Thanks for the final update - so when the advisor told you that dividends were reinvested, do you think they just didn't understand their own product, or that they were lying to you?
I don't believe the FA had ill intent, honestly. After writing him a very detailed email explaining the difference between the price index and s&p total return index and including a couple charts showing a 19% "performance" gap over 5 years, he wrote back and conceded that the prospectus was indeed confusing in that it should be separated, one addressing "subaccounts" and one addressing these "indexes" and was humble enough to admit that he learned from this (obviously I cherry picked bogleheads responses in forming my explanation- thanks).
FA set up a conference call with me and Lincoln which I wrote back that I would not be taking and would like to move on from the product.
He then passed along my dividend diatribe to Lincoln to explain.
Here was Lincoln's response:
(Start of email)
"I can see where they’re coming from, especially given they’re used to total return index funds.
They’re definitely correct on comparing their historical upside and concluding the total return index has a high probability of returning more than the price return.
However, I would definitely say it comes down to the insurance side.
They could have definitely earned more, historically, in the index fund, but their Level Advantage index account would have lost a lot less during severe downturns like recently and in 2008. Taking this a step further, one could argue their account value could have been even higher if the downturns in their graphs were more limited by having some of their assets in Level Advantage. And even if the client is correct and the market rallies for the next 6 years, they can still capture a large portion of the S&P’s return while knowing they still have protection.
To (Lincoln's other sales rep)’s earlier point, if you were to use this product as a fixed income replacement, it would still allow you to have significant downside protection during downturns for equities and, despite not returning as much as the total return S&P, they can still get S&P-like returns instead of the returns bonds have been realizing over the past 10 years. As an example, the S&P 500 Price Return realized an 8.25% annualized return over the past 10 years whereas the Barclays US Agg Bond Index returned only 3.88% over the same timeframe. Even assuming the Price Return S&P, the returns were over double what intermediate bonds did."
(end of email response)
So, I've got to say, while we've been fixated on busting the product based on the (lack of) dividends as a price index vs total return index, the Lincoln guy does make a decent point. FIL would be getting s&p returns (sans dividends) with 20% downside protection and 150% upside. (10% downside/uncapped upside is also an option and I presented the 10%/uncapped originally, but FIL is more interested in 20%/150%) which would very likely exceed the return of most bond funds and help my FIL sleep easy and stay the course. It would allow him to capture a fair amount of the market upside, while protecting the downside at the expense of his dividends. While the likelihood of loss after 6 years is slim, black swan events can and do occur...
Truthfully, the FA is in a tough spot. My FIL lost his ass in 00 and 08 (being invested recklessly, using a different advisor) and can't stomach another bear market where he gets wiped out. He panicked on the way down (around the level where we are at right now) and went to cash. We all know part of the FA's job is to talk a client out of selling low- but at this point, he could re-enter the market at about a net zero (not counting dividends). One way or another, FIL needs to get back into the market but is a perma-bear and isn't convinced we wont re-test the lows, but obviously no one really knows what will actually happen in the coming months - with another wave, reinfections, companies going under, things not getting back to normal, yada yada all being possibilities. or the market could go straight up from here! If he gets talked into buying anything and the market turns south it's going to be a "I told you so" situation. If he buys this annuity now, and the market drops 20%, he will still sleep easy, knowing he hasn't lost a penny (vs being in cash) since he has the 20% downside buffer (and 150% upside cap).
My FIL is just a few years away from retirement and needs to protect his nestegg but would still like to grow his returns above what cash or straight bonds would yield. It may not be optimal, but for someone that is petrified of the market, he'd be looking at a 20% downside protection, 150% upside cap for a 6 year term, if it continued it's historical 8.25% annualized return over the 6 year period and offered a 20% downside protection (rather than doing 10% downside, uncapped upside) it seems like it could actually still be a viable option based on his behavioral proclivity toward getting out of the kitchen when the heat gets turned up knowing he is locked into this come hell or high water for 6 years due to expensive surrender fees. As an alternative, I've looked into the cost of buying protective puts 2 years out and it'll cost nearly 13%....imagine what 6 years of buying puts looks like..
Like I said, behavioral finance is in play here more so than just the numbers. Looking at a fund that was suggested, specifically Vanguard Wellesley, VWINX, the last 5 years its total return was 5.41%, 10 year 7.21%. The S&P price index has a greater historical return (8.25%) and this thing has that downside buffer which carries a lot of weight with him. While it's not for me, as the cost of that downside protection is the foregoing of total return due to lack of dividends- as i'm still in the accumulation phase and focused on maximum growth, I think my FIL could do a lot worse than this and if it fits the bill for him to help him stay the course for his remaining 6 working years instead of losing sleep over what the market is doing to do a day, a week, a month, a year down the road to his retirement...it's better than sitting on cash.
This would only represent about 5-7% of his total portfolio.
Last edited by TooLegit2Quit
on Sat Apr 25, 2020 1:04 am, edited 1 time in total.