Transcript Edited For Clarity

Kevin: Hi this is Kevin.

Enpo: Hi Kevin this is Enpo calling on behalf of My Financial Coach for My Financial Coach – Live! How are you doing this evening?

Kevin: Fantastic! No complaints. You never have a bad day when you’re working, and you’re alive.

Enpo: All right well, hey Kevin. Thank you very much for hopping on the program as part of our desire to expand the knowledge of our listeners. We often times lean on our Subject Matter Experts for timely and important news in financial services. But, before we deep dive into the topic for today, why don’t you give a little bit of background about yourself and your firm?

Kevin: Yes, thanks. I appreciate also the opportunity to talk to everybody on this call and for your efforts as well making this all happen. I know you’ve done this for a while, so thanks again for your assistance, Enpo. I appreciate it. The bit about me, I’m originally from Florida. I was raised by a guy with one arm, so I have had this “can do” attitude since I have been a little kid. I’ve been in the industry of investment advising for probably over twelve years now. My firm is in Orange County, California. And, I’ve done this… you know, throughout different locations. Mostly down where I’m at now. Where we manage, you know, assets under management. We help clients put together written down income plans that show them where to safely put their money to grow it as soon as possible with as much opportunity for growth. We’re a full service firm, so we don’t just do one area, one thing in terms of financial services. We try to be more holistic, and see everything from a thirty thousand foot view, and really work with our clients to hone in on where they want to be in five or ten years. And then, you know, as a fiduciary firm, we don’t have any restrictions on where to guide a client. Nor do we have a set agenda. So, we are there are more to be that teammate with the clients, and show them all the options that are out there. And, all the pros and cons to them, and then together we can make a better informed decision, and create a future that meets what they’re going for. That’s our goal in the end is make sure they cannot outlive their money, and have a lifestyle they want to have. So, that is what we do.

Enpo: All right well Kevin thank you very much for that background about yourself and your firm. I think that the one of the things you mentioned was retirement. As you know, there’s certainly a lot of different laws that change all the time surrounding retirement. Contribution limits get changed from year to year. Recently, there has been a landmark change where there is now a new act that was not passed too long ago, called the secure act. It actually includes a lot of interesting provisions. One of the provisions is an inclusion of annuities inside of 401ks being allowed now. Before they were not allowed inside as one of the investment options. So, can you share with our listeners some of the pros and cons of this inclusion? And, share with us some thoughts on the annuities industry in general? Why many people seem to have a negative view of some of these products?

Kevin: Totally. It’s a great point to bring up is probably one of the major changes, or provisions in that act that you just brought up. So in short, why it’s so important in my opinion in seeing that there annuities now being allowed inside of a 401k plan is a lot of liability for employers. Before this act, the employers were held liable often times if they had investments in their 401k plans, where one of their employees lost money. It wasn’t properly fitting to what their ages were, etc. Then they would get sued. So, this act changed a lot so that. So now, they can actually put in to the 401k plans these annuities which have protection of principle and a lot of pros to them (and I’ll explain in a minute the pros and cons) but now they have these vehicle, these products, that lets employees put money in to this this vehicle without risk of loss of the principal due to stock market volatility that’s huge from a liability standpoint and from an employer. But also, I feel in general, annuities do you play a part inside of anybody’s retirement plan. Because if you think about it, our goal in retirement planning is not to lose principal. That’s the main thing. I think we all have that role. I think Warren Buffet said it best:
“There’s two rules for investing- first, don’t lose any money, and second rule is don’t forget rule number one.”… I’m paraphrasing that, but it is true in the world of planning. You want to make sure a percentage of your money isn’t at risk of a stock market crash. Very obviously why, but we all want to make sure we don’t lose our money, but we have to grow it safely above inflation. Not at the one percent you get a CD rate right now. You want to get it where it is growing safely above inflation, I’ll call it a forty six percent clip would be a good number. Annuities oftentimes can do that. They can actually give you the opportunity for growth without losing principal during the down years, which again is a target number one. So, now that 401k plans can hold these vehicles, I think it gives an investor or an employee an opportunity to really now be without nerves, without fear of losing a lot of their money because of the volatility that we’re seeing in the stock market. Now that’s there, I think a lot of employers are going to feel safer not being at risk of getting sued because of a crash that occurred like in 2008, where you know many folks lost thirty percent of their 401k values because they had no other options. All they could be in was mutual funds or cash. A lot of them didn’t even have cash as an option so now they can put them into these index annuities that can actually protect their principal and give it opportunity for growth which is the goal in the end of all investing. So that’s why I feel it’s good. The negatives of it which we hear negatives of course with anything in life. A lot of times, I will question the source of the article you may read on the internet where attacks a stock or mutual fund or annuities or life insurance. Whatever it may be. You wanna make sure the source is not biased or has an agenda behind it. As a fiduciary here, we look at all things and I have no agenda which ones I’m gonna promote more than something else. We want to make sure we’re giving facts that are unbiased and true. In annuities, the negatives are (what I would see in my opinion) the limits. There are limits to all annuities. Each one has different features to them, but in short… an annuity is going to have a cap. A limit to how much money you’re gonna be able to make per year. That of course is a negative, and it limits my growth as a negative but as I mentioned earlier, the positive with a lot of these annuities are that you don’t lose money in any down. You keep all the gains you made in earlier years if there were some, and you don’t lose money in the down years going forward. That’s a very big positive, but the part that balances it out is going to be the negative of well, if there is a good gain one year, you are not going to get all the gains. It’ll vary per contract and carrier but I’ll just say 50% just keep it simple. So, we make a stock market gain, in the S& P 500 of ten percent. We’re gonna get about five percent returns in our annuity. Not that bad when you consider you took zero risks to get it. So that’s a big thing to understand: the risk you’re taking to get what rewards? At which interest rate? So, those are the two biggest factors I see in most annuities.There are of course fees like any account. A lot of times what I’m seeing, the fees are pretty similar to what I would see in a mutual fund fee. A lot of those fees can range from 0.8% to 1% percent in terms of internal fees in an annuity. And that’s still much of what I see in many mutual funds. So those are just kind of common in the world investing everything has got fees for the most part. That’s how you are paying it, and one of the benefits for the fees so, that’s kind of a quick summary that is to help a little bit there?

Enpo: Yeah, I think that you definitely covered a lot of the concerns that most individuals may have about annuities. Would you say that part of the reason why annuities have been so negatively criticized in the past have been some of the compensation models? Or perhaps some of the ways that they were originally structured? As you know indexed annuities are a relatively new product and when most people think about annuities, they are thinking about something more with an interest rate attached to it. Or, perhaps something that is more immediate that pays out over time for example similar to a pension: how you would choose a life option or a period that it will pay out for a certain time. And then afterwards, if you pass away, then the annuity goes away which is what most people think about when they think of pensions.

Kevin: Yeah. That’s a good point to bring up. We know the world changes and annuities change with the needs and wants of consumers so the articles or things I’ve heard of in the past were… which were negative as you brought up, that have giving them a bad rap (again, them meaning the annuities of the past ) is a fact of once you get your income for life started which is one of the benefits of annuities, is they provide you with a lifetime income for whenever you activate it. And that’s the nice thing, that you’re gonna have a guaranteed income stream for life when that occurs, but the old annuities, -the negative part- was they would have a feature where, if you died… let’s just say you have a five hundred thousand in your annuity, live five more years and only withdrew a hundred fifty thousand, well that means you had three hundred fifty thousand leftover. Well, in the old annuities, the insurance company, the annuity company will keep that difference, and that’s obviously not a fun thing to have happen nor does many families want to see that occur with their inheritance. So, that’s now and for the most part does not exist for almost all carriers I’ve seen. Meaning, if you do die in my example you’ll have five hundred thousand in your annuity, you only withdrew a hundred and fifty thousand, and you passed away… well, the difference that’s left over that you did not take out… that goes to your beneficiaries, not insurance carriers. So, they pretty much gone away with that really bad rap. The fact that I just mentioned that a lot of the older annuities had that feature where they would keep the difference. Not anymore, it does not exist. So that’s a really important factor to know. The other thing I’d say is negative they were bringing up that you may hear about is the withdrawal rates, or how much you can take out per year without a surrender charge. You know, that can be a factor if you’re trying to pull out you know a large sum of your money from an annuity to buy a house. Well then, that probably is in the best vehicle for your money if you’re going to buy this house within you know ten years or whatever the surrender charge goes away. So, you don’t want to put everything in, obviously, one bucket anyhow. But, they limit you from most parts to about ten percent a year. Most of the companies that you can take out of your annuity without any fees or penalties I should say. And that’s, you know again a deterrent. It isn’t a prevention. Doesn’t mean you can’t access your money if you had to for an emergency. If you do access more than 10% in most cases, there’s a slight surrender charge based on the year that you took it out. It could be around 5% or 4% based on the year that you did it. So it isn’t, again – they don’t lock your money up. It isn’t taken away from you. If you had to get it, you can pull it out, there’s a slight slap on the wrist kind of like a CD. If you close the CD early, you’re gonna get a charge. They will dng you on some interest if you take it out early. That is very much like an annuity. So they use this as a deterrent, not as a prevention from accessing your money. But again, you’re looking at pros and cons. Do the pros (protecting your principal during down stock market years with the opportunity to grow it during the good years) outweigh the negatives of “okay, they limit you to 10% a year” which in my opinion, if you’re in an IRA, anyhow that’s probably what you want to do no matter what. Nobody wants to bring out or take out a lot of money from their IRA in a tax year because that usually brings you up to a higher tax rate. So, why do that? You want to use an IRA or 401K. vehicle to pull out small chunks per year till the day you die. That’s ideally what you can do to keep yourself in as low as a tax bracket as possible let your money grow, compound and grow… without it being tax every year. That’s a positive, so that’s kind of I’m hearing about, and what I see your people asking us in questions, and the negatives but at least it’s explained in simple terms. Does that help?

Enpo: Yeah, I think I think of that definitely is a good point. As you know, there are plenty of reputable companies in the past that have – in general – negative views. In fact, there is one national company that I think of that has alleged in the past that there may be a conflict of interest for those individuals who sell annuities. In fact, I believe their tagline is “When you do better, we do better.” insinuating that people that sell annuities don’t care how well you do. So, what would your response to that allegation be?

Kevin: Well, you want to get the facts. I think I know the other company that you’re mentioning without saying the name of them. Also, I did a lot of research into that and they found out that actual company does sell more annuities than most companies out there. Most financial firms. So, they use this as a tactic to get folks to call in to see, you know, what it is about…. the current consumer may have bought an annuity last year or 5 years ago… and they want to know is their annuity bad. Well most times in a row, a marketing ploy is being done. They’re gonna say “Well, Mr. client, your annuities are bad, but better ones at these.” So a lot of times, that’s what I found that happens. Again, what’s the agenda behind the message? So, you want to find a person or company that doesn’t have that agenda, that doesn’t say one message over another. I’m never gonna say to anybody “All stocks are bad or being the stock market is bad.” As much as I know it’s volatile, I think there’s definitely a need in a percentage of anybody’s portfolio that should be in equities. But, I will never say that “annuities are all bad”, or “should never be touched”. There’s a piece for everything. You want to have a full rounded portfolio. When I say “diversified portfolio” or “rounded portfolio”,that doesn’t mean that you have a hundred stocks. That does not mean that you’re diversified. If i’m all in equities when the market crashes, 9 out of 10 of the stocks are probably all going to be down. That doesn’t mean that you are diversified. You want to be in separate asset classes – such as of course: real estate, equities, bonds, annuities, alternate investments (precious metals). There is a lot of different things that a person can look at to make sure you’re diversified in non correlated holdings. All your stocks, everything in the stock market to me isn’t proper diversification. Any company that says “all annuities are bad, I would never touch annuities.” I would look behind the screen, look behind the red curtain. See what is really going on because it is inaccurate that’s not a logical solution to anything to me in my opinion, especially being a fiduciary, I have to look at all classes of all assets and give the pros and cons each one of them. Not just, say, so I can sell you my mutual fund portfolio, that all annuities are bad. How does that help the consumer? It doesn’t. There is a lot more to that story that can probably get into in the ten minute call today, but that’s the short version of that answer.

Enpo: All right. Well Kevin, thank you so much for hopping on the line with us here at My Financial Coach – Live! We hope that our listeners at home have enjoyed this conversation and we look forward to hearing good things from you soon Kevin.

Kevin: Thanks a lot. I appreciate your time, Enpo.