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Filed Under:Annuities, Fixed Indexed

The investment edge: Too happy blues

The other week was back-to-back with sponsored meetings. Combine that with online Webinars and teleconferences and one barely has time to do actual work.

Is the market decline proportionate to the number of sponsored activities for financial professionals to attend? If so, we are all in deep trouble, since as many reps leave the business for new, supposed greener pastures and companies change or discontinue investment offerings, there seem to be more and more meetings and Webinars.

As I survey the landscape, I see fewer companies competing in the investment annuity living benefit business. Prudential still offers an array of benefits, including a living benefit that compounds at 6% off the highest daily value (250 times yearly to hit a high-water mark). Prudential's portfolios are strategy-driven, with some weakness in individual sub-account offerings for portfolio nuts like me. I'm not saying Pru does not have good stuff, only that they could add some sub-account offerings for those of us who like to roll our own.

Jackson has either option -- one can focus on performance, with good living benefits, or on income later, with quarterly ratchets and pre-built models. It has a great lineup of investment choices, even including private equity and a novel, low-expense way to handle alternative investments.

Transamerica, alone, has improved its living benefits in the last few months. It now offers 12 step-ups yearly and a great lineup of sub-accounts. Lincoln Financial continues to offer its patented living benefit, providing tax advantages to the retiree (much like a single-premium immediate annuity does).

I have not reviewed AXA of late -- our wholesaler moved on -- but have to say that its living benefits, sold in the early 2000s, have worked superbly (my only AXA complaint is that it could use updating in its investment options). MetLife's living benefits also have worked nicely, as have Ohio National's. SunAmerica continues to offer its well-regarded MarketLock. Nationwide has an interesting and easy-to-explain living benefit, too.

Many of these companies offer superb death benefits. In the case of Genworth, for example, one may take a living benefit of, say, 5%, and the death benefit will stay equal to the initial deposit, so long as one does not use up all the money (Genworth has a mechanism to stop income if it will destroy the death benefit).

Disclosure: I love investment annuities. However, aren't we going to need a way to keep track of past and future living and death benefits? Will customer service departments be able to sort things out for customers who are 80 or 90 years old? For that matter, will things be sorted out for financial reps in the same age bands? Given the complexity of living and death benefits inside investment annuities, who is going to explain and administer them in the future?

All this can give one the blues. But blues with a tinge of happiness, since I see more focus on investment annuities in quality investments. This is tinged with the discomfort over some insurers and reinsurers micro-managing investment choices, a form of hedging. I've seen no evidence whatsoever that these company-driven portfolios have been better than advisor-driven alternatives. It's the Too Happy Blues.

Investing: U.S. and overseas

Back to the meetings -- at one, a speaker from Red Rock, a private equity firm, asked the audience this question: What is the percentage of people who are middle-class in China? No one had the answer. According to the speaker, a year ago, the answer was 2%. His point? The other 98% want big-screen TVs, washing machines and comfortable places to live. This desire is present in India and Indonesia and other places on the globe. People want to live the good life.

As I began to think about it, I realized that people no longer have to move to the United States to realize success and a good lifestyle. In fact, I can think of one person -- and I'm sure there are thousands more -- who moved from here to there. Jim Rogers, the great investor and former partner to George Soros, says this about his move from the U.S. to Malaysia: "Singapore speaks English and Chinese, (has) great education, great health care, (and) everything works ... it has been an extremely successful country, so it seems to be ideal." Mr. Rogers adds that 40 years ago, Singapore was a swamp, and now it's extremely successful, modern and beautiful. He wants his daughters to grow up speaking Mandarin and English. In other words, he wants his family to be where the present and future action is.

Smart investors realize that future growth may well be in China, Indonesia and India, as well as Brazil, and perhaps even in many countries in Eastern Europe. The U.S. may remain the financial engine of the world, but we have our future finance sector work cut out for us (we certainly made no friends overseas with the sub-prime debacle).

As to investing, where we might provide deep multi-national investing value (examples: IBM, Microsoft, Johnson & Johnson and Wal-Mart), dynamic sales growth is more likely to happen overseas than here. There are more people who want to move forward there than there are here (actually, there are simply more people there, period), which equates to more people buying more goods.

But have no fear that the U.S. has run out of business. We manufacture more than we think we do, forgetting autos for the moment, and we still innovate. Examples of U.S. creativity abound. The Oct. 5 edition of Forbes contains list of 20 "most promising" companies. Included: A company that can inexpensively (relative to other choices) tell you when and how your manufactured product, new or old, is likely to fail, a real boon to aviation; a company that makes microwaveable pastries with a nine-month shelf life; software to help commercial landlords manage utilities; and a portable machine that can disinfect up to 20 million gallons of water daily. The worldwide application for the portable water-sanitizer got me to thinking about all the people in the world who become diseased or die because of bad drinking water.

Businessmen and inventors innovate in the United States. Even inventors from overseas come here to initially manufacture, distribute and market. Processes that are incredibly difficult in other countries are fabulously easy here. The legal and financial systems here are without parallel in the world. Even in China, one's invention may be immediately copied and marketed, all without any royalties whatsoever. Ditto almost everywhere else. If you have something valuable and want to protect your rights, this is the place.

My theory is that, despite our bad schools (not all are bad -- many colleges and universities here are top international choices), people innovate, create and market here because they can -- the system allows for and encourages business and artistic creativity -- and because all of us have a degree of certainty that our rights will be protected.

For the investor, there's probably happiness to be had through multinational companies -- companies that don't just market here, but throughout the world. Nestl? is a Swiss company headquartered in Vevey, Switzerland and Wal-Mart is home-based in Bentonville, Ark., while both names are recognized throughout the world.

Wrong not to right-size

See why this is titled the "Too Happy Blues?" It's exciting and rocks to a good beat; however, there's a little sadness over the U.S.'s bad financial behavior. In lots of ways, we don't seem to "get" things.

For example, I just read a piece in our local paper about 529 plans and how they had been adopted by the wealthy, partially for tax advantages. OK, but have you wondered why we don't have a diversified plan for the parents in their 20s and 30s who could save, say, $20 monthly? If you want such a plan, you have to pony-up $50 per fund, and if you don't like age-based plans, you are stuck with minimums of $100 to $250 monthly, far beyond the ability of many new parents to pay.
I could pick 100 things. We have 529 plans, but they are screwy -- and here I blame the companies and states who offer them -- and not right-sized for the people who need them the most.

The economic whiz kids figured that we would save about $5 billion when the July numbers popped. We saved more than four times that much. See what I mean? I'm happy we are saving, and unhappy we are not buying, buying, buying. Get it? Too Happy Blues.

This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed.

Broker's Bookcase
Riches Among the Ruins -- Adventures in the Dark Corners of the Global Economy, by Robert P. Smith, with Peter Zheutlin (AMACOM, 2009). Wow! This is one fascinating book; it reads like an adventure story. Did you ever lose $15 million on a Russian currency bet? In one day? The author did. What did he do? He bought more of what got him into trouble. That is one thing that separates great traders from average traders: Belief in one's own instinct. Smith lost $15 million on one day in 1998, and made it all back, plus some, by 2001.

Not only is it a terrific book, but Smith and Zheutlin are great teachers. If your knowledge is a bit shallow about currency trading or even trading generally, you may find answers here without trying -- the authors are that good; one learns without realizing it and one learns with enjoyment.

It's Smith's story (Zheutlin is the professional writer half of the ticket), and he began his global life with the U.S. Agency for International Development (USAID) and as a foreign service officer, after graduating from Bowdoin and Boston University Law School. He spent time in Vietnam, and in many other hot spots.

Smith traded bonds in countries that were downright dangerous, some gripped with revolutionary fervor. He even became a market-maker in Guatemala, a country that, in 1983, didn't have a bond market.

In the pages of Riches, you will meet QAQA, a Rhodesian James Bond-like trader, mega-billionaire Vladimir Potanin, and other intriguing characters.

Where else can one find the adventure of Indiana Jones combined with the exotic practice of sovereign funds and bond trading? Enjoy!

Richard Hoe, CLU, ChFC, AEP, has been an investment professional for 40 years, and is a registered
representative and investment advisor representative. He is a member of the adjunct faculty at the California Institute of Finance, a graduate school at California Lutheran University. Readers may e-mail Richard Hoe at

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