Variable Annuities can be Costly

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Back in the 90’s I sold a lot of variable annuities. I worked for a large financial services company that strongly encouraged the use of variable annuities and there were some advantages. For one, it was a great way to gain access to multiple investment companies within a single platform. As a new rep starting from scratch, I could broadly diversify a relatively small sum or monthly investment without the complex and costly use of a clearing firm.

When the dot com bubble burst in 2000, I had reason to believe the broad diversification among top money managers within my firms product would sustain itself relatively well. Unfortunately, my analysis over the course of that first recession of my career revealed dismal performance.

Why? I came up with two reasons. My first conclusion has more to do with active retail money management so I will address it separately at some point. The second and more crucial reason for the poor performance had to do with cost.

The poor performance had been there all along but we couldn’t see it due to the eye-popping high returns nearly everyone was experiencing during ’90’s. It was easy to assume any underperformance compared to the market was due to lower risk premiums. Once the market went negative, we could see the poor performance more clearly and identify the cause.

A well diversified portfolio is expected to shave off the highs AND lows due to reduced risk compared to the market. Since the variable annuities experienced a reduction in return in both up and down markets I concluded it was at least partly due to the high costs within the product.

I learned a hard lesson that year. With my new knowledge about the importance of costs and other key investment performance factors, I founded a new practice. No longer working for a financial services company, I was able to commit fully to providing investments and advice that were in the best interests of my clients.

It would have been much easier for me to continue working for the financial services industry. The industry paid me very well, treated me fairly, and provided ample resources. Integrity has cost me a relatively easy living but it has benefits as well.

Today I work in the same community as I have lived for many years. My kids have grown up alongside many of my clients children. I serve on boards, worship, and spend my leisure time with and in the presence of those I serve. It’s very satisfying to know my practice is a contributing factor to their success. Making a difference sometimes means owning up to missteps and always requires a lot of hard work at the margins, but to me it’s worth the effort.

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