Meet the “Merchant of Simplicity”

Published on
February 17th, 2020
Duration
41 minutes

The “Third Rail” of Pensions: Politics, Problems, and Solutions


Meet the “Merchant of Simplicity”

The Expert View ·
Featuring Ramsey Smith

Published on: February 17th, 2020 • Duration: 41 minutes

Ramsey Smith, founder and CEO of ALEX.fyi, is a firm believer in the power of annuities to provide guaranteed income to retirees at the time they need it the most. But he thinks that the annuities industry too often pushes retirees into complex (and high-fee) products. He founded ALEX.fyi to deliver affordable longevity protection by connecting retirees with simple, low-fee annuities, and he joins Real Vision to discuss his life mission is to be a "merchant of simplicity" rather than a "merchant of complexity." Filmed on January 23, 2020, in New York.

Comments

Transcript

  • JO
    Jeffrey O.
    25 February 2020 @ 11:48
    Here's a story of "Simplicity" for you ---> You buy an annuity from an insurance company right before a major market downturn. The insurance company's financial position has been weakened by years of low interest rate spreads preventing them from making profits in their core business. Both the insurance company and it's reinsurance backer go out of business because of poor investment risk management, aka "reaching for yield". You lose you entire capital investment and any future payment streams. You are forced to return to work to survive in your old age. Jeffrey Gundlach (of Doubleline capital fame) likes to described how weak the life insurance industry has become in the last decade. The insurance companies based in Europe are "waiting for their inevitable bankruptcy". This does not sound like an industry I'd like to trust my money too.
  • NI
    Nate I.
    17 February 2020 @ 20:38
    Insurer counter party risk notwithstanding (I'll assume for brevity that's zero), annuity investors get decimated by inflation. The cost of living could be rising at 15% and the CPI would still be engineered by the BLS to be 2% more or less through hedonic adjustments. In other words, the CPI is as phony as a 3 dollar bill and it's used to justify suppressing interest rates. A simple, annually re-balanced, mix of 45% blue chip stocks, 30% inv grade bonds and 25% gold is far better and a chimpanzee could manage it. Anyone contemplating an annuity should read the paper Chris Cole at Artemis recently published entitled "The Allegory of the Hawk and Serpent - How to Grow and Protect Wealth for 100 Years". It is timely and very well documented research on the optimal portfolio for long term wealth creation. Maybe someday insurers will build a better mousetrap, but I'm not seeing it yet; however, I'm always looking for evidence to challenge my views so I would like to thank RV and Ramsey Smith for presenting in favor of annuities. I'm sticking with my stocks, bonds, and gold for now.
    • BA
      Bruce A.
      17 February 2020 @ 23:14
      'A simple, annually re-balanced, mix of 45% blue chip stocks, 30% inv grade bonds and 25% gold is far better and a chimpanzee could manage it'. Love it. But could a human manage it?
    • JL
      Jinny L.
      23 February 2020 @ 11:57
      chris cole is certainly a bright and talented guy but he is also a salesman. also, look at his returns for his fund. it's not as grandiose as you might think. additionally, what person needs a 100 year portfolio? most peope dont even live that long. day trading is certainly not the way to go but 100 year? that is at the other end of the investment horizon spectrum which i am not comfortable with.
  • JG
    Joshua G.
    19 February 2020 @ 22:45
    Reading these comments is like watching a Left vs Right politico fight on Twitter. Incredible how much annuities generate so much fervor... Overall great video. I wish him good luck with his endeavor. Gonna be tough to change a centuries plus old business model. The industry is incredibly slow to modernize and is always running into talent and management issues IMO. Plus regulatory environment has been brutal since GFC and many States like NY and CA add additional hurdles. Like the approach of income annuity as keep it simple stupid but interest rates are so low now and unless age mid 70 to 80+ yo the payout factors are IMO too low to compete with top tier FIA’s and Jackson’s VA. Had contracts generate 14-15% last year with Allianz FIA with zero downside and 20+% in Jackson VA. For a guaranteed income product properly employed you can’t beat that for a portion of retirees portfolio. Comparing a product that produces a guaranteed income stream and insures against market risk to bond or equity portfolio is not helpful for situation virtually every expert agrees is necessary to mitigate the retirement crisis this entire RV theme is about. Seeing a lot of comments on here about cost/ fees /liquidity / inflation. All of course important to consider but not comparable to liquid managed portfolios. How many are trading and able to have full 100% access to their pension plans? Zero and the ROR on those are paltry with high risk of future benefit reductions. Inflation is also not factor if using right combination of contracts/strategies. Keep annuity portion under 30%, Use high rated carriers (Without history of playing games with contract fee adjustments) with solid product design and quality guaranteed income payout factors then ladder the contracts like bond portfolio with a mix of SPIA, FIA and VA and across insurance carriers and retirees will be hard pressed to have issues. Frankly they love it. A check every month to cover their fixed expenses and risk spread across carriers is a big piece of mind and confidence booster for them which is especially important in that stage of life. Probably more certainty than a paycheck from an employer IMO. The behavioral factors are also massive when comparing income generating annuities to rolling over bond ladders and using principle and dividends from equities. The typical retiree in my experience has major behavioral bias toward yield hunting and too often find themselves in products or securities that are highly risky and often end up worthless or locked in litigation for years. Anyway cheers to all that are engaged in this! Massive issue for us all! Big THANK YOU to RV team and all participants! Really doing an incredible job at this juncture in economic and demographic cycle.
    • TT
      Tokyo T.
      22 February 2020 @ 14:47
      Take one look at his website, he is not running a serious business. Don't give your retirement money to him.
    • JL
      Jinny L.
      23 February 2020 @ 11:50
      seems like you know what you are talking about. where do you go to find these type of information? any good websites or financial advisors?
  • JV
    John V.
    19 February 2020 @ 03:56
    I priced insurance products for a major life insurer for over 30 years and although I am a big believer in life insurance, I am not a fan of annuities. Just remember that the insurance company will use conservative assumptions that play to their favor (lower interest rates and lower mortality rates than current experience). That is why there is no underwriting for annuities. They assume everyone is in great health. Also, there is no death benefit. So if you give the insurance company $1M and then die a year later, your hiers are out of luck. If you cannot responsibly manage your money or you expect to live to 110, then an annuity may be for you. Otherwise, I cannot recommend one.
    • MN
      Michael N.
      19 February 2020 @ 18:17
      i agree, they are one of the worst products out there.
    • ZE
      Zachary E.
      20 February 2020 @ 01:45
      Most annuities today have a death benefit
  • JG
    James G.
    18 February 2020 @ 19:27
    Totally an infomercial.
    • BB
      Bob B.
      19 February 2020 @ 02:47
      Agreed. Never met a poor FA/FP. Of course he could just be philanthropic. Opposed to an annuity a Tontine sounded interesting absent a profiteer (i.e. just a reasonable admin fee). The FAs, FPs and life insurance companies will fight against tightly regulated Tontines.
  • VS
    Victor S. | Contributor
    18 February 2020 @ 19:16
    You like social security that is going bankrupt while paying 2.49% since 1983 and your “not a believer in gold “ which has outperformed T-Bills by 300 bps since 1971?
  • TE
    Thomas E.
    18 February 2020 @ 16:18
    I agree. For many annuities are a great solution. Many of today's retirees only have maybe 200k in their retirement. They can't afford to have that exposed to market risk. Putting it into an annuity and getting that guaranteed income along with SS means they will at least be able to have a decent retirement. Are annuities oversold? Of course they are. Does everyone need an annuity? Of course not. But for many it's a legitimate solution to not having saved enough.
  • MC
    Max C.
    17 February 2020 @ 18:40
    Though I've been in the financial services business for 45 years and started in the life insurance industry, I have never heard of the term "mortality credits". From his description of how it works, if you live longer than your life expectancy, anything past that is "gravy" and delivered to you by those mortality credits. Which actually are the uncollected income and principal payments not made to those who die prior to life expectancy. Perhaps it is a Goldman term. His pitch focused on the added benefit to the annuitant who lives past life expectancy. And I see how that matters to that person. But, what about the poor guy who buys, say, a $1,000,000 life annuity at 65 and dies at 66? Somebody else (not his heirs) gets the benefit of the entire nest egg. He was not mentioned. I have many clients with seven-figure IRA's and investment portfolios and most are near or in retirement. Social Security is or will be a small part of their income, so their additional cash flow needs are substantial. While they would no doubt like to reduce or eliminate market risk, and an annuity could do that for them, they don't want to disinherit their children and grandchildren. Of course, one could purchase annuities with various modifications, such as joint and survivor, return of premium, 20 year guarantees, etc. so that heirs receive benefits if you die early, etc. But, these modifications away from a "straight life" annuity reduce your income proportionately. I do appreciate his caveat that "annuities are not for everyone". and his description of the 30% rule. The fact is, annuities are sold and not bought and the reason why agents have those "free" lunches and dinners so they can explain your Social Security benefits. It is my understanding that there are "no-load" annuities available. The bottom line, for me, is that from a return on investment perspective, this may be the absolute worst time in history to purchase an annuity due to the ultra-low interest rate environment. You do not get much "bang for your buck" today and assuming that inflation and interest rates will remain low for the rest of your life is not a wise bet.
    • TT
      Tokyo T.
      18 February 2020 @ 06:24
      Awesome insights. RV should have interviewed you instead of this sales pitch.
  • TT
    Tokyo T.
    18 February 2020 @ 05:41
    As an industry saying goes, “Annuities are sold, not bought.” Don’t be one of the people who gets sold.
  • GF
    George F.
    18 February 2020 @ 04:17
    One of RV’s best presentations. Annuities are misunderstood and largely ignored in practice. Well done.
  • PP
    Patrick P.
    18 February 2020 @ 04:11
    IMO annuities work well for high income individuals that have run out of ways to avoid taxes....and for someone that absolutely can not manage their own money such as a disabled spouse or child. And if you're going to buy an annuity then Vanguard probably is your best bet because of the low fees.
  • GS
    Greg S.
    18 February 2020 @ 01:43
    These things are contracts. Know who you are doing business with and their ability to live up to the promises made. Read the fine print all the way through. If you can't or won't, hire someone who can and will and have them explain it to you in concrete terms.
  • AA
    Alexander A.
    17 February 2020 @ 21:23
    sorry realvision but this sounds like an ad
    • SA
      Scott A.
      18 February 2020 @ 00:57
      Yup, I kinda agree. I did get a kick out of the Mortality credits, which sounds just like the tontines episode! And if you are going to talk about how much better annuities are than a bond portfolio, maybe you better adjust that $1 million for the annuity sales charge, and bring up liquidity issues and counter party risk.
  • CL
    Claudio L.
    17 February 2020 @ 23:57
    In the end, all these products tend to rely on market returns and how the capital gets allocated and whether there is any conflict of interest and commissions that can erode returns for the retiree.
  • RC
    Robert C.
    17 February 2020 @ 09:12
    Anybody else experiencing sound issues where it goes quiet then loud throughout the video?
    • TK
      T K.
      17 February 2020 @ 10:27
      Yup, same here
    • sl
      simion l.
      17 February 2020 @ 10:43
      yep
    • KG
      Kevin G.
      17 February 2020 @ 12:28
      yes, sound level kept moving on me
    • JD
      John D.
      17 February 2020 @ 15:52
      Me too.
    • JL
      Jack L.
      17 February 2020 @ 16:57
      Confirmed, from the 29:20 remaining time marker down to 29:10 remaining (countdown timing, not forward timing) there is a distinct ramp-up in volume. (Maybe elsewhere as well, haven't watched entire video yet.)
    • KO
      Kevin O.
      17 February 2020 @ 20:03
      Thanks for flagging, Robert. Will update the master file by tomorrow morning.
  • AS
    Aaron S.
    17 February 2020 @ 19:58
    I'm so happy to see fixed income products being discussed more on Real Vision. Keep bringing on experts to discuss these products: annuities, life insurance, bonds, etc. Really enjoyed this interview!
  • SM
    Stephan M.
    17 February 2020 @ 11:21
    Hm, does he suggest to buy life insurances? Life insurances in some countries can lower or even suspend payments. F.ex. the market in Germany for life insurances is nearly dead. You pay your whole life and get very small money in the end. No dividend payments during work life. Insurances are liabilities to a group of other people not wealth. If you want to backup your family you can still buy a risk life insurance - but to buy a life insurance to fund your retirement is not a good option.
    • MC
      Minum C.
      17 February 2020 @ 17:41
      He's actually talking about annuities which is pretty much exactly the opposite of life insurance. With life insurance, you pay nothing up front but there is negative cash flow each month with a lump sum positive cash payout when you die. With annuities, there is a lump sum negative cash payout up front with a positive cash flow each month and nothing when you die. The cash flows for the insurance depend on your health. The cash flows for the annuity apparently do not depend on your health. There should be a possibility for arbitrage here.
  • MZ
    Matthew Z.
    17 February 2020 @ 16:30
    As a financial advisor with 17 years in the business (and still under the age of 40) I was excited for this. Big disappointment. I appreciate the "simplicity" of immediate / deferred annuities, but this stuff will get absolutely trashed when you get inflation. Given that's the only way out of the debts we have - this is a terrible bet. Jackson National has a variable annuity that will let you invest he money however you want (go balls deep into US tech stocks if you want), and guarantee a withdrawal amount for your entire life. This is literally the only thing that makes any sense for any person in the annuity space at this time. Yeah it's expensive, but given that the alternative to buy bonds with negative real yields, an annuity with no CPI protection, or just hope the market keeps going up - what the heck else are you supposed to do to make sure you have your base income needs met in retirement?
  • JB
    Jon B.
    17 February 2020 @ 13:32
    very useful contextual insight.