Jack Marrion

My car was in the shop and my wife was nice enough to say she’d pick me up at the airport. After waiting 20 minutes, she called to say she was having car problems but had managed to park in a strip center at Colony Road and the Sam Rayburn Tollway. I told her I’d grab a cab and meet her.

I got into the airport cab and the cab took off. The driver asked for the address and I told him just to head east on the tollway and I’d tell him when to turn. This got him rather agitated and he asked again for the address while stabbing his GPS keyboard. I told him we’d exit north on Colony Road. This didn’t work for him. He said he had to have an address. I called back my wife and she said the number on the business was 5466. The driver stabbed some more and said GPS didn’t have that. I called back and asked my wife for the name of the business. She told me and I relayed this to driver who was spending most of his time swerving back and forth on the turnpike as he entered various names into his GPS. 

A few miles later, but far from my destination, he takes an early exit and drives south. I ask him where he’s going. He says his GPS says the business is six miles south. I tell him to turn around because he’s going the wrong way. He argues his GPS says to go south. I told him to stop the cab. I paid my fare and walked to the nearest gas station.

I asked the attendant if he had the number for a local cab company. He did and I called it. I told the dispatcher I was at the gas station at the South Josey Road tollway exit. He asked for the address. I said it’s the only gas station at the intersection. He said he knew where it was, but their GPS system needed an address to send the cab to; the attendant didn’t know the address. I hung up and called a neighbor who arrived with a sense of humor and a ride to get me to my wife.

This is the same neighbor that was kind enough to let me use his address for arriving packages. Two years ago the McKinney Post Office erased our home. They had switched to a new software program and didn’t enter the house address of seventeen years. I discovered this when I noticed no mail or packages were being delivered. I contacted the Post Office and they said there was nothing they could do. I contacted my Congressman and after a year of pushing he was able to get the Post Office to correct their error and I started to get mail delivered to the house again, but there are still some GPS programs that show an error message when I use my address.   

There are hundreds of stories of bad addresses that have people following their GPS into lakes and even into the wrong country. In some instances, the employer won’t permit the employee to use their common sense and dictates that GPS must always be followed. However, many people voluntarily surrender their common sense and robotically obey computer devices that were intended to aid human decisions—not replace them. As for me, I’ll keep a map in the glovebox and try to avoid cabs. 

By your observation, what products are generating the most interest (and sales) from producers?

Marrion
Although variable annuities still lead sales, according to Beacon Research reports, the annuities I’m hearing the most buzz about are structured variable annuities, also called registered index annuities or buffered annuities. In the agent channel fixed index annuities (FIAs) continue to lead.

Lane
For the past several months, MGYAs have continued to dominate Fairlane’s fixed sales, due to the significant increase in guaranteed rates. Our sales have tripled in MYGAs over last year. Indexed annuities with first year premium bonuses remain strong with a slight increase over last year, due in part to additional carriers raising their caps and spreads to buy market share.

What markets (age, affinity, affluence, life stage, etc.) are showing significant interest in annuities? Are any previously reluctant segments showing increased interest?

Marrion
Studies continue to show the primary candidates for deferred annuities are those ages 55 to 65 with a quarter million to a million in assets, and for immediate annuities the primary buyers are those in their mid 60s. New white papers show that millennials are generally more attracted to the income guarantees of annuities than older age groups, but this attraction has not yet translated into meaningful sales.

Lane
Our Programming and IT departments develop phenomenal reports for management that give us a good handle on what’s happening in the field. These reports show which producers are selling certain products and to whom they are selling (clients’ ages, zip codes, etc.).

We can glean from this data that Fairlane’s MYGA sales for 2018 are being purchased by seniors with an average age of 69. Last year the average age was 64. The average annuity purchase this year is $67,000, compared to last year’s sale of $58,000.

It’s hard to discern whether affluence plays into the sale, but our feeling is this age group and older consumers had been waiting on the sideline for rates to increase. Their CD and money markets are less attractive and MYGAs offer the “sacred” rate guarantees that they covet.

Equity markets that have been a mainstay for many seniors are being challenged by today’s higher interest rates and global corrections. Our data shows more seniors are purchasing fixed products with shorter surrenders (3-5 years). Yesteryear’s reluctance to fixed annuities is vanishing. Higher, guaranteed rates are very forgiving.

What answers can producers offer to offset consumer concerns about surrender charges and/or lack of liquidity in a still relatively low interest rate environment?

Marrion
Unless the carrier is in receivership there is almost never a lack of liquidity with deferred annuities, but there usually is a cost of liquidity; a surrender charge. Agents need to get the consumer to look at the big question which is, “Looking at all of your assets will there likely be a need to surrender the annuity?” If the consumer understands they probably won’t need the cash in the near-term, the surrender charge becomes less of an issue. The consumer also needs to look at the opportunity cost of not buying the annuity. Putting $100,000 into a two percent money market produces $8,243 in four years. Putting the same amount in a fixed index annuity with a five percent cap can credit $10,250 even if the FIA records zeroes half of the time and $15,762 if the cap is hit in three of the four years.

Lane
The answer to surrender charges is simple. The insurance carrier has to invest the annuity owners’ monies into matching duration assets. This guarantees that the carrier can pay the annuity owner the promised account value at the end of the surrender period. If the annuity owner wants/needs their monies prior to the stipulated surrender period, in theory, the carrier must liquidate the investment asset early and would lose future gains. Hence, they pass this loss to the owner in the form of a surrender charge.

The consumer can equate the surrender charge to their CD. If they liquidated their CD early, usually the accrued interest is lost but they would have their principal. We have “return of premium” annuities too, but rates aren’t as attractive. Recently, the low interest rate environment has received a shot-in-the-arm from the Fed.

The liquidity factor should be discussed and exposed. The carriers assume the consumer has been apprised of the annual withdrawal options by their agent as part of the presentation and application process. We have carriers that offer an accumulated (50 percent) withdrawal during the surrender period.

Living benefit riders continue to appeal to producers and clients.  What has been your experience with these and other lifetime benefit options?

Marrion
The variable annuity world has done a better job in positioning lifetime income riders as income tools; independent agents tend to focus on the roll-up rate. The big story here is not “you can earn a six percent roll-up rate” but “you will receive $12,000 a year at retirement guaranteed for life and you keep control of the asset.”

Lane
GLWB riders continue to be popular amidst rising rates. We’re selling indexed annuities that will offer the highest payout to the client to help them set a floor for their retirement. They like the peace of mind that they can’t outlive that money and the rider fee is insignificant to those who understand this benefit. Laddering these indexed annuities is a popular strategy that can create payment streams at different times and protect against inflation.

Those concerned with liquidity for long term care can achieve peace of mind with living benefit riders. Clients can access up to 100 percent of their money in the event of confinement in a nursing home or terminal illness. The aforementioned GLWB riders may double your payment for a period of time to provide extra money for long term care costs as well. These riders, coupled with rising rates, are driving annuity sales as a supplement, or alternative, to traditional long term care policies.

With interest rates edging up, what is your forecast for the annuity business through 2019? What current product types might see an upswing and what, if any, innovation might be on the horizon?

Marrion
All annuity sales will increase from now through 2019. Rising rates means multi-year annuities should maintain a competitive advantage over most bank savings vehicles and increasing stock market uncertainty leading to a bear market will especially encourage the purchase of fixed index annuities and structured variable annuities. There will be incremental changes in annuity products, but no true innovations.

Lane
If higher rates continue into 2019, this will be the bellwether consumers respond to. Fixed indexed annuities with first year bonuses will be in vogue too. The MYGA arena has exploded during the last several months due to higher rate offers like 4.10 percent guaranteed for seven years. Look for new fixed products next year with enhanced death benefit riders available.

Some carriers are reintroducing long term care riders, but producers haven’t seen a renewed interest. The older clients that want the riders find it too expensive. Perhaps somewhere down the road we’ll find a happy medium in benefit vs. costs. Stay Tuned! 

Rolling a die and betting it comes up with a two on top creates an 83 percent risk that we’ll be wrong—the risk is knowable and can be predicted and quantified. What is the risk that we’ll run out of money early by withdrawing three percent or four percent or five percent from our investment portfolio? Although this is a risk, what we are really talking about is uncertainty, since too many of the variables—such as living too long or earning too little—cannot be accurately predicted.

Wall Street pretends there is no uncertainty, but instead quantifiable risk, by creating models and then proclaiming that there is a “78 percent probability that their model will perform.” However, the reality is there is neither a 78 percent probability that their model will be right nor a 22 percent risk that it will be wrong due to model uncertainty.  This uncertainty takes three forms: The first is that the parts used in building the model are subjective and art rather than science (the composition of the investment portfolio, inflation rate, past period used, longevity); the second is assuming that, even if we got all the parts correct, that the performance and economic forces of the past will repeat; and the third is assuming that people will act like the model requires—a supposition that is routinely contradicted by real life behavior.  

Wall Street’s models have gotten better—Monte Carlo models are better than simply using average performance because they show the range of returns—but every one of them suffers from model uncertainty.  Of these, the primary flaw is using a static past to predict the future. In broad terms the past is useful…markets go up and down…but the past is largely useless in predicting specific periods. As a small example: The market of the ‘80s and ‘90s did not reflect what has happened so far in this millennium, and a retiree relying on a Monte Carlo model from that period could be in serious trouble today due to sequence of return risk and lower overall returns. These models could be improved if Bayesian statistics were more commonly used, since Bayes tries to incorporate current changes and new assumptions into old data, but I have not found Bayesian statistics commonly utilized by Wall Street advisors. 

Of course, a way to avoid this type of retirement uncertainty is to simply purchase an annuity with a guaranteed lifetime income benefit. If a $30,000 a year inflation adjusted retirement income is desired, today’s Wall Streeter usually says you need $1 million. However, at age 66 you can also get an inflation-adjusting $30,000 initial income for $634,000 with an immediate annuity (go2income.com). Or, if you have a bit of time, a guaranteed lifetime increasing-income withdrawal benefit can get you that $30,000 for quite a bit less than $1 million and you retain access to the balance.

Buying a life-income annuity for retirement does not completely get rid of general uncertainty, because there is the possibility of carrier failure (notwithstanding the promises of state guaranty associations), but it does eliminate almost all of the model uncertainty that taints Wall Street investment-based models. Buying an annuity is rolling a pair of dice with a two on every side. 

Many years ago a study claimed that New York heroin addicts were stealing $4 billion of private property per year. This caused a big outcry and a demand for more police. When someone asked how that number was derived, the study authors said that the average addict spent $30 a day on heroin and that there were 100,000 addicts; which added up to $1.1 billion. And since stolen property can only be fenced for a quarter of its value that means at least $4 billion of property was originally stolen. The police departments began a hiring spree based on the crime wave trumpeted in the media. 

The authors were then finally asked, “How do you account for the fact that only $200 million in stolen property is reported to police and insurance companies each year?” The claim that there was a $4 billion addict crime wave quickly faded from the news. The magical $4 billion number was created by bad extrapolation based on flawed assumptions. 

The main reason there are no longer Saturday morning cartoons is because a quarter century ago Texas Congressman John Wiley Bryant wanted children watching more educational programs on TV. By the time regulators had stopped fiddling with the Children’s Television Act it had become so onerous that networks simply blocked out their least profitable time slot with the lowest cost content. The result: Educational programming that few children watch and Bugs Bunny is now homeless. 

In 2007 the State of Washington said employers could no longer look at job applicant credit scores as a hiring criterion because they said it discriminated against African-Americans and the young in general. The result? Companies simply hired fewer of each group to lower the risk of getting an employee with a low credit score.

 In 2015 the Department of Labor published changes to the definitions of what is a fiduciary, saying that commission-based practitioners were abusing consumers and that this abuse was costing consumers $17 billion per year. Both of these claims were headlined by the press in story after story. However, the $17 billion was a made-up magical number created by extrapolating the investment performance of a group of employees at one college where the only choices were do-it-yourself or use a broker (http://www.nber.org/papers/w18158). In addition, not only didn’t any of the independent studies listed by the department conclude that a fiduciary-only standard was better or that consumers were being harmed by the current regulatory system, even the DOL’s Phyllis Borzi was forced to admit that “none of this research evidence necessarily demonstrates abuse.”*

What were the unintended consequences of the DOL’s actions? Many financial advisory firms and broker/dealers raised their minimum account size and this worked to deny financial services to the lower net worth clients the DOL was trying to protect, and a few providers that catered to the middle class got completely out of certain businesses with fiduciary risk altogether. The ultimate result was less professional advice available to the part of the public that most needed it, and the shifting of hundreds of millions of dollars—money that would have ultimately gone to consumers—into attempting to comply with a flawed rule.

Many of the rules passed in every area of life by politicians and regulators are hastily conceived reactions to the outrage du jour and possible consequences are almost never examined. One of the reasons for the lack of analysis is that by the time a proposal gets close to a vote or implementation there is a steamroller effect going on that paves over any opposition. However, bad rules can often be modified or kept from surfacing if action is taken early on—when the proposed law is still in committee or when the regulation is being created. At the first sign of danger our elected officials need to be made aware of possible results that they are not yet seeing.

The reality is that the agent in the field does not have the time to keep on top of all this, which is why membership in industry organizations is so important. By supporting the National Association of Insurance and Financial Advisors, National Association for Fixed Annuities, National Association of Professional Insurance Agents, Society of Financial Service Professionals and others, agents have someone working for them that can explain to politicians about the law of unintended consequences.

* Testimony of Phyllis C. Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration Before the House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor, and Pensions. 26 July 2011  http://www.dol.gov/ebsa/pdf/ty072611.pdf.

As a boy I collected postage stamps. My collection had U.S. unused stamps going back to the 1920s and plate blocks (attached groups of four or more stamps) covering the years from 1965 to 1975. Kids and adults collected things such as coins, comic books and stamps. You collected mainly for the satisfaction of collecting; but there was also a monetary aspect. Back in 1975 the Scott Catalogue said the suggested value of my collection was supposedly four times greater than the postage value and the value was going up.

My thought was I would pass along my stamp collection to my children, but neither had any interest. I tried to give it away to various nieces and nephews, but there was no interest. As a final resort, I looked at selling my collection on eBay or a similar site and discovered that unused stamps were selling for forty to eighty percent of the postage value.

I was not too surprised when I saw the value of the stamps had dropped. The newer generations dont collect stamps so the demand is down. In checking around the same thing happened to coins, comic books, baseball cards and Hummel figurines.

In spite of all this the price of one bitcoin exploded to nearly $20,000 a few months ago. As I write this it is valued at $9000. But what is it really worth? According to two experts about $20.

A pair of economists decided to value bitcoin based on the time honored formula of P=MV/Q which translates to Price of currency equals Money circulating times Velocity (times it changes hands) divided by what it has actually bought.* By their equation a bitcoin is worth $20, so it is presently 450 times overvalued. However, to traders using a platform like bitcoin revolution test or similar, this valuation could be a good thing as they try to increase their Bitcoin portfolio at lower prices in attempts to sell as the value increases over time.

After this evaluation, another economist thought the first pair were underestimating the use (velocity) of bitcoins in the hands of drug dealers and other criminals and came up with a value of $600 for each bitcoin. But these are the valuations of economists. The actual value of a bitcoin remains unknown, however, this doesn’t stop millions of people investing in the online currency. Essentially this means that judging the value of Bitcoin can be confusing, so if you are going to be using this cryptocurrency make sure you have a rough idea of what exactly you are doing. Correspondingly, you may want to check out websites like Bitcoin Loophole to gain more information on this, so you are aware.

Bitcoin can actually be traded and even spent on some websites like Amazon. Many users look to websites like cryptoevent.io to recommend reliable trading sites where people can trade their bitcoins automatically without hassle, in order to generate a profit. In recent years, cryptocurrency trading platforms have soared in popularity with more and more people choosing to trade Bitcoin in line with market trends. You can find further Bitcoin trading resources on the bitcointrader website. Above all doing plenty of research is crucial if you want to make a profit from trading Bitcoin.

I used to enjoy winter nights looking at the stamps in my stamp collection, just as comic book collectors enjoyed reading the stories and numismatists marveled over the history associated with their coins.

Reference:

* 23 April 2018. Lionel Laurent. The true value of bitcoin. Bloomberg Businessweek. p.29-31