Fee-only is different from fee-based... period, and don't let your fee-based advisor tell you any differently (and they'll try). I recently talked with a stock broker from Raymond James Financial (of course he called himself an advisor) who wanted to split hairs in an effort to get me on board with the idea that someone such as himself was really the same as a fee-only advisor. Baloney!
I politely explained to him that only a firm that gets paid solely by the client, and not by a third-party, can legally claim to be a fee-only advisor. He looked a bit puzzled and asked me what I meant. I said it was really quite simple. A fee-only advisor doesn't accept money from anyone other than their client. A fee-only advisor works for their client and their client only. When I asked him if the many mutual funds he sells his clients pay him a sales commission (a loaded fund) he reluctantly admitted that they did. Bingo! Major conflict of interest since the advisor now has a vested interest in selling you products that will make him money, paid to him by a third-party, rather than products that are in your best interest.
Fee-only, independent advisors registered with the SEC can claim fiduciary status; the manufacturers and sellers of financial products (mutual funds, variable annuities etc.) can not. In the words of Evan Cooper of InvestmentNews, "the providers of products and advice (whether known as brokers, representatives, financial consultants, financial advisors or any other title that connotes investment advice-giving) must recommend only those products that are suitable for a client," (a much looser standard that does not require the client's best interests to be placed first.) Mr. Cooper goes on to write that, "Wall Street wants to keep the suitability standard as long as it can, because it permits principal trades. If a brokerage firm can sell a bond from its inventory when a client comes in to buy, it's a lot more profitable for the firm than having to shop the order among other dealers to get the best price. There's a lot of money to be made by the brokerage business by putting the broker-dealer ahead of the investor."
Not a problem you say to yourself? You don't buy bonds from your fee-based advisor? How about stocks? Your boy gets a commission every time you buy one of his recommendations, incentivizing him to sell you stocks, whether it is in your best interest or not. And how about those front-loaded, high operating cost, 12b-1 mutual funds that are still so prevalent in the industry? Your boy gets paid every time you pony up your hard earned money to make an investment in an average performing fund that almost certainly has a no-load, lower operating cost alternative. I mean for crying out loud! There are something like 10,000 mutual funds out there now, more funds even than stocks.
Want to know the saddest part? The academic evidence overwhelming shows that no one can pick a mutual fund that will outperform its peer group a priori (in advance), which means that everyone should be focusing on costs and tax efficiency when it comes to mutual fund selection. That's right, all of those so-called advisors out there who tout their ability to put you into the best performing mutuals funds are full of you know what. The fact is (and it is a fact) that the top twenty performing mutual funds from the prior five-year investing period will not be the same top twenty who outperform over the coming five-year period. In fact, few if any names will repeat.
Oh, and one last pearl of wisdom from Mr Cooper of InvestmentNews that I couldn't agree with more, "The rules should be crystal clear. If you are licensed to give financial advice in any way, shape or form, you must put clients' interest first. If brokerage firms (and fee-based advisors) can't comply, let them reorganize themselves, or label their advice as sales promotion."
Amen!
Monday, April 27, 2009
Monday, April 13, 2009
Retirement Planning Requires Goals And Balance
The talking heads on TV spend a majority of their time agonizing over the question of stock market direction. When they aren't talking stock market direction, they're talking economic trends - hoping that will help them predict stock market direction. Less often they will focus on individual stocks and try to predict their near-term direction. It is well understood within the industry that most "marks" (read individual investors) don't have the patience to actually buy a stock for the long-term (three to five years) and instead want their investments to start appreciating right away. Stock brokers get that, which is why they tout growth and momentum strategies, despite the mountain of evidence showing that those strategies under perform over the long run. Brokers know that most investors are all too happy to buy a sexy growth story, rather than buy a company selling for less than its intrinsic value.
Speaking of stock brokers, I want to be very clear what they actually do for a living. Stock brokers are out on point, selling whatever new hot products Wall Street wants sold. Oh, they've taken to calling themselves financial advisors, financial planners and "financial health coaches" (no kidding, I actually had a broker tell me recently that he tells his meal-tickets he's a financial health coach. I guess he's hoping the meal-ticket will view him like a personal trainer instead of as the commissioned based salesman that he actually is). But at the end of the day, stock brokers are exactly what they've always been, Wall Streets hit men, compensated handsomely for pushing product through the pipeline and into the hands of the unsuspecting public. John Bogle, founder of Vanguard, is on record as stating that most of Wall Street's innovations are designed to benefit Wall Street, not investors. Ya think! Legendary value investor Jean-Marie Eveillard told Consuelo Mack recently in an interview that, "When I’m in a good mood, I say Wall Street is a vast promotional machine,” Eveillard said. “When I’m in a bad mood, they are a den of thieves.” Amen! And don't forget that the "financial health coaches" aka stockbrokers, are the den-of-thieves' agents (think Mr. Smith from the Matrix)!
Okay, enough of the broker bashing (for now). Let's get to the retirement planning.
You can't know how to get there if you don't know where you're going. Sounds straight forward enough right? But you'd be surprised how many individuals really haven't sat down to figure out where they are going. For example, most individuals I talk with have actually spent very little time thinking about how big their investment portfolio should be in order to throw off enough cash in retirement to meet their desired lifestyle. One million? Two million? Three million?
How's 4 percent grab you?
William Bengen developed the 4% rule in 1994, arguing that investors could safely withdraw 4% from their balanced stock/bond portfolio in the first year, and then adjust that dollar amount upward for inflation each year. Bengen recommended an allocation as close to 75% stocks as possible, with the remainder in bonds. Subsequent research suggested a mix closer to 60/40 stocks and bonds was better. The consensus now seems to be somewhere in the 40% to 75% stock range. Cooley, Hubbard, and Waltz quantified Bengen's rule in 1998, determining that "safe" represented a 95% success rate with a 50/50 portfolio.
And success is defined as making your retirement portfolio last 30 years without running down to zero. Bengen's original findings were that the 4% rule allowed a retiree to live off his investment portfolio in every 30-year period on record from 1926 through 1994, some periods with only a few bucks to spare and some periods with millions left over. The 4% rule has maintained its success rate since 1994, despite the last eight years of horrible stock market returns.
Investors who are sophisticated enough to correctly gauge market valuations can fine tune the 4% rule based on current market valuations when they retire. It turns out (as common sense would suggest) that investors can increase their withdrawal rate when market valuations are depressed at the start of their retirement. Michael Kitces, publisher of The Kitces Report, showed in a 2008 study that safe withdrawal rates in a balanced portfolio depend on market levels. Withdrawal rates in excess of 4% are possible when valuations are depressed, based on Shiller's P/E (a 10-year trailing average). Conversely, of course, withdrawal rates should be reduced when market levels are high, as they were in 2000 and again in 2007. In fact, the greatest risk to a retiree's portfolio is severe market under performance at the beginning of the retirement period, a risk that many recent retirees are unfortunately experiencing first hand right now. The problem with stock exposure is that severe under performance at the beginning of the retirement period will leave the retiree with a depleted portfolio balance that will result in a smaller annual distribution, at least until the portfolio recovers - which can be a very long time depending on the investing period.
There are some retirement experts who believe that stocks should be avoided entirely, precisely because of the risk of early-year under performance. Robert Huebscher has written (Advisor Perspectives, March 24, 2009) that an all bond portfolio is preferable to a stock/bond portfolio. His main contention is that an all-bond portfolio offers far more certainty of success because cash flows are much more certain and total real return depends only on correctly forecasting inflation rates. He further maintains that "inflation is far more predictable than equity market returns and can be efficiently hedged using TIPS." His last main point is that, "the all-bond portfolio is insulated from the risk of historically unprecedented adverse-market conditions near the beginning of the retirement period." Although he admits that there is a risk to the all-bond portfolio - underestimating inflation.
I think Mr Huebscher makes some interesting points, but his over-all argument for an all-bond portfolio is dependent on not underestimating inflation, and that is, in my humble opinion, exactly where we stand today. I also take issue with his contention that TIPS provide an efficient means of hedging inflation. The U.S. government has a huge vested interest in under reporting inflation, since all of the cost of living adjustments for social security and federal employees and retirees are tied to the CPI. It is extremely naive to believe that our government is accurately reporting inflation. In fact, economist Dr. John Williams, of Shadowstats fame, estimates that inflation is currently running about 8% higher than the official number.
More importantly, we are at the cusp of a long period of rising inflation and rising interest rates, brought on intentionally by a government determined to debase our currency in order to make it easier to meet the $65 trillion in unfunded liabilities it has taken on over the last twenty years of unprecedented spending. Governments everywhere and always have chosen the least politically painful option of currency debasement, once they've recognized their inability to make debt payments. The process has just begun in the United States and is likely to culminate, as in the 70's, in double digit inflation rates and double digit interest rates. Now, I am making no guarantees. It is barely possible that our elected officials will do the right thing, sharply curtail spending, raise short-term rates to encourage savings, and defend the dollar at every turn in an effort to keep it front and center as the world's reserve currency. But I doubt it.
The main point, however, is that an all bond portfolio will leave retirees eating dog food in 10-years or so if my inflation scenario comes to pass (and I give it better than a 50% chance of doing so). A prudent investor would do well to maintain a balanced portfolio of stocks and bonds in order to balance the risk of a near term short fall in stocks at the beginning of retirement against a longer-term risk of loss of purchasing power with an all-bond portfolio. It is exactly the uncertainty surrounding both stock market returns AND inflation rates that demands using both asset classes to increase the likelihood of a successful retirement using the 4% rule. (And no I do not think that stocks are cheap enough yet to raise the withdrawal rate to 5%, but that is for a different blog).
Oh, and the average inflation rate since 1966 has been 4.6%, yet many financial advisors use the 2.5% to 3.0% default rates prevalent in the investment planning software used by many of them when projecting real, long-term portfolio returns for their clients. You might want to ask them why next time you speak with them...
Speaking of stock brokers, I want to be very clear what they actually do for a living. Stock brokers are out on point, selling whatever new hot products Wall Street wants sold. Oh, they've taken to calling themselves financial advisors, financial planners and "financial health coaches" (no kidding, I actually had a broker tell me recently that he tells his meal-tickets he's a financial health coach. I guess he's hoping the meal-ticket will view him like a personal trainer instead of as the commissioned based salesman that he actually is). But at the end of the day, stock brokers are exactly what they've always been, Wall Streets hit men, compensated handsomely for pushing product through the pipeline and into the hands of the unsuspecting public. John Bogle, founder of Vanguard, is on record as stating that most of Wall Street's innovations are designed to benefit Wall Street, not investors. Ya think! Legendary value investor Jean-Marie Eveillard told Consuelo Mack recently in an interview that, "When I’m in a good mood, I say Wall Street is a vast promotional machine,” Eveillard said. “When I’m in a bad mood, they are a den of thieves.” Amen! And don't forget that the "financial health coaches" aka stockbrokers, are the den-of-thieves' agents (think Mr. Smith from the Matrix)!
Okay, enough of the broker bashing (for now). Let's get to the retirement planning.
You can't know how to get there if you don't know where you're going. Sounds straight forward enough right? But you'd be surprised how many individuals really haven't sat down to figure out where they are going. For example, most individuals I talk with have actually spent very little time thinking about how big their investment portfolio should be in order to throw off enough cash in retirement to meet their desired lifestyle. One million? Two million? Three million?
How's 4 percent grab you?
William Bengen developed the 4% rule in 1994, arguing that investors could safely withdraw 4% from their balanced stock/bond portfolio in the first year, and then adjust that dollar amount upward for inflation each year. Bengen recommended an allocation as close to 75% stocks as possible, with the remainder in bonds. Subsequent research suggested a mix closer to 60/40 stocks and bonds was better. The consensus now seems to be somewhere in the 40% to 75% stock range. Cooley, Hubbard, and Waltz quantified Bengen's rule in 1998, determining that "safe" represented a 95% success rate with a 50/50 portfolio.
And success is defined as making your retirement portfolio last 30 years without running down to zero. Bengen's original findings were that the 4% rule allowed a retiree to live off his investment portfolio in every 30-year period on record from 1926 through 1994, some periods with only a few bucks to spare and some periods with millions left over. The 4% rule has maintained its success rate since 1994, despite the last eight years of horrible stock market returns.
Investors who are sophisticated enough to correctly gauge market valuations can fine tune the 4% rule based on current market valuations when they retire. It turns out (as common sense would suggest) that investors can increase their withdrawal rate when market valuations are depressed at the start of their retirement. Michael Kitces, publisher of The Kitces Report, showed in a 2008 study that safe withdrawal rates in a balanced portfolio depend on market levels. Withdrawal rates in excess of 4% are possible when valuations are depressed, based on Shiller's P/E (a 10-year trailing average). Conversely, of course, withdrawal rates should be reduced when market levels are high, as they were in 2000 and again in 2007. In fact, the greatest risk to a retiree's portfolio is severe market under performance at the beginning of the retirement period, a risk that many recent retirees are unfortunately experiencing first hand right now. The problem with stock exposure is that severe under performance at the beginning of the retirement period will leave the retiree with a depleted portfolio balance that will result in a smaller annual distribution, at least until the portfolio recovers - which can be a very long time depending on the investing period.
There are some retirement experts who believe that stocks should be avoided entirely, precisely because of the risk of early-year under performance. Robert Huebscher has written (Advisor Perspectives, March 24, 2009) that an all bond portfolio is preferable to a stock/bond portfolio. His main contention is that an all-bond portfolio offers far more certainty of success because cash flows are much more certain and total real return depends only on correctly forecasting inflation rates. He further maintains that "inflation is far more predictable than equity market returns and can be efficiently hedged using TIPS." His last main point is that, "the all-bond portfolio is insulated from the risk of historically unprecedented adverse-market conditions near the beginning of the retirement period." Although he admits that there is a risk to the all-bond portfolio - underestimating inflation.
I think Mr Huebscher makes some interesting points, but his over-all argument for an all-bond portfolio is dependent on not underestimating inflation, and that is, in my humble opinion, exactly where we stand today. I also take issue with his contention that TIPS provide an efficient means of hedging inflation. The U.S. government has a huge vested interest in under reporting inflation, since all of the cost of living adjustments for social security and federal employees and retirees are tied to the CPI. It is extremely naive to believe that our government is accurately reporting inflation. In fact, economist Dr. John Williams, of Shadowstats fame, estimates that inflation is currently running about 8% higher than the official number.
More importantly, we are at the cusp of a long period of rising inflation and rising interest rates, brought on intentionally by a government determined to debase our currency in order to make it easier to meet the $65 trillion in unfunded liabilities it has taken on over the last twenty years of unprecedented spending. Governments everywhere and always have chosen the least politically painful option of currency debasement, once they've recognized their inability to make debt payments. The process has just begun in the United States and is likely to culminate, as in the 70's, in double digit inflation rates and double digit interest rates. Now, I am making no guarantees. It is barely possible that our elected officials will do the right thing, sharply curtail spending, raise short-term rates to encourage savings, and defend the dollar at every turn in an effort to keep it front and center as the world's reserve currency. But I doubt it.
The main point, however, is that an all bond portfolio will leave retirees eating dog food in 10-years or so if my inflation scenario comes to pass (and I give it better than a 50% chance of doing so). A prudent investor would do well to maintain a balanced portfolio of stocks and bonds in order to balance the risk of a near term short fall in stocks at the beginning of retirement against a longer-term risk of loss of purchasing power with an all-bond portfolio. It is exactly the uncertainty surrounding both stock market returns AND inflation rates that demands using both asset classes to increase the likelihood of a successful retirement using the 4% rule. (And no I do not think that stocks are cheap enough yet to raise the withdrawal rate to 5%, but that is for a different blog).
Oh, and the average inflation rate since 1966 has been 4.6%, yet many financial advisors use the 2.5% to 3.0% default rates prevalent in the investment planning software used by many of them when projecting real, long-term portfolio returns for their clients. You might want to ask them why next time you speak with them...
Monday, April 6, 2009
Consumers Beware!
Fidelity Investment long ago made a name for itself in the mutual fund industry by providing a wide range of open-ended mutual funds that, at one time, were consistently ranked in the upper end of the mutual fund universe. Peter Lynch made Fidelity a household name back in the 70's and 80's with his stellar performance as manager of Fidelity Magellan, a fund that has fallen on hard times in recent years.
But what many investors don't know about Fidelity is that the firm is no longer a pure mutual fund company, having strayed from its roots as a producer and passive distributor of product to an active distributor of product back in the 1990s. The company currently runs a hybrid operation that now not only offers mutual funds directly to the public, but also pushes managed-money programs and other proprietary products through a broker network of its own. Now, since we're all educated consumers of financial products, we know that anytime a company is selling its own products to consumers through brokers that we have entered the "Conflict of Interest Zone!!!!!"
Apparently, many of Fidelity's own brokers are acutely aware of the conflict as well, given that dozens recently jumped ship, claiming that they were forced to leave because Fidelity was requiring them to obtain their certified financial planner certification. Now why would that cause a problem for the brokers? After all, obtaining a CFP certificate sounds like a step in the right direction for these sales people. It can't possibly hurt to require a stockbroker to actually get an education in investing before going out and peddling stocks to individuals can it?
Of course not, but the problem (as is usually the case) centered on compensation and disclosure. Apparently Fidelity wanted the brokers to get educated, but was continuing to prohibit them from disclosing to clients and prospects that a substantial portion of their compensation was commissioned based. Unfortunately for Fidelity, a CFP holder or candidate must disclose material conflicts of interest to clients and prospects, including compensation arrangements. So what was Fidelity's response to the dilemma? Did it choose to continue to require its brokers to obtain a CFP certificate in order to better serve clients, and then also begin disclosing compensation arrangements to clients?
Hah! Not a chance. Fidelity has decided to rescind the mandate to get educated and is instead no longer requiring its brokers to obtain the CFP certificate, thus preserving the commissioned based part of their compensation scheme (albeit back in the shadows once again) and allowing brokers to continue to profit handsomely from client transactions.
Caveat Emptor!
But what many investors don't know about Fidelity is that the firm is no longer a pure mutual fund company, having strayed from its roots as a producer and passive distributor of product to an active distributor of product back in the 1990s. The company currently runs a hybrid operation that now not only offers mutual funds directly to the public, but also pushes managed-money programs and other proprietary products through a broker network of its own. Now, since we're all educated consumers of financial products, we know that anytime a company is selling its own products to consumers through brokers that we have entered the "Conflict of Interest Zone!!!!!"
Apparently, many of Fidelity's own brokers are acutely aware of the conflict as well, given that dozens recently jumped ship, claiming that they were forced to leave because Fidelity was requiring them to obtain their certified financial planner certification. Now why would that cause a problem for the brokers? After all, obtaining a CFP certificate sounds like a step in the right direction for these sales people. It can't possibly hurt to require a stockbroker to actually get an education in investing before going out and peddling stocks to individuals can it?
Of course not, but the problem (as is usually the case) centered on compensation and disclosure. Apparently Fidelity wanted the brokers to get educated, but was continuing to prohibit them from disclosing to clients and prospects that a substantial portion of their compensation was commissioned based. Unfortunately for Fidelity, a CFP holder or candidate must disclose material conflicts of interest to clients and prospects, including compensation arrangements. So what was Fidelity's response to the dilemma? Did it choose to continue to require its brokers to obtain a CFP certificate in order to better serve clients, and then also begin disclosing compensation arrangements to clients?
Hah! Not a chance. Fidelity has decided to rescind the mandate to get educated and is instead no longer requiring its brokers to obtain the CFP certificate, thus preserving the commissioned based part of their compensation scheme (albeit back in the shadows once again) and allowing brokers to continue to profit handsomely from client transactions.
Caveat Emptor!
Wednesday, April 1, 2009
The Variable Annuity Con
It makes me both sad and mad to see how many individuals get conned into putting IRA and 401(k) money into a variable annuity. Variable annuities are a tax-deferred investment vehicle that come with an insurance contract, typically designed to protect you from a loss of principal. The earnings inside the annuity are allowed to grow tax-deferred and there are no annual contribution limits as there are with other tax-deferred investment vehicles such as IRAs and 401(k)s.
Wait, back up a moment... did I just write "as there are with other tax-deferred investment vehicles such as IRAs and 401(k)s"? Well, by golly I did didn't I. Well then why in the world would an insurance salesman want you to take your already tax-deferred money and put it into another tax-deferred investment vehicle? Is there some kind of double deferment thing happening here? NO
What's happening is the snake-oil (ahem) I mean variable annuity salesman is looking for a big pay day, anywhere from 5%-10% of the total amount of the money you put into the annuity. It's a bad deal for the investor, make no mistake. You gain nothing in improved tax treatment, yet variable annuities are expensive, running 2.44% per annum in annual expenses versus 1.32% for the average open-ended mutual fund, according to Morningstar. And that 2.44% doesn't take into account the additional commissions that are often paid out as ongoing fees. Oh, and there is the pesky little surrender fee designed to lock you into the variable annuity long enough for the insurance company to pay-off the guy who sold you on the idea in the first place. The typical surrender fee in the first year of a contract is a whopping 6%, dropping to a mere 1% in the seventh year.
And what's the big benefit of using a high-commission, high-expense variable annuity? Well the smooth talking salesman is going to point to the minimum guaranteed return, the so-called death benefit. The death benefit guarantees that your account will maintain a certain minimum value - usually the amount that has been invested. Sometimes the minimum guarantee will be some positive rate of return, but you can rest assure it will be a very low hurdle indeed, one that the profit-seeking insurance company expects to clear with ease. As well, the death benefit usually expires at around age 75, making it no real death benefit at all. In fact, given that stocks have returned approximately 11% annually from 1926 through 2007, it isn't surprising that the death benefit is triggered very rarely, perhaps for less than 2% of all annuities sold - almost sounds like a lottery ticket set up doesn't it?
Bottom line here folks is you gain zilch by putting your IRA and 401(k) money into a variable annuity, but you give up plenty in the form of commissions, extra fees and investing flexibility.
Okay, okay you say, no more putting already tax-deferred money into an expensive, inflexible variable annuity. But surely these things are worthwhile for non-qualified chunks of money right? In most cases no. Why?
Because gains are taxed as ordinary income, which can run as high as 35% versus the current 15% on long-term capital gains. Remember, gains are tax-deferred not tax free, meaning you will eventually pay taxes on the high-commission, high-expense investment vehicle's earnings. And the different tax rate makes a huge difference in your after-tax returns. It may take 15 to 20 years for the benefits of the tax-deferred variable annuity to make up for the more onerous tax treatment. Of course, it will take even longer to come out break even when you factor in the higher expenses.
Still want an annuity for your non-qualified money? Fine, at least cut out the snake-oil salesman and go direct to a low-fee, variable annuity provider. You can buy a low-cost variable annuity from many mutual fund and insurance companies such as Jefferson National, Vanguard or T. Rowe Price. Already own a high cost variable annuity? No problem. Make a tax-free transfer (1035 exchange) to a low-fee annuity (but don't forget to check on your surrender charge first).
Wait, back up a moment... did I just write "as there are with other tax-deferred investment vehicles such as IRAs and 401(k)s"? Well, by golly I did didn't I. Well then why in the world would an insurance salesman want you to take your already tax-deferred money and put it into another tax-deferred investment vehicle? Is there some kind of double deferment thing happening here? NO
What's happening is the snake-oil (ahem) I mean variable annuity salesman is looking for a big pay day, anywhere from 5%-10% of the total amount of the money you put into the annuity. It's a bad deal for the investor, make no mistake. You gain nothing in improved tax treatment, yet variable annuities are expensive, running 2.44% per annum in annual expenses versus 1.32% for the average open-ended mutual fund, according to Morningstar. And that 2.44% doesn't take into account the additional commissions that are often paid out as ongoing fees. Oh, and there is the pesky little surrender fee designed to lock you into the variable annuity long enough for the insurance company to pay-off the guy who sold you on the idea in the first place. The typical surrender fee in the first year of a contract is a whopping 6%, dropping to a mere 1% in the seventh year.
And what's the big benefit of using a high-commission, high-expense variable annuity? Well the smooth talking salesman is going to point to the minimum guaranteed return, the so-called death benefit. The death benefit guarantees that your account will maintain a certain minimum value - usually the amount that has been invested. Sometimes the minimum guarantee will be some positive rate of return, but you can rest assure it will be a very low hurdle indeed, one that the profit-seeking insurance company expects to clear with ease. As well, the death benefit usually expires at around age 75, making it no real death benefit at all. In fact, given that stocks have returned approximately 11% annually from 1926 through 2007, it isn't surprising that the death benefit is triggered very rarely, perhaps for less than 2% of all annuities sold - almost sounds like a lottery ticket set up doesn't it?
Bottom line here folks is you gain zilch by putting your IRA and 401(k) money into a variable annuity, but you give up plenty in the form of commissions, extra fees and investing flexibility.
Okay, okay you say, no more putting already tax-deferred money into an expensive, inflexible variable annuity. But surely these things are worthwhile for non-qualified chunks of money right? In most cases no. Why?
Because gains are taxed as ordinary income, which can run as high as 35% versus the current 15% on long-term capital gains. Remember, gains are tax-deferred not tax free, meaning you will eventually pay taxes on the high-commission, high-expense investment vehicle's earnings. And the different tax rate makes a huge difference in your after-tax returns. It may take 15 to 20 years for the benefits of the tax-deferred variable annuity to make up for the more onerous tax treatment. Of course, it will take even longer to come out break even when you factor in the higher expenses.
Still want an annuity for your non-qualified money? Fine, at least cut out the snake-oil salesman and go direct to a low-fee, variable annuity provider. You can buy a low-cost variable annuity from many mutual fund and insurance companies such as Jefferson National, Vanguard or T. Rowe Price. Already own a high cost variable annuity? No problem. Make a tax-free transfer (1035 exchange) to a low-fee annuity (but don't forget to check on your surrender charge first).
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