Much of the financial services industry connects to consumers through what we used to think of as the Brokerage Companies. Think Morgan Stanley, Smith Barney, Merrill Lynch, etc. Many of them are gone, absorbed by other companies that somehow managed to survive.

Another part of the industry is comprised of insurance companies, and you know they come in all sizes and shapes and reasons for existence. Sometimes these two parts of the financial services industry overlap and in the minds of consumers, confusion typicially reigns.

Meanwhile, there are independend financial advisors like myself who have developed a good reputation in the community, who have clients that gravitated to us over the years, and with whom we have a trusted relationship.

A number of years ago, the insurance industry created a product designed specifically to provide safe, predictable and guaranteed income from a portion of a retiree’s portfolio. It was/is designed to do this while providing a sense of security and low stress. The industry calls this product The Variable Annuity, but it falls far short of its goal, yet continues to be the primary solution ‘sold’ to the clients of the aforementioned sales outlets.

Its Guaranteed Income Rider gives the investor a false sense of safety to an otherwise volatile investment in the market…by its very nature it takes away potential growth and adds additional costs to an investment portfolio while leaving much of the volatility and uncertainty in place.

In contrast, there is another product which is largely pooh-poohed by the same sales outlets. It’s called a Fixed Annuity. In a client’s portfolio, it provides tax favored income and growth with safety and predictability. However, your comfort with a contract like this depends on several assumptions, few of which you can control.

Many retirement portfolios were designed to operate effectively on 4% distributions but are struggling to stay above water. They all face varying degrees of risk in anticipation of the next market downturn. A couple of years ago, we were offering products that still credit 5% and 6% returns and those clients that purchased them are enjoying incredible value today as opposed to their friends and neighbors who are sitting on 1% money.

Many planners’ answer to this situation is to use Variable Annuities with Guaranteed Income riders. But what they are really accomplishing is to reduce the return potential of the underlying portfolio due to the required ultra conservative investment mix; then to further reduce it by the expense of the mortality and administration charges and the cost of the benefit riders. The result is that the clients’ true potential return over time is less than 5% while they still endure the exposure to account value losses due to the volatility of the market.

My solution is to combine a Fixed Annuity with guarantees so you cannot run out of income if you live too long, with a solid investment portfolio. One that over the past five plus years (including 2008 and 2009) has averaged almost 15% per year, net of all fees. Have your investments done this well recently?

Call or email our office to better understand what we are talking about.