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Retirement Planning > Saving for Retirement

Why This Attorney Likes VAs

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Let’s connect the dots: Baby boomers are likely to run out of money in retirement. It is going to be a big surprise to them. Investors hate surprises.

Unhappy investors, particularly surprised and unhappy investors, run to their attorney’s office.

Out-of-money retirees do not have many alternatives at that stage, and the alternatives are all unpleasant: a) go back to work (if physically able and if firms other than big box stores will hire them); b) decrease spending dramatically; c) die; or d) sue their financial advisor who didn’t protect against this catastrophe.

Prediction: most times, they will choose d). In fact, they will file complaints and lawsuits in record numbers.

Now some advisors are thinking, “well, that is 10 years away, and the statute of limitations will save me.”

Think again. Earlier, the advisor’s chief legal counsel probably had a great idea–mandatory National Association of Securities Dealers arbitration on all new account forms. The legal counsel noted how this would put the advisor in a friendlier, less expensive forum than the county courthouse. Most advisors agreed, so they now regularly refuse to take on an investor unless the client gives up his/her rights to sue the advisor in a court of law.

The good news about that is that the advisor probably has saved some time and some money in arbitration.

But there’s bad news, too: arbitrators are unpredictable and have been known to completely ignore the statute of limitations, to the detriment of the firm. So advisors shouldn’t count on the statue of limitations to save their bacon.

To make matters more difficult, there is a great product that could help investors have a guaranteed income in retirement and allow them to have equities in their portfolio. This product gives retirees a steady stream of income they can never outlive. The problem is, many advisors are too scared to mention it, due to unwarranted bad press and misunderstandings.

The product is the variable annuity. There are at least 25 reasons why VAs are attractive from a litigation-prevention perspective. Here are just three:

1) Investors know their worst-case scenario the day they sign the paperwork. Granted, they will not know the best case on the day they send in a check; only time and the market will tell on that score. But they do know the worst. That means there are no surprises. And surprises are what drive unhappy investors to their attorney’s office.

2) It takes the fear out of the marketplace. Investors sleep better knowing they have a “safety net” in the portfolio so they can invest in equities, get market upside, and yet have downside protection.

Take this case, which happened to an advisor friend of mine: Husband retired and shortly thereafter the market tanked, cutting the couple’s retirement savings in half. This is the worst possible thing that could happen to any retiree because it is unlikely the retiree will have enough time to make it back. The agitated couple asked the advisor to referee a serious fight.

The husband wanted to put all the money into equities–the only way to get the nest egg back to acceptable levels, he said. The wife insisted on a bank certificate of deposit–too much stress with being in equities and taking further losses, she said. The advisor had a great suggestion to address both concerns: purchase a VA with a living benefit rider that would guarantee a certain income in retirement.

They did that. Later, they contacted the advisor and thanked him for saving their marriage. They told him they had become so angry and polarized over this issue, they had been ready to divorce. That was before the advisor provided them with a solution that pleased them both.

3) Advisors can use a word we all love, but can never say: guaranteed. They can say it because insurance, including VAs, offers contractual guarantees that are very important to clients.

Is a VA the perfect investment for everyone? No, of course not. It is a complicated product, and not right for everyone. The following cases are not good candidates and should be avoided:

The client is young and has a strong likelihood of needing the funds, incurring either tax or withdrawal penalties.

The client can take a great deal of risk and has no interest in insuring the portfolio.

The client doesn’t understand the product.

The VA investment, more than others, should be sold carefully, with lots of disclosure.

What can the sale do for financial advisors? VAs can help advisors sleep at night, because their clients have guaranteed income in retirement and there are no surprises. Speaking as an attorney for advisors, that’s good for me, too. I like my shut-eye as much as the next gal.


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