I would like to add my comments to the letter “ The Most Misunderstood Investments .” Those extra fees associated with variable annuities are used to pay the investment adviser—me. When I recommend an annuity to my clients, I can easily show how it is actually less expensive for them to invest through an annuity than in the alternatives. For example, paying a 1.25% variable annuity fee is lower than the 1.5% I would have to charge them in a managed account.
Variable annuities also can be less expensive than using loaded mutual funds where the upfront fee can be more than 5%. Part of my job as an adviser is to continually track the performance of the underlying fund managers I select for my clients. When the manager leaves or the environment changes, I move my clients’ money to another manager within the annuity. If the client were in a loaded fund, each change would cost them another fee. Within an annuity, I can make changes without any charge to my clients. After all, it is not a matter of if a change will be required within the account, but when.
I rebalance my clients’ portfolios on a quarterly basis back to the appropriate allocation. Rebalancing has historically enhanced performance. If I use loaded funds outside a managed account, the rebalancing will be expensive for the client and an administrative nightmare. Within a managed account (that is nonqualified) the rebalancing would only lead to income tax implications. However, under a variable annuity the rebalancing can be set up to occur automatically and is tax-deferred and without charge.
Finally, on top of all the above benefits, if my client should die during a down market, his or her beneficiaries would typically receive at least what was originally invested, if not more, under an annual step-up feature. This “death benefit” is very valuable to many clients and simply comes along with the package.
Carole-Lynn Saros, CPA
CS Financial Services LLC
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