Listen to Scott and Pat review a caller’s annuity and IRA account to evaluate whether the returns are what can be expected.
Scott Hanson: And let's talk with Dave. Dave, you're with Hanson McClain.
Caller: Hey, good morning gentlemen. How are you this morning?
Pat McClain: Excellent. How are you doing, Dave?
Caller: Good. I've got an IRA and an annuity. I got the annuity about 10 years or 11 years ago. I was not happy with the guy when I got it. He said "I approved it, but I don't remember it." In actuality, the annuity has done better in the last 11 years than my IRA.
Pat McClain: Okay.
Caller: Once in a while, I go out and just shop a little bit. Talk to some other brokers or some other analysts, I guess I should say. I do this to see how I'm doing, what their opinions are (on my portfolio). And the IRA has continued to grow at about 4% or 5% per year. One fellow recently said, "Dave, you should cash out that annuity because there's no penalties." I've had it, I think, 11 or 12 years. "Put that in your IRA and invest the whole thing in the stock market." So I thought, wow, that makes sense. But the IRA has consistently been an 8% to 10% growth annually where the IRA hasn't grown as much.
Pat McClain: Okay, so the annuity is consistently 8% to 10%. Tell me about the annuity a little bit. Is it a variable annuity, where you have sub-accounts that you get to select inside of it?
Caller: I don't do anything with it. I think it's through Prudential. When I get my statements, it's invested in several different products. And most of them are bonds and markets of that nature. I really know very little about it.
Pat McClain: Got it.
Caller: I wasn't happy because the agent that sold it to me made a big commission (which I found out later). He says I approved it but I don't remember it. I would have never of bought it. As it turned out, it hasn't worked out too bad.
Pat McClain: So let's talk a little bit about what you have going on here. One is you have what is called a variable annuity. And inside that variable annuity are a bunch of sub-accounts. Things like Reed mutual funds, and each mutual fund has its own objective. Some might be stock. Some might be bonds. Some might be international. Some might be growth. Some might be value. Those are sub-accounts in your variable annuity. And you can choose between those. THAT’S the variable annuity. Now, you also have the IRA. And inside of an IRA you can buy...
Scott Hanson: Just about anything.
Pat McClain: ...just about anything. The difference between the two is the cost associated with them. And the variable annuities typically are more expensive than a regular mutual fund. The difference in your returns has just been purely coincidental or luck, based upon those portfolios that were picked inside of the IRA and the annuity. And it doesn't sound like they're actively managed on either side which means no one's looked at them since the purchase. Would that be a fair statement?
Caller: That would be a fair statement. In fact, that's one of my concerns. The fellow that I'm currently with now, the analyst, really doesn't call me. I have to call him. Once in a while I still work. I now have to take minimum distributions because I'm over 70 and a half. But I'm still healthy, still working, and I have no plans to retire so...
Pat McClain: Does he make changes to the IRA? Is he actively managing it?
Caller: He does on my request.
Scott Hanson: Got it. Yeah.
Pat McClain: Dave, the answer to the question is actually you need to get another advisor. Because in the real world this IRA would be more advantageous than the annuity. You would want someone that actually looks at it on an ongoing basis and manages it on an ongoing basis.
Scott Hanson: So if the annuity provides no insurance benefits that are of any value to you, then the answer would be you should not be paying for an insurance (annuity) that you don't need, which is what you're doing. The right answer would be to combine those (investments) into an IRA. Get rid of that cost of insurance. The challenge you've got, you've got some sort of broker that is not actively managing your money, is not being proactive and is being more of an order taker. And so you're like this doesn't seem to be doing any better for me.
I think our advice would be, Dave, is to talk to some other financial advisors. Find someone who is a fee-based financial advisor, in other words, someone who is not going to earn a commission on a transaction, but rather is going to have their financial incentives aligned with yours. So as your account grows in value then their income would grow. You want that kind of alignment. All right? Appreciate the call.
Caller: This fellow is fee based. I'm paying a fixed fee, monthly fee.
Scott Hanson: Then you've got the wrong guy.
Pat McClain: You've got the wrong guy.
Scott Hanson: Yeah. You've got the wrong guy, Dave. Well it's not working out is it? Otherwise you wouldn't be calling us so anyway...
Scott Hanson: ...We got to run, Dave. Appreciate the call, Dave. Hope that was some helpful advice.