of the largest commissions available among financial products.
Worse still, the insurance companies themselves hand-pick the investment choices in that annuity, which is akin to a casino choosing which cards remain in the deck at the blackjack table.
It’s not that annuities are evil per se, in my opinion they’re just misapplied probably 90% of the time, usually because they pay the broker so well. There’s a mile of paperwork associated with selling one, so it’s pretty bulletproof in terms of any legal backlash, but while the 200 pages in paperwork is supposed to protect a client, it also makes them blindly trust the advisor even more, because the sales process is so complicated. Oh, sweet irony.
And if you want just one indicator that the markets could be poised to rally over the next five years, this latest product push from the annuity world is probably as good as any.
From Registered Rep:
“…Since the crash of 2008, many insurance companies have been forced to drop out of the variable annuity business entirely,” Greenberg says. “Others are finding ways to re-price and re-tool by increasing fees, cutting benefits and limiting investment options. We see more advisors and their clients looking for new ways to hedge portfolios and get downside protection in a volatile market where every basis point counts.”
A new portfolio management program claims to curb huge losses in exchange traded funds held within life insurance subaccounts by automatically shorting futures contracts.
Under the program, created by ValMark Advisors, an Akron, Ohio-based advisor firm, and Milliman, a Chicago-based actuarial firm, clients are charged an embedded 20 basis-point hedging fee. In addition, clients in the hedged portfolio give up returns on the upside.
What the article glosses over is that when you hedge you also give up the upside. And when you hedge you are also taking on the risk of managing the downside vs. the risk the insurance company carried before this latest “innovation”.
So, now it’s as easy as ever to hedge just like the big boys. Caveat emptor.