Why does this veteran agent prefer variable annuities and recommend that young agents focus on money management?
By Paul Wilson
"For a new agent coming into the business today, if I were starting, I would build my practice around money management."
Marc Silverman is a past Chair of the Top of the Table and has served on the Million Dollar Round Table Advisory Board.
He began his financial planning career in 1983 and formed Silverman Financial in 1989, where he has a diversified client base including public corporations, closely held businesses, individuals, trusts and estates.
Marc has addressed audiences in the United States, Canada, South Korea, United Kingdom, New Zealand, Singapore, Taipei and Australia. He lives in Miami with his wife, Patti, and daughter, Cara.
I recently spoke with Marc about the current state of the financial services industry, the Glenn Neasham case and his advice for younger agents.
ProducersWEB: Your firm specializes in pre-retirees and those who are already retired. Considering 10,000 boomers are now retiring every day, I imagine things are pretty busy for you?
Marc Silverman: Booming? [laughs] Business is very good. There are 10,000 people who are retiring, and the first baby boomer hit 65 this year. Business is very, very good and we’re thick in that marketplace.
PW: You spend a lot of time discussing and writing about annuities. Why is that?
MS: When you take a look at America, there are 76 million baby boomers going through this retirement ringer right now. And most people are not super wealthy. Most people make $60,000 to $80,000 a year if they’re lucky and have limited dollars to invest.
If you take a look at the majority of people, they would prefer a guarantee and will spend a little more money to have that guarantee.
Annuities provide three basic guarantees: one is a death benefit, two are living benefits. [Of the living benefits] one is a guaranteed growth rate and one is a guaranteed income rate when you start taking the money out of the annuity.
PW: Are there any particular products that your prefer?
MS: It depends on the situation of the person.
I’m not a big fan of indexed annuities. I think they’re very expensive, although they say there’s no cost. There’s always a cost.
Fixed annuities are not a great annuity to buy right now because interest rates are as low as they are.
Variable annuities are, I think, appropriate for a majority of people because you know what the cost is. It’s disclosed and as long as you earn over a certain level, you’re going to have an increase in income and you’re going to have growth if you’re not touching that money.
PW: Does that depend a lot on age and situation? I probably hear more criticism of variable annuities than any other type because of the risks people associate with them.
MS: Well, I think you heard a lot of criticism prior to the market tanking, but I think there have been a lot more positive articles written in the last two years. Even the Obama administration mentioned the importance of annuities in retirement plans, saying, “Hey, we need some way to protect the citizens of this country and an annuity was mentioned as one of those ways.” PW: What goes through your mind when you hear that important players such as Aviva USA are considering leaving the annuities industry? What effects does it have when a significant departure like this occurs?
MS: There have been a tremendous number of changes in the annuity world. MetLife has changed what they’re doing. Sun Life exited the business altogether. SunAmerica just made a change. Prudential just made a change. And the reason for the changes is the cost to hedge the risk is much greater because interest rates are as low as they are.
So these insurance companies, to hedge the risk — because there is a risk; the market can go down — they need to earn so much money to hedge that risk and it costs them a lot more when interest rates are as low as they are. That’s why all the changes have been made recently.
Now as far as companies exiting, I’m not overly concerned with that because I’ll find the next best thing out there.
PW: Which is a healthier environment for consumers: a market consisting of a few companies that are more fit or a larger field offering more variety?
MS: Well, I think you first of all need to have a fit company, no matter what. I would not recommend an annuity to any individual if the company wasn’t sound. That’s number one.
Now, having said that, there are guarantees in the United States in which variable annuities are kept in separate accounts. The investments have to be kept aside from the core assets of the company; so you’re not going to lose your money, but you might lose your guarantee.
As far as a number of companies, I would like to have more offering different guarantees so that I can make the guarantee more appropriate to the situation of the individual client. More choice is what we really need.
Some companies had lifetime guarantees starting at 45, some at 50, some at 60, now 65. Some would allow you to take more income as you got older. A lot of companies won’t do that. You have to look at every nitty-gritty detail of what that company is offering.
PW: I recently read a blog discussing variable annuities in which the author asked “What would happen if the boomers needed to ‘collect’ on the ‘theoretical bucket’ guarantee all at once — for example, if the market did poorly over the next 10 to 20 years? How would annuity companies handle this stampede? Remember AIG?” What is your answer to that?
MS: I rarely answer a question with a question but how many people lost money with AIG? Let me help you. None. That’s because the money was kept in a separate account and AIG had no access to any of that money. Nor did they go under by the way, because the government helped bail them out. Furthermore, it’s a question that’s theoretical, at best. No one’s going to have a complete run on the bank ever — it’s never happened in history. There have been larger runs on the bank, but not in its entirety. Secondly, the companies have the money put away to make good on that promise.
Some of the companies, for example, Prudential, move money into a government-backed bond fund when the guarantee separates from the current market value by at least 7 percent. So they’re providing a hedge against the market going really low, and that’s what is enabling them to make good on the guarantee and provide the client with protection.
PW: So that’s what you would tell your clients if they had concerns? There are safeguards in place.
MS: There are safety belts in place to cushion the blow of the loss of money.
PW: Have you been following the Glenn Neasham case out in California? What are your thoughts?
MS: Not only was I following it but I was asked to be an expert on a radio call in show about a month ago. My thoughts, and I’ve read pretty much everything on that case, are that I don’t believe in what he recommended to that woman. That’s my personal belief. However, what he did, in my opinion, is not illegal.
I don’t think I am qualified to determine the mental state of health of an individual, because I’m not trained in that. However, from everything I’ve read, he did nothing wrong and went by the state of California’s law. He broke no laws. Why he was found guilty, I really struggle to understand. I don’t really think he did anything wrong.
PW: At least illegal.
MS: Ethically, I don’t agree with what he did, but that doesn’t mean he broke a law.
PW: Some have suggested that cognitive testing similar to that required in LTCI cases should be mandatory for all insurance companies selling annuities to clients who are 65 or older? What do you think?
MS: Well, how do you decide on age 65? I mean, what is the cut off when you say, “Hey, this person is cognizant enough to make their own decision versus not.” So, why age 65? Why not age 72 or 63? I don’t think you can use a set age to determine what someone should or should not be doing. I think you have to have your antennae up and be aware of whether someone is cognizant or not. And frankly, I usually don’t deal with anyone over age 75. And if I do, which is rare, I want to make sure their family is there while we are going through everything.
One of the things that has been suggested to protect us is to videotape your interviews. I do record some of them so that there’s no ambiguity about what was said. PW: Whether or not you agree testing should be done, do you foresee anything mandatory being put in place down the road?
MS: I don’t think so. I think the Neasham case is an isolated, one-off case and the outcome should never have gone the way that it went. In fact, it’s still being appealed right now so we don’t know what the final outcome will be. In the meantime, it has pretty much bankrupted him.
PW: As a 30-year industry veteran, what kinds of changes have you seen during your career?
MS: Well for me personally, I made a transition from doing mostly life insurance to becoming a certified financial planner, a charted life underwriter, a chartered financial consultant. Where life insurance used to be 90 percent of my revenue, it’s now more like 10 percent of my revenue. We’ve really gone to money management. We’ve moved out of the life insurance business and into the money management business.
For a new agent coming into the business today, if I were starting, I would build my practice around money management.
PW: Why would you make that recommendation?
MS: Unfortunately in the life insurance business, you feel like a rat on a wheel that’s just going around, and you start the year with zero. The life insurance companies had it all right for them and maybe not so right for the agents. Because once a client buys, they buy. And yes, there are more sales down the road, but I would rather be getting paid a little bit each year and have ongoing, recurring revenues and a business to sell. For the most part, no one’s buying a life insurance practice. They are buying a money management firm that throws recurring revenues off each year. That is something that’s of value.
PW: And within the industry itself, what trends and changes have you noticed over time?
MS: Obviously, FINRA has played a big role and didn’t like variable annuities at one point in time. I think they’ve become a little more accepting of the variable annuity product because it did protect a lot of people when the market went down. I think what they really don’t like was the rolling over of all the business, [for] which I don’t blame them, unless it was to the client’s best interest and you had documentation to back that up.
PW: What’s one thing you’ve learned during your career that you wish you had known when you started?
MS: I think that I would have become better educated earlier on, meaning my CFP. I would have gone into the retirement area right away and worked with people who have retired or are getting ready to retire.
You ask me what I know now that I wish I’d know back then? That the 76 million baby boomers were going to go through a transitional period called retirement and that’s the greatest need. The other thing that I wish I would have done earlier that I was told about but I just didn’t believe in was really working a market deep. In other words, becoming an expert in one area rather than trying to be all things to all people.
Unfortunately, most people in our business want to try to do everything. They want to do life insurance, long term care, pensions, term insurance, whole life insurance, disability, and they want to be an expert in everything. Well, you can’t. I chose the IRA area, the retirement planning area, the annuity area, where I could really help people transition into retirement. And it’s not a sale; it’s working with them to help them solve their personal problems. The old expression is, help somebody get whatever they want and you will get what you want.
PW: What niches are underserved right now?
MS: In my opinion, the middle class is vastly underserved. The reason I say that is in our business, when you get to MDRT, you want to make it to the next level: Top of the Table. You’re looking for the wealthiest person in town, because that’s where the perceived money is. I would submit to you this expression: There’s a lot more sparrows in the world than there are eagles. So, better to go after the sparrows — the everyday people — to make a living, than the wealthiest person in your town.
The people that need the most help are the middle class, because nobody is really helping them. And that’s the market, or the sandbox if you will, that I chose to play in.
Let everyone else have the top 6 percent, I’ll take the everyday, hard-working individuals that struggle to make a living; that have a finite number of dollars when they retire. That’s my marketplace. And annuities work well in that marketplace because of the guarantees they provide.
PW: With the expected demise of defined benefit plans and continually discouraging news about the future of Social Security, can defined contribution plans fill the gap or do they need to be supplemented?
MS: They’re going to help to fill the gap. I wouldn’t say they will fill it. Most Americans still need Social Security in order to retire. If they don’t have Social Security money coming in, they will not have enough money to survive. For most people, that extra $1,500 to $2,000 a month is the difference between working or not working and enjoying retirement.
We get a lot of questions: “When should I take it?” “Should I wait until age 70?” “Should I take it at age 62?” “Should I take it at normal retirement age?” There’s something like 600 different ways you can take Social Security benefits. There is no one right answer.
PW: What advice do you have for younger generations who are worried about a future without these benefits?
MS: Well, it’s kind of like when you’re on Lake Erie in the middle of the storm: Pray to God but row like hell. What I tell them is that they really need to work on saving money for retirement and that they shouldn’t rely on the government. Rely on your own means and yourself.