074 Kerry Pechter: Bermuda Triangle Retirement Zone

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welcome to fun with annuities with your

0:06
host me stan the annuity man america's

0:09
annuity agent can annuities be fun can

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contractual guarantees be fun

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absolutely they can find out the brutal

0:17
facts about annuities with no sales

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pitches or high pressure nonsense just

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the brutal and factual annuity truth

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which is all you need to hear

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let's have some fun with annuities and

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let's have that fun start right now

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[Music]

0:39
welcome to fun with annuities the number

0:41
one annuity podcast on the planet i'm

0:43
your host stan the annuity man america's

0:45
annuity agent licensed in all 50 states

0:47
as you know

0:48
with the podcast

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fund with annuities are saying is living

0:52
the reality not the dream

0:54
and you can find us on all major podcast

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platforms we also have a fun with

0:58
annuities youtube channel if you want to

1:01
see me and the guest interact it's kind

1:03
of fun um and also have a a standing

1:06
nudey man youtube channel which is

1:08
has over 400 informative youtube videos

1:12
for the consumer so without further ado

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let me introduce

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our guest today i'm so happy that he is

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here his name is carrie pector he's the

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editor and founder of retirement income

1:22
journal um

1:24
it it reaches around

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way over 7 000 readers each week and

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recently celebrated its 600th issue

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which is fantastic and he uh he he

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designed he he

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launched this in 2009 and really to just

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to create

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kind of a digital only

1:41
subscription-based publication

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um that is not biased whatsoever he is a

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very smart guy which is the reason he's

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on he has authored a book you might

1:52
already have it's called annuities for

1:54
dummies and he's also written two other

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non-fiction books so we we share that

1:58
we're both writers

2:00
he's been an editor for annuity market

2:02
news he's written for vanguard's

2:04
individual annuity marketing department

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his articles have appeared in every

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major publication from the new york

2:10
times wall street journal

2:12
los angeles times anybody anywhere that

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that uh that smart people are reading

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about financial stuff and especially the

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retirement income category he's there

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fun fact about him he's the graduate of

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kenyon college in gambia ohio and if you

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don't know this and this is a fun fact

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in my my team research this

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kenyan college

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has 60 national titles in athletics

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which ranks them fourth behind stanford

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ucla and southern cal so a division

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three juggernaut athletically kenyan

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college he studied creative writing

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there uh he and um

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and other in fact he studied creative

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writing on a teaching fellowship at

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indiana university but i'm assuming he

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did the same type of studies at kenyon

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um he didn't list that what he what he

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got his major in

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uh at kenyon but i love the kenyan

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college story without further ado

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welcome to fun with annuities carrie

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pector

3:15
hi stan it's great to uh

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you're an old friend and i know we share

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a lot of the same perspectives about

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annuities and retirement income

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we sure do i think i stunned you with

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the kenyan college facts though that's

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pretty cool

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[Laughter]

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let's jump right in um recently and i

3:32
read carrie's weekly um it comes out

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every thursday and every time it hits my

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my email i stop what i'm doing i see

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what he's trying to what he's saying and

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what he's trying to get across to his

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readers

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it's very heady stuff and recently um on

3:46
his july 1st

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uh

3:48
publication and from that i've chased

3:50
him down you got to get on my podcast

3:52
he had an article called the insider's

3:55
take

3:56
on the bermuda triangle strategy and

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hang in there with me because this is

4:02
interesting i'm going to read

4:04
from the first three paragraphs from his

4:07
article and then from there we're going

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to dig in so let me do that and hang in

4:11
there with me because this is important

4:13
and it will be the foundation for this

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conversation from kerry first paragraph

4:18
the fed's low interest rate policy over

4:20
the past decade has pinched the oxygen

4:23
supply of u.s life and annuity companies

4:26
especially publicly held firms

4:29
low bond yields have squeezed their

4:31
profit margins and forced them out of

4:33
old lines of business into new ones

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several companies have employed what

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kerry calls the bermuda triangle

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strategy the points of the triangle are

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characteristically a life annuity

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company with a large enforced block of

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usually fixed annuities with guaranteed

4:50
returns

4:52
a bermuda based or other offshore

4:54
re-insurer which we'll get to

4:56
and a major buyout firm or money manager

4:59
last paragraph generally the life

5:01
annuity company will cede cede the

5:04
annuity contracts to the reinsurer the

5:07
re-insurer typically pays the life

5:09
annuity company a seating commission for

5:12
the assets

5:13
then the money manager often affiliated

5:15
with the reinsurer then earns fees for

5:18
the

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invest for investing the assets when i

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read that carry it's in a chill down my

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spine because i read i wrote an article

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for market watch

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years and years back about this

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fictitious smokey filled room with with

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high level single mop scotch

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where the uh the the mavens and the

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masters of the universe with all the

5:37
money we're looking at these insurance

5:39
companies and saying boy wouldn't we

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like to get our hands on that money

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that's probably more of a conspiracy

5:45
theory than what the truth actually is

5:47
but i need you to kind of

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i don't want to say dumb it down because

5:51
my my listeners are very smart but

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explain

5:55
the bermuda triangles uh theory and then

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we'll go into your article where you

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interviewed mike castor who's the

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executive vice president of willis re

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which is a reinsurance so with that

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jump in i can't wait to hear what you

6:09
have to say

6:10
well it's pretty uh it's not that hard

6:12
to understand in the in the uh

6:15
in the macro view if you just think of

6:18
the triangle and and a company

6:21
if a company can do all these things

6:24
which is have a life insurance company

6:27
which brings in

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long-term

6:30
money money that's going to stay where

6:33
it is for years

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and

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where there are even penalties for

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early withdrawal

6:40
you know market asset

6:42
market value

6:43
adjustments

6:44
surrender penalties all kinds of

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protections for the issuer it's a way of

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bringing it's it's a it's a way of

6:51
bringing in money that's that's not

6:54
going to move and is not going to ask

6:56
you a lot of questions about what you're

6:57
going you're doing with it

6:59
so that's a good that's a reason to own

7:01
a life insurer

7:03
and it's always been an issue and you

7:04
know a reason to own a life insurer or

7:06
any insurance company warren buffett's

7:08
been doing that for years to bring in uh

7:11
capital

7:13
and and uh so if you have you have a

7:15
piece

7:16
you have the life insurer is one piece

7:18
the asset manager is

7:20
really the most important piece this is

7:23
a company that takes the

7:25
the money that has come in from the sale

7:28
of annuities

7:29
and

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invest it in as

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in the ways that they that they do best

7:36
for high returns but in the case of an

7:38
insurance when you're dealing with

7:40
insurance assets you have to there are

7:42
limits to the amount of risk that you

7:44
can take with them

7:45
and then the third piece

7:47
is the uh

7:50
is the reinsurer

7:51
and the reinsurer is provides an extra

7:54
margin of

7:56
insurance as a kind of leveraging where

7:58
you bring in another partner

8:00
to share some of the risk and you and to

8:03
the extent that you free up that you

8:06
share the risk you free up some of the

8:08
capital or the reserves that are backing

8:11
the uh

8:13
you can run your business more cheaply

8:15
with less uh with less money that you

8:18
have to put aside in low risk

8:20
assets and the accounting part of it is

8:22
really not my my specialty

8:25
the but those are the those are the

8:27
pieces

8:28
and

8:28
after the financial crisis you had kind

8:31
of a uh

8:35
a perfect storm in a way

8:37
of

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uh

8:40
of changes in regulation changes in

8:42
interest rates uh

8:45
changes in in the customer relationships

8:47
of

8:49
changes in the annuity products that

8:51
that made sense

8:53
uh all kinds of changes that's that sort

8:56
of brought the insurance companies to

8:58
the attention of the asset managers like

9:01
uh

9:02
eventually now all the big ones are uh

9:05
kkr and

9:06
black stone and others brought into this

9:09
and they found a ready audience the life

9:12
insurance were desperate they had uh

9:14
especially the far known life insurers

9:17
uh and the the

9:19
private equity companies had their own

9:21
reasons for looking for safer assets

9:23
they wanted to emulate warren buffett

9:25
for one thing who who uses his private

9:28
his property casually companies as a

9:31
resource

9:33
so

9:34
so they started gradually

9:37
and then in a flood

9:39
acquiring either blocks of existing

9:41
annuity business or better off better

9:44
yet life insurers and setting up

9:47
re-insurers now this started off

9:49
gradually and and uh and it has now

9:52
become kind of perfected

9:55
in a sense that you have consulting

9:57
firms and reinsurers positioning

9:59
themselves as what i call well what they

10:01
call uh

10:03
solution providers so they'll come to an

10:06
insurance company and say

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you're petrified that you promise to pay

10:11
four percent on existing

10:15
liabilities

10:16
which for the customer is their life

10:18
savings

10:20
uh

10:21
and you you'd only think you're gonna be

10:23
able to earn you know a safe three

10:25
percent going forward and they see they

10:28
see themselves being swept towards a

10:30
kind of

10:31
waterfall

10:32
uh which is not good you know it's it's

10:35
doesn't mean that that there's going to

10:37
be a failure or a crisis or anything

10:39
huge like like we saw in 2008 but it

10:42
will mean that they will have to dip

10:44
into their own capital to make up for

10:46
the lost investment returns or they will

10:49
have to you know if they can't do that

10:51
they will have to sell out to another

10:52
company well and and this is um this

10:55
podcast obviously you know as a consumer

10:58
podcast i would say 99 of people

11:00
listening and viewing are consumers

11:02
they're not in the business so they're

11:03
trying to figure out

11:05
okay stan the annuity man you brought

11:07
this up with carrie this bermuda

11:09
triangle how does it affect me as the

11:11
consumer because

11:13
if you're in rural america middle

11:14
america you know fly over america and

11:17
you're buying annuities and now you

11:19
stan's brought up the thing with kerry

11:20
that these people are selling off blocks

11:22
of their business to masters of the

11:24
universe it is a little bit of a red

11:26
flag i know why the annuity companies do

11:29
and the life insurance companies do it

11:30
is to get that upfront money to make

11:32
that balance sheet look better but the

11:35
way that i understand it even though

11:36
they're selling off the

11:39
the block

11:40
they still are liable for the the claims

11:43
paying ability that they sold correct

11:47
oh yes yes and there's a general relief

11:50
in fact among regulators that at least

11:54
these uh

11:55
that these liabilities are

11:58
now in the hands of

12:00
investment mavens who are more likely to

12:02
be able to cover

12:03
the liabilities

12:05
let's hope right is there any oversight

12:08
on the leveraging or derivatives or any

12:11
type of super uber aggressive

12:15
investment strategies that when they

12:17
sell the block of business to someone in

12:18
the bermuda bermuda or ireland or

12:20
wherever these uh reinsurance of places

12:23
are located any oversight on those

12:26
investments

12:27
uh well you've got uh you've got a kind

12:29
of a balkanization as usual in the uh

12:32
regulation of insurance products you've

12:34
got uh you've got

12:37
you you've got

12:38
reinsurance in bermuda which uses a

12:40
different accounting standard from the

12:42
united states uses standard accounting

12:44
and not gaap

12:46
gaap accounting

12:48
uh which creates some ambiguities about

12:51
how the how much reserves bermuda will

12:53
require and also these these uh

12:56
regulatory havens are

12:59
are not as transparent as

13:02
some of the domestic

13:04
in terms of what assets are being held

13:06
behind the annuity liabilities which is

13:11
the public savings and i think that i

13:13
think that's the rub i think that's the

13:15
concern because

13:16
as you know annuities are confidence

13:18
products their transfer of risk

13:20
confidence products and as you so

13:22
so um

13:23
you put it in your in your

13:25
in your article which i love which is

13:27
it's an already fragile

13:29
image that the annuity industry has

13:33
does this make it more fragile as the

13:36
these stories get out from people like

13:38
you that understand the business and

13:40
understand the intricacies of how this

13:41
work do you think

13:43
do you think this hurts the industry i

13:45
know the regulators like like it but i i

13:47
really don't care about them i care

13:48
about the consumer yeah if you're if

13:50
you're if you're john johnson in des

13:53
moines iowa

13:55
does this make you sleep better or does

13:57
this keep you up at night

14:02
it cuts both ways stan and

14:04
and uh

14:06
so you have to be able to weigh uh these

14:08
two things in your mind one hand on the

14:10
other

14:11
the where it where it helps it if you're

14:14
in existing annuity holder

14:16
and you like the terms of your annuity

14:20
and

14:21
it is now

14:23
being backed by people who advertise

14:25
themselves as the smartest guys in the

14:27
room

14:28
that's would be a cause for comfort

14:31
uh

14:32
on the other hand

14:34
as these annuity liabilities move from

14:36
company to company there's some question

14:39
about whether the service will lag

14:42
and if you've ever if you're

14:44
and this is where we get into it matters

14:48
this is an article i wrote

14:50
published yesterday

14:54
well let's back off of that for a second

14:55
that that's kind of a punch line we can

14:57
get to that in a

14:58
minute save it yeah the uh but where

15:02
this concerns me is

15:04
i'm uh

15:08
i'm not the only person who is alarmed

15:11
at the talk now the proud discussion of

15:14
the acquisition of permanent capital

15:17
and when somebody starts to talk about

15:20
my savings and and i have an annuity

15:23
uh as their permanent capital capital

15:27
that's

15:29
dumb money

15:31
that can be used

15:34
for whatever purpose

15:36
and that they're crowing about this to

15:38
their shareholders that makes me nervous

15:41
i would at least like to have an

15:43
insurance company that

15:45
it tells me

15:47
that

15:48
i'm there

15:49
i'm of great value to them and my

15:52
and so as these annuity liabilities get

15:54
sold to companies with different

15:57
uh

15:58
motives and priorities

16:01
there's a possibility that the service

16:03
of on your annuity is not going to

16:07
if you if you've ever like had to settle

16:09
in a state you know that some companies

16:10
are much harder to get your money back

16:13
you know if you have say sure uh a 401k

16:16
that you inherited that's it custody in

16:18
a certain place depending on the culture

16:21
and the priorities of that company you

16:23
may have a very hard time getting your

16:25
money out of them and if you're

16:28
looking to start an annuity income at a

16:30
certain date in the future and you're

16:31
expecting checks every month you don't

16:34
want to be in the position of having to

16:36
call somebody and say

16:38
where's my check

16:41
you want to be

16:42
you you don't want to be the last one

16:44
paid well what jumped out at me you said

16:47
something in that in that um

16:49
what you were just talking about but

16:50
there were two words that jumped out at

16:51
me and i wrote them down

16:53
and you said proud discussion

16:55
and proud discussion means that the

16:57
masters of the universe are sticking

16:58
their chest out and saying you know

17:00
we've got this

17:02
you know it's easy

17:04
it's easy to say things like that and to

17:07
be

17:08
confident in a raging bull market and i

17:10
always say that a lot of the money

17:12
managers that are out there i have

17:14
cowboy boots older than them and they

17:16
have really never seen down markets or

17:18
problems with markets they've only seen

17:20
things go up

17:22
which

17:23
the masters of the universe the smart

17:25
money as you say

17:27
it makes me a little

17:29
queasy because i've been doing this for

17:30
three decades with major firms and you

17:32
know dean witter and payne weber and ubs

17:34
and morgan stanley i did all that so i

17:37
understand i know those guys i've met

17:39
and those ladies i've met them in the at

17:41
the cocktail party

17:42
um

17:44
but it but it but it concerns me carrie

17:46
it really does well here's why it should

17:48
concern you

17:49
is because your

17:52
interests are not aligned

17:55
with the people who have your money

17:56
exactly and

17:59
now

18:00
it's particularly important for me to

18:02
talk to you about this because you

18:04
understand

18:06
that with a traditional income

18:09
annuity based on your life

18:12
expectancy there's pooling there and

18:15
that polling generates a return for you

18:18
correct

18:19
and

18:20
the new products

18:23
or the and then you and i have both

18:26
talked about in the past we sort of

18:27
bemoan

18:29
the idea that that source of value

18:32
is less and less agreed appreciated

18:35
agree okay well i'm saying that that

18:38
pooling value

18:40
which is the result of you

18:43
committing your money for a long time

18:47
that's not in these products

18:50
and the it's this is

18:52
vital to the consumer

18:54
because they're getting they're now and

18:57
we've we you and i have talked about you

18:59
know the creep of an insurance product

19:02
towards an investment product

19:04
and so on their contracts their

19:07
contracts they are contracts and there

19:10
is a life element in them but we but

19:13
instead of

19:14
actuaries

19:16
determining

19:18
the outcomes of and and the benefits you

19:21
have you have quants you have

19:26
you you have a complete

19:28
i i want to get to i i don't want to go

19:31
into something esoteric like the

19:32
difference between quants and actuaries

19:34
one prices liabilities the other prices

19:37
risk and or one price is right

19:41
or

19:42
they're different people they look at

19:44
definitely definitely and and uh

19:47
they come from different places now so

19:50
what this means is is that the products

19:53
that are going to be sold are the

19:55
products of of greatest interest

19:58
to

20:00
the asset manager

20:01
and and to the life insurer who are all

20:04
related now and uh

20:08
so i'm afraid and i'm gonna get in a lot

20:10
of trouble for this and i have and it's

20:13
i'm in a conflict because i have people

20:15
who are talking me off the record about

20:17
what they think which is which and they

20:20
can absolutely not possibly be quoted

20:22
because they would never eat lunch in

20:24
this town again right and

20:28
and so but so what you are getting you

20:30
are getting a product

20:32
it's not an insurance product there's no

20:34
risk transfer

20:37
yeah with these structured products that

20:39
are coming out and i've always said this

20:42
you know annuity the annuity industry

20:44
and there's many different products as

20:46
you know but i'm just saying this for

20:47
the consumer it's a it's a transfer of

20:50
risk strategy

20:51
that typically provides for principal

20:54
protection and or long-term and or uh

20:57
lifetime income so principal protection

20:59
lifetime income is the primary two

21:01
things that people

21:02
solve for

21:03
the problem with the annuity industry

21:05
and i've been saying this for the last

21:07
decade

21:08
is everything that they're doing is for

21:10
the growth story the market return story

21:14
instead of focusing on what i think the

21:17
demographic tidal wave of 10 000 baby

21:19
boomers want which is lifetime income

21:20
guarantees and principal protection

21:23
guarantees

21:24
that i

21:25
and it

21:26
i don't understand other than them

21:28
wanting to make profits

21:31
them doing that and not focusing on the

21:34
lifetime income story which is the

21:35
monopoly that the annuity industry

21:39
has it it confounds me to this day why

21:42
and i know that what they're going to

21:44
say and this is the reason that me and

21:45
you neither get we we need to get

21:47
christmas cards from the industry well

21:49
you know you don't understand stan you

21:51
know we're you know we're doing these

21:52
complex products with the structures and

21:54
this um i don't care all i care about is

21:57
will the customer

21:58
my customer get the contractual

22:00
guarantee of the policy that they have

22:03
in their hand period

22:04
yeah i don't think it's even i i i don't

22:07
think

22:08
that anyone is gonna

22:10
if they read the fine print they're not

22:12
going to

22:13
be cheated out of their guarantee but

22:15
what they're going to get

22:17
is a very they're going to pay a lot for

22:20
a very tepid

22:22
form of protection

22:24
if if

22:28
one thing i learned i would work for

22:29
vanguard for years and one thing i

22:31
learned you know there were a few

22:32
general guidelines and if you have 10

22:34
years to invest

22:37
you don't invest in short-term bonds

22:43
people are putting money into 10-year

22:45
fixed indexed annuities

22:47
that have virtually no risk of not

22:51
returning at least

22:52
their principles to them

22:55
and

22:58
so what you're doing is you're you're

23:00
you're buying insurance for walking to

23:02
the mailbox and back

23:06
in the morning you're you you apparently

23:09
i don't understand

23:12
if these are

23:15
there's a place for this product but

23:17
once you get into the design of the new

23:19
products with the volatility controlled

23:22
indexes right and all kinds of other

23:24
protections

23:27
if you've ever read a document if you've

23:29
ever read a fair warning like written by

23:32
a lawyer

23:33
you know that it's written not for you

23:35
it's written to protect whoever the

23:37
lawyer is working for and all of the

23:38
buffered annuities and the structured

23:40
products that are coming out not no and

23:42
we're not talking about the simplistic

23:43
annuities the spee is diaz and culax and

23:45
mike that's right right this is very

23:46
simplistic the ones that i always say if

23:48
you can't explain it to a nine-year-old

23:50
you shouldn't buy it um those are the

23:52
ones you ask a really good question in

23:54
your interview with this um reinsurance

23:56
guy

23:57
um mr caster and you said

24:00
quote so the life insurance seeds a

24:02
potential expensive liability and gets

24:05
cash back at the same time and then you

24:09
ended it with hey that sounds sweet that

24:11
sounds great

24:13
but that's not it

24:14
right

24:16
i mean that's not that's not it's not

24:18
totally sweet

24:22
uh

24:23
well this gets a little complicated uh

24:25
let's go there there

24:27
the

24:31
money this is all done

24:33
in

24:34
paper this is all paper transactions

24:36
that are

24:38
the the

24:39
no money might move around it's just a a

24:43
change in uh

24:45
in the reserves uh some of the alarm

24:48
bells went up

24:49
when the companies were

24:52
now now this goes back to which side of

24:54
the trade are you on if you're an

24:55
investor in if you're an investor in a

24:58
publicly held life insurance company and

25:00
they get cash back out of these

25:02
reinsurance deals and they use that cash

25:04
back to buy their stock back from their

25:06
shareholders at a premium

25:09
you and

25:10
wall street and the wall street journal

25:12
are just you know

25:13
happy

25:14
right

25:16
and

25:17
uh

25:18
but if you're the permanent capital and

25:21
your savings has been sold to bermuda or

25:24
or it looks like that it doesn't your

25:26
money doesn't actually go to bermuda

25:29
i mean no i i get it it's it's i get

25:31
that one of the things that mike castro

25:33
when he

25:35
the person you're interviewing for for

25:37
listeners um his answer was if the

25:40
reinsurer sees future value in that in

25:43
the block of business that they're

25:45
purchasing it will pay a seating

25:47
commission which is the equivalent of a

25:49
purchase price that commission would

25:50
result in a direct improvement in the

25:53
selling company's capital position which

25:55
explains why the selling company's doing

25:57
it but once again i could give a crap

26:00
about that all i care about

26:02
is the consumer is there a list of

26:05
the reinsurers and the activity and and

26:08
how can the consumer or can't stand the

26:11
annuity man the top independent agent in

26:13
the country get a list of what's going

26:16
on behind the scenes behind the curtain

26:17
or is this just all

26:19
trust me stuff

26:23
there's people working on this uh

26:25
i can

26:27
i can mention an advisor group there's

26:29
an advisor who has a product that i'm

26:32
probably going to have a i don't think

26:34
it's really well let's let's talk about

26:36
that

26:38
off um off podcast and if i deem it

26:40
appropriate for my clients i'll i will i

26:42
will put it on my site but

26:44
what you're saying if people are working

26:46
on providing that transparent list

26:48
yes you have there is a group of

26:50
advisors who there's one advisor in

26:53
particular and he's growing an audience

26:55
uh

26:56
who's concerned about

27:01
about the

27:02
the the about not being able to see the

27:04
assets that are backing the annuities

27:08
and he's changing the companies that he

27:10
buys

27:11
i mean this is where it comes this is

27:14
where this is where it gets explosive

27:16
yes and where i have to be really

27:19
careful

27:20
yeah don't don't do anything that um you

27:23
know off off uh off podcast um i want

27:26
that person's name because guess what

27:27
he's gonna be on the podcast because

27:29
we're gonna dig into this because um you

27:31
know what kills me about the annuity

27:33
industry we always have this argument

27:35
well should annuity people be

27:36
fiduciaries and fiduciary standards

27:38
listen if you're advising people on

27:40
their money in their retirement by

27:43
default voluntarily you are a fiduciary

27:47
or get out of the business so everything

27:50
anyone's doing out here should be in the

27:52
best interest of the clients

27:54
which is i'm so happy that you're on

27:56
because we're digging into something

27:57
that is new that no one really talks

28:00
about

28:00
but it needs to be

28:02
to be talked about um

28:04
well it's interesting i heard a comment

28:06
yesterday from a consultant that covers

28:08
this area

28:10
again you know a person who can't

28:11
possibly be quoted which puts me in a

28:14
terrible position but they said you you

28:17
have to you always have to look at both

28:18
sides of these things and they said the

28:20
regulators

28:23
are more concerned about

28:25
solvency than suitability right now and

28:28
they they can't really

28:30
they don't have bandwidth to do

28:32
everything at once

28:34
and there's there in i got the

28:36
impression that they're so relieved

28:38
that there's a light at the end of the

28:40
tunnel for covering the liabilities

28:43
which is the work that the asset

28:44
managers are doing to try to get higher

28:46
returns

28:48
in the low interest rate that they're

28:51
taking their that they're not paying as

28:53
much attention they're not focusing on

28:55
the suitability of the products that an

28:58
insurance person should not

29:03
be selling somebody something that's so

29:05
safe that they don't need insurance on

29:07
it

29:08
they don't need to pay they don't need

29:10
to bring in the overhead of a life

29:11
insurance company because it's too safe

29:14
to be to be in that category and the

29:16
average person especially the average

29:19
risk the first person who's being told

29:21
that my god the

29:22
stock market is at 36 000 and it can

29:25
only go down

29:26
and interest rates can only go up and

29:28
your bonds will you know crash

29:31
and and scare them to death and say why

29:34
don't you park your money in this thing

29:35
it's ultra safe and it gets upside

29:39
for 10 years

29:42
it's that's not suitability in and i'm i

29:45
want to call that out at the risk of

29:47
offending a lot of my

29:50
subscribers it's a it's a great sales

29:53
pitch but

29:54
forget sales pitches we're talking about

29:57
we're talking about contracts so i i

29:59
agree with you i think from going back

30:01
to the fiduciary which for people in

30:03
english that means putting the client's

30:05
best interest ahead of the advisor agent

30:08
um whoever's recommending whatever is

30:12
putting the client's interest and if

30:14
that's if that's where the industry

30:16
keeps pushing us

30:18
then we need to have all of the

30:20
information

30:21
available on these annuity companies and

30:23
life insurance companies before

30:24
recommending

30:26
and i think that you're doing an

30:28
unbelievable service

30:30
to the consumer and i'm going to make

30:33
sure that you're going to get the credit

30:34
for ripping the scab off of this thing

30:37
and and making sure people understand

30:39
that this is something we need to look

30:40
into as an industry this is something

30:42
that we need to make sure that the

30:44
consumer understands and i'm not being a

30:46
conspiracy theorist i'm just saying

30:49
let's keep an eye on people because we

30:51
all know

30:52
big money isn't always moral

30:55
and there are bad people in every

30:57
industry and we just have to make sure

30:59
that

31:00
the people that have worked

31:02
their rear ends off to to buy a

31:04
contractual guarantee and to transfer

31:06
risk that they're taking care of i mean

31:09
seriously and when you when you say and

31:10
when you said solvency versus

31:12
suitability and they're more interested

31:14
in insolvency and all the annuity

31:16
industry talks about a suitability

31:19
i'm like wait a minute you're talking

31:21
out both sides of your mouth here you

31:22
get get focus on what you want us to do

31:26
well the regulators can live with

31:27
solvency solvency as long as there's

31:29
solvency you know it's the valid it

31:33
suitability is mushier and it's spread

31:36
out among a million agents

31:38
and uh but the fiduciary thing i've

31:40
never you know when i first heard about

31:42
the fiduciary rule

31:43
i i thought i don't understand

31:47
you either you know and and i

31:49
i learned about the fiduciary rule by

31:52
watching saturday night live

31:53
uh i'll make this brief john candy the

31:56
late john candy is running a food repair

31:58
shop

31:59
and and uh uh

32:02
paul simon comes in with a bag of

32:04
pretzels that where the pretzels inside

32:06
are all broken

32:07
and and and john candy looks at him says

32:10
he looks at the bag of pretzels he's

32:12
like assessing it he's you know

32:14
figuring it trying to give him an

32:15
estimate on it he says listen paul

32:18
you know i could i could charge you you

32:21
know

32:22
300 400 dollars and and to repair every

32:25
pretzel in this bag

32:27
but i'm going to level with you the bag

32:29
costs 1.99

32:32
and

32:33
you can get another one right around the

32:35
corner

32:36
for for that price and

32:38
i'm going to level with you

32:40
and so paul simon goes so i thought you

32:42
know really it's that simple

32:45
well and fiduciary if bernie madoff had

32:47
a plaque on the wall that said he had um

32:50
been he had passed a test and been

32:52
labeled as a fiduciary does that make

32:53
him a fiduciary

32:55
um so fiduciary is is inherent and it's

32:58
voluntary and it's a given if you're in

33:00
the business well there's another thing

33:02
that popped out in the in the article

33:05
um that was interesting to me about

33:08
you know it sounds like you know mike

33:10
castor is it knows what the heck he's

33:12
doing that's the person you interviewed

33:13
in the article

33:14
but he talked about vetting the the

33:17
relationship between the life insurer

33:19
and the reinsurer and all these masters

33:21
of the universe

33:22
which which popped immediately in my

33:24
head is

33:25
do they all do that kind of vetting or

33:28
is there a little bit of wild wild west

33:29
here oh well the the this is a problem

33:32
that we haven't talked about so far it's

33:34
the affiliations between all three

33:37
partners i mean if you if you're all

33:39
working together

33:42
you're churning yourself yes you can do

33:44
it you can do anything if you don't have

33:47
arms length if you don't have

33:49
if you if counterparties are working

33:51
together there is no counter if

33:53
counterparties are working together

33:54
there's no counterparty right

33:57
right

33:58
so and and this is no but this is where

34:00
we get into dangerous

34:02
stuff because i can't i cannot impugn

34:07
the you cannot make you know broad brush

34:11
accusations of anybody's intentions no

34:14
or or i you just you just can't do that

34:17
that's unfortunately we can only do that

34:20
after the fact

34:22
yes

34:22
and that's that's unfortunate is after

34:24
the fact when the the

34:26
the [ __ ] is hit the fan

34:28
and there's a problem then we can go

34:30
back and say what was the i mean what

34:31
unfortu i would like to have something

34:33
in place where

34:34
i i love what you said about the

34:36
counterparties i mean there should be

34:38
some type of regulation that there

34:39
should be no commingling intermingling

34:42
or in english churning themselves you

34:45
know

34:46
if you own the other company the other

34:48
company can charge whatever the

34:49
commission they want to charge or fee

34:50
because you own the company it just

34:52
there's so many problems there

34:55
inherently and going back to the

34:56
consumer we got to bring it back to the

34:58
person listening to this

35:00
um is is this really comes down to a lot

35:03
of these new structured products that i

35:05
always tell people anytime that the

35:07
interest rate environment is low

35:09
banks and insurance companies they start

35:11
creating products to sell to people they

35:14
just start that's that's where it

35:15
happens and that's the impetus for these

35:18
uh quote-unquote creativity that you're

35:21
seeing correct

35:23
yes you can blame it you can blame it on

35:26
that and uh

35:28
and but we can't we can't just

35:31
uh say well you can't do anything about

35:34
it because

35:35
it's the low interest rate and we're

35:37
stuck

35:38
yeah you're you're moving around there

35:40
so whatever you're doing it we got some

35:41
bad audio that last little sentence you

35:43
said so

35:44
oh well we can't we can't simply uh

35:48
i'm i'm sorry i had i i've got the sun

35:50
pouring suddenly pouring into my window

35:52
and i didn't

35:53
you look good you look good kerry so

35:55
don't worry about it it's it's a

35:56
spotlight on you so go ahead

35:59
so uh no i was just saying we can't we

36:01
can't just say oh it's the low interest

36:03
rates and and uh

36:05
the the uh

36:07
everyone people know that the low

36:08
interest rates have a certain danger but

36:10
they're so busy counting their

36:13
their stock market gains that

36:16
that

36:18
they don't need to look at it i i wish

36:20
uh

36:22
i wish rates were

36:25
higher only because you know we could we

36:28
i well i don't want to get into

36:29
discussion or interest rates that's but

36:31
but uh but you can't be

36:34
you can't that

36:36
that alone

36:38
now now i would like to talk for a

36:40
second about you know i have some

36:42
thoughts about on on what people should

36:44
should do do and they're basically

36:47
that's what this is all about yeah we've

36:49
we've obviously laid a pretty good

36:50
foundation so let's pay to that

36:53
well here's the way i think about it

36:55
which is the way i you know

36:58
you've written about it and i mean if if

37:00
you have a

37:01
if you your liability as a retiree is

37:04
your monthly income your basic monthly

37:06
income if you adopt that model

37:08
and that that should be covered by by

37:10
guaranteed

37:12
income

37:13
and today you're the prices of income so

37:16
so you really want to go out and you

37:18
want to buy

37:19
whatever that income you need let's say

37:21
it's another two thousand dollars a

37:23
month and or three thousand dollars a

37:25
month

37:26
okay so well if it if it didn't it

37:32
i think

37:33
you should use some of your stock market

37:35
gains i believe i agree with wade fowle

37:37
that you should use your

37:39
bonds to buy your guaranteed income with

37:42
but buy an income annuity with but but i

37:45
also think that the low interest rate

37:47
while it has taken away from the income

37:50
annuity it has given on the other hand

37:53
with to the stock market and i think

37:55
that you should just supplement

37:57
you know your bond portfolio with

38:00
some stocks

38:02
uh don't let taxes rule your life i uh

38:06
it's more important to have guaranteed

38:07
income and supplement and buy as much

38:10
income as you need income is expensive

38:13
stocks are not as expensive so you get a

38:16
break there

38:17
and buy yourself the guaranteed income

38:19
that will give you i agree east of mine

38:22
retirement just by the income well and

38:24
wade's going to be on the on the podcast

38:26
in a couple weeks and we're going to dig

38:28
into that as well but um you know as

38:31
people know they go to my site the

38:32
annuityman.com and run you know quotes

38:34
whether they want to do a reverse

38:36
engineered quote or and that's a 24 7

38:38
365 and these are commodity products

38:41
transfer risk products always tell

38:42
people with lifetime income there's no

38:44
roi until you die i mean you either and

38:47
most people and in a world that we don't

38:49
have pensions as you know kerry they

38:51
need that income floor that guaranteed

38:53
amount that's coming in with the other

38:54
annuity they already own called social

38:56
security that

38:58
and i'm just been pounding that into the

39:00
table for the last decade plus of you

39:03
own an annuity for what it will do not

39:05
what it might do which is the

39:06
contractual guarantees and there's no

39:08
perfect time to buy lifetime income

39:11
um what i like about

39:12
kerry's newsletter it's called

39:14
retirement income journal

39:16
and it's all about retirement income at

39:18
chapter two of your life just to i'm

39:20
going to get i'm going to step on the

39:21
soapbox and step off it quickly

39:24
but

39:25
when you're in chapter 2 it's all about

39:26
the guarantees and now yes you do need

39:29
stuff in the markets yes you do need

39:30
growth

39:31
but this comes back to what we were

39:33
talking about the annuity industry

39:36
wants wants your growth money too and

39:39
that's where the annuity industry and i

39:41
get in in an argument with like uh-uh

39:44
the annuity industry

39:45
should not be all about the the

39:48
messaging should not all all be about

39:50
growth and currently

39:52
that's where it is because those prof

39:54
products are the most profitable not

39:56
only for the

39:57
um

39:58
the issuer but the agent

40:01
and and that's where that's where the

40:04
suitability issue

40:06
uh comes into play

40:08
and um and and is an issue but these

40:10
structured products are are they're fun

40:13
and games when the market's going way up

40:15
it's easy

40:16
but when we have some volatility and

40:18
choppy markets and maybe ever if we ever

40:20
go back to normal market type

40:22
environment

40:23
boy this is going to get interesting

40:24
don't you agree

40:25
well i don't have a problem with the

40:27
registered index linked annuities i

40:30
think they make more sense uh

40:32
because the client is taking some risk

40:35
and but i but i don't think that they're

40:38
i don't even argue we can argue about

40:40
that another day okay but but i don't

40:43
see why they're

40:44
but to me they're the same as structured

40:46
products and i don't i don't know why

40:48
you would need

40:50
the late you know you're buying you're

40:52
you're risking the option you have an

40:54
option budget the option budget

40:56
restricts

40:57
uh and i don't understand why they

41:00
they're implicitly insured products i

41:03
don't understand why they need the

41:04
further

41:06
expense of a life insurance company uh

41:09
overlay and and uh i agree

41:12
the the only reason to have the life

41:15
insurance overlay would be that that

41:19
it's hard for a retail investor to go to

41:21
wall street and get

41:23
it's more expensive you have to go to a

41:25
bigger

41:26
bank to get a structured product for

41:29
yourself and it that's expensive and

41:32
it's custom and what

41:34
the life insurance companies have done

41:36
uh is uh to take that and made it a

41:39
a uh

41:41
mass-produced

41:43
off-the-shelf uh

41:45
retail product so you it would be hard

41:47
to get a ryla

41:49
registered

41:50
uh but ryla's is not on the table for

41:54
today and they don't really do much with

41:55
retirement income so that's my uh the

41:59
limit i'm sort of limited in my interest

42:01
in i riley's because they're investment

42:03
products and give give the acronym

42:06
a definition of ryla

42:08
oh

42:09
it's registered index linked annuities

42:12
and it differs from a fixed index

42:15
annuity and it had in that you can lose

42:18
money

42:19
your lower end is buffered but not zero

42:23
and you know what i call those carry

42:24
i'll call those copay annuities

42:27
because

42:28
because if you're sharing in some of the

42:29
downside

42:31
um and that's where that's where i get

42:33
an argument with well heck if you're

42:35
going to do that i mean

42:37
why not just go

42:38
buy real investments with real growth i

42:40
understand their argument coming back to

42:42
me

42:42
but the buffered products are are messy

42:45
and they are

42:47
um hard to understand for the for the

42:49
consumer out there as i i really wish

42:52
the annuity industry would would go

42:54
toward a more simplistic

42:56
structuring of products so people can

42:58
understand them or else there's going to

43:00
be issues down the road when people say

43:03
i don't know i didn't know that's what

43:05
it did

43:06
and there and there i think as an

43:08
industry they need to be aware

43:10
be careful of selling these mat like you

43:12
said what they're structuring these

43:13
products and selling them to the masses

43:15
well the masses don't understand what

43:16
they're buying they only only understand

43:18
the sales pitch at the bad chicken

43:19
dinner seminar and it's out or it sounds

43:21
too good to be true and they're buying

43:22
it based on trust of the advisor no no

43:25
you have to understand

43:27
the good the bad the limitations and the

43:28
benefits of every annuity contract

43:31
period and that's where i know for a

43:33
fact that these structured buffered type

43:34
products

43:36
in most cases in my opinion from people

43:38
that call me they're not they're not

43:40
being

43:41
explained properly and maybe that's that

43:44
that might be the agent's fault the

43:45
advisor's fault or the industry's fault

43:47
i don't know but the bottom line i don't

43:49
really care whose fault it is the

43:50
customer needs to know what they're

43:51
buying

43:54
yeah yes i think well i think that

43:56
people need to understand

43:59
risk

44:00
and that gets a little complicated but

44:02
the simpler thing to understand with

44:04
annuities is just that the core value of

44:08
an annuity is longevity risk pooling

44:12
and that's the dividend you get and it

44:14
has nothing to do with the markets it's

44:16
a diversification from the markets and

44:19
why would you buy a life insurance

44:21
product that has nothing to do with

44:22
longevity or mortality bingo and and

44:26
you and i have i mean we've been talking

44:28
about this

44:29
for well i've i've been

44:32
i started for at least a decade i know

44:35
since i started i'm talking about me and

44:37
you in our conversations at least a

44:39
decade oh yeah our conversations and and

44:41
separately probably two decades at least

44:44
yes and it's it's

44:46
if it's more complicated than that

44:51
and most moleski wade foul and stan the

44:53
annuity man are all about mortality

44:54
credits and transfer of risk etc

44:58
and carrie pector

45:00
and if those four musketeers who've got

45:03
a long time in the business are saying

45:04
that then why

45:06
are the annuity companies going in that

45:08
other direction and i think it's just a

45:10
herd mentality one last thing i want to

45:12
go back to one of the

45:14
points very simple the reason is simple

45:17
that the companies went from mutual to

45:19
publicly held

45:21
after 2000 or around 2000 and they're

45:25
and and and a

45:26
an ownership and they had higher profit

45:30
benchmarks to me and they had to get a

45:33
new and you can't get higher returns

45:36
from from putting from using

45:39
right

45:40
you have to go into the stock market

45:43
i

45:44
one thing that you wrote in here about

45:46
letters of credit and one of the things

45:48
that uh mr caster was saying in your

45:50
article that you interviewed him in the

45:52
july 1st edition of your retirement

45:54
income journal is that

45:57
you know

45:58
he was saying he'd rather see the assets

46:00
held in the trust to back up the

46:01
transaction but what you were pointing

46:03
out was a lot of these transactions are

46:05
done using letters of credit

46:08
i don't want to go into the weeds of

46:09
that but that to me is a huge red flag

46:13
um because a lot of games can be played

46:16
there do you agree

46:17
well this is actually this is one of the

46:19
most

46:21
the one of the fuzziest

46:23
um you know

46:25
parts of the whole thing i i can't

46:27
really

46:28
what we're talking about though a letter

46:29
of credit is traditionally you know a

46:31
very uh simple thing it means your bank

46:34
here in

46:36
new york you know works with the bank in

46:41
london you know to guarantee

46:44
your your money or your it represents

46:46
you with a letter of credit on your

46:48
behalf so that's a very simple thing the

46:50
problem with what what what's what's

46:52
happening in bermuda is that you have uh

46:56
letters of credit used at

47:00
say a pledge a letter of credit of a

47:02
billion dollars or

47:04
100 million dollars is being used to

47:06
back a

47:08
annuity as a reserve against uh

47:11
losses on the annuity and the problem is

47:14
that this letter of credit it's not

47:15
clear whether that's really committed or

47:18
not or whether it's uh

47:21
not

47:23
whether it's really solid whether it's a

47:25
it's it's a uh

47:30
whether it's just

47:31
talk you know it it

47:34
and uh it's not a real asset it's a

47:36
promise of maybe to get an asset if one

47:39
is really needed in an emergency

47:42
it it it sounds like the gray area

47:45
i mean well it is it is a gray area and

47:48
and

47:49
you know these are these are all gray

47:51
areas and uh i would i would emphasize

47:54
that i don't believe that there's a i

47:56
don't have any reason to believe that

47:57
anybody is breaking the law

48:00
they have teams there are many lawyers

48:02
who are making sure that there is no

48:05
uh violation of any law

48:08
and so uh

48:10
but but i'm a big believer in that you

48:12
have to look at the if you don't if

48:14
you're not

48:15
following the spirit of the law

48:17
the the letter of the law is going to be

48:20
pretty flimsy but that's uh

48:22
but that's another thing i know i don't

48:24
believe anybody is breaking the law and

48:26
i wouldn't i don't either i'm not

48:27
implying that but what i am you know

48:29
forcefully saying as people know is

48:32
annuities are not about the the life

48:34
insurance issuing companies they're not

48:36
about the reinsurer they're not about

48:38
the advisor they're not about the agent

48:40
they're about the consumer

48:42
and

48:43
the i think the annuity industry just

48:46
needs to

48:47
reel some things in here

48:49
and and remember that the demographic

48:52
tidal wave of baby boomers are

48:55
depending on them

48:57
to back up these guarantees and to be

48:59
transparent and i think one of the great

49:01
things about having you on and i

49:02
certainly you know we cover we've spent

49:04
most of our time on the bermuda triangle

49:06
issue which i think is very important

49:07
for us to expose

49:09
but in future um podcasts with you i

49:11
certainly want to dig in deeper on other

49:13
items because i think you are a um

49:17
somewhat of a lone voice on the

49:20
annuity industry from a from a

49:22
retirement income standpoint and from

49:23
how the sausage is made standpoint and i

49:25
think what you're doing is is um very

49:28
very important to for everyone to

49:31
understand

49:33
you know what's happening behind the

49:34
scenes what's happening

49:36
behind the curtain let's talk about the

49:37
wizard behind the curtain let's talk

49:39
about

49:40
the so-called masters of the universe

49:42
and how that might affect the consumer

49:44
in closing do you have any um any

49:47
comments or advice or sage words for the

49:50
for the listeners as we close this out

49:56
i would work with a company that that uh

49:59
where you feel like you're the primary

50:01
customer and that you're not the

50:04
second or third in line

50:07
to get paid and uh if somebody is

50:10
talking about your life savings as

50:12
their permanent capital

50:14
i would uh

50:19
i would i would work with someone else

50:21
sage advice carrie pector from

50:23
retirement income journal editor founder

50:26
he does a lot more than that

50:29
and

50:30
we're just so happy that you joined us

50:32
on this

50:33
so with that i want to thank everyone

50:35
for joining

50:37
me and carrie on this episode of fun

50:39
with annuities and i'll see you next

50:41
week my name is stan the annuity man

50:48
thanks for listening to fun with

50:50
annuities please hit the subscribe

50:51
button and make sure to go to my site at

50:54
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50:57
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51:00
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51:04
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51:07
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51:10
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51:12
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51:15
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51:17
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51:20
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51:22
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51:25
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51:27
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51:29
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51:31
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51:33
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51:36
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51:37
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51:38
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51:41
[Music]

51:52
you