Pete Winer is a man with a plan: he advocates the use of controversial equity-indexed annuities (EIAs) as part of a portfolio for retiree clients of his firm’s financial advisors. As VP of strategic development for Covenant Reliance Producers in Nashville, Winer works with Covenant’s 100 or so financial advisors across the country that specialize in advising retirees and pre-retirees with an average age of 65. Winer estimates that about 65% of client assets are generally in equity-indexed annuities balanced by mutual funds and other investments.
EIAs pay an interest rate linked to the performance of the stock market index, with a guaranteed minimum rate if held to maturity. Winer steers clear of variable annuities because he says they’re too expensive and carry “extraordinarily high fees,” which typically range from 3% to 5% per year. “Warren Buffett is calling for a decade of lower than normal market returns–[of] only 6%. If you are giving up 3% to fees, you are giving up 50% of the gain–and giving it up in down years, too,” Winer argues.
What’s the most important rule in investing? “Not losing money,” answers Winer, “and EIAs don’t lose money in a down market.” Winer recently penned a study entitled “A Comparison of Investment Strategies in Sideways Markets Cycles,” that shows had EIAs been available before 1982, they would have outperformed the stock market in previous “sideways” markets that lasted 25 years (1929-1953) and 17 years (1966-1982) respectively, and which we may be experiencing now. To view the study, go to www.eiainfo.com. To wit: a $100,000 deposit in a representative EIA in 1966 would have resulted in almost $203,000 in 1982 compared with $178,500 from the Dow Jones Industrial Average, including reinvestment of dividends, he claims, using EIA software from MCP Premium (www.MCPpremium.com).
“I recognize 90% of EIAs are linked to the S&P, not the Dow,” he says, but MCP Premium has no data on the S&P before 1960 for these purposes.
The Trouble With EIAs
In 2005, EIAs garnered inflows of more than $27 billion, mostly from retirees, Winer’s study notes. Their exponential growth in recent years has brought them a lot of attention–and a lot of criticism.
The problem securities regulators and others see with the product is that the stock market historically rises over time. So EIAs, without ever paying dividends, cannot keep pace with a total return of 11%, the average rate of return of the stock market per year, including a 2% dividend over long periods of time, notes Donald Moine, a financial services consultant who coaches advisors and Fortune 500 companies.