Latest / The Perfect RIA / Annuities: What Every Advisor Needs to Know with Guest Brian Smith [Episode 275]

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Annuities: What Every Advisor Needs to Know with Guest Brian Smith [Episode 275] · The Perfect RIA

• 0:28
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• 1:07
  Matthew Jarvis: Hello everyone, and welcome to another episode
• 1:08
  Brian Smith: Co-owner of Foundational Income Associates,
• 1:10
  of The Perfect RIA podcast. I'm your host, Matthew Jarvis, and
• 1:13
  with me special guest Brian Smith, or some people called
• 1:17
  Smitty, who is a... Brian, Call your title! co owner
• 1:22
  but Wholesaler.
• 1:24
  Matthew Jarvis: Yeah, yeah. Well, here's, here's how I would
• 1:26
  describe. So you've worked with Micah and his dad, Floyd and his
• 1:30
  sister, Jamie, for how many years now? How long have you
• 1:31
  known the Shilanski's?
• 1:32
  Brian Smith: I think we're coming on 15 years now.
• 1:34
  Matthew Jarvis: Yeah and so for those of you that know Micah, or
• 1:36
  know of Micah, like Micah doesn't surround himself with
• 1:40
  anybody who's an idiot, for lack of a better term, like, if
• 1:43
  you've hung out with the landscapes for 15 years and been
• 1:46
  a valuable resource, like, You've got to renew your stuff
• 1:50
  and be good at fishing. I've heard you gone fishing with them
• 1:52
  a few times, but you've got to really know your stuff. And
• 1:54
  Brian, where your expertise is, is in annuities and insurance
• 1:59
  products. Now for our listeners who sometimes have an adverse
• 2:02
  reaction to that, who sometimes, like, wait a second, I don't do
• 2:05
  that. That's doing your practice an incredible disservice. And
• 2:09
  let me give you one quick example, like, so let's run a
• 2:11
  scenario. And Brian, I know you've run into these, a client
• 2:13
  comes in or a prospect comes in and says, Hey, I talked to
• 2:16
  somebody, and they pitched me this product where I get all of
• 2:20
  the markets upside and none of the downside. It's perfect,
• 2:23
  right? In other words, a fixed, indexed annuity. And as
• 2:25
  advisors, if we're not in that space, we're often tempted to
• 2:28
  say, well, that's garbage, that's junk, that's whatever,
• 2:30
  and dismiss it. But there's something about that that spoke
• 2:34
  to the client's concerns, right? And if we dismiss that out of
• 2:37
  hand, what you're doing is telling the client, hey, what's
• 2:39
  important to you is not important to me. If instead, you
• 2:43
  can say, actually, it's funny. Mr. Client, you should mention
• 2:45
  I've got this resource. This guy, Brian Smith, he is an
• 2:48
  expert in these things. Let me have him take a look at it. Let
• 2:51
  me have him shop this thing around and make sure it's
• 2:53
  actually a good deal. And then let me have him let us know the
• 2:56
  pros and cons of this. Does that sound okay for you? Now, I've
• 2:59
  gone from an adversarial relationship to one where we're
• 3:02
  on the same side of the table. So I guess, Brian, with that
• 3:05
  scenario, let's, let's kick this thing off, man. Like, is that a
• 3:07
  scenario run into? How do you help advisors in that spot? Run
• 3:10
  us through this thing.
• 3:12
  Brian Smith: Absolutely, and that is a scenario that we see a
• 3:14
  lot, particularly with advisors that don't use a lot of
• 3:18
  annuities. Yeah, you know, hey, I'm really working on a u m, and
• 3:22
  I don't know that much, and so they just tend to avoid the
• 3:24
  situation, and I would encourage them to embrace it. But you
• 3:28
  don't have to do it alone, right? You can call me. I'm
• 3:31
  going to look across the industry, find out what's going
• 3:34
  on, or take a specific look at that particular product and say,
• 3:38
  OK, now, not all annuities are bad, not all annuities are good.
• 3:42
  It's a tool. You have a lot of tools in your toolkit. If this
• 3:45
  isn't one that you're currently using that let me do some
• 3:48
  digging, find out what's good right now with interest rates
• 3:52
  are where they are our product or more, it's more competitive
• 3:56
  than we've seen in a very, very long time. In fact, better than
• 3:59
  I've ever seen since I've been in the industry. So what I'd say
• 4:02
  is, what is it about that particular product that
• 4:05
  interests that client? Is there something that's even better out
• 4:08
  there? Unfortunately, one thing my industry does not do well is
• 4:13
  they tend to over promise and under deliver. But that doesn't
• 4:18
  mean that all of the products do. Let's fight, is it the
• 4:20
  safety that the client is interested in, or is it income?
• 4:24
  Or is it both? Yeah, let's look across the industry. Find the
• 4:27
  very best thing with a very highly rated carrier with a
• 4:30
  great solvency ratio, and maybe there is a slice of that
• 4:34
  portfolio that would be appropriate for the annuity.
• 4:36
  Matthew Jarvis: Yeah totally in fact, to move away from the
• 4:39
  hypothetical Brian. Before you and I had met. I had a client.
• 4:42
  He sold his small business for a few million dollars. You've been
• 4:44
  an entrepreneur's old life comes in. He says, Hey, Jarvis,
• 4:46
  listen, 1 million of this, $4 million what he sold his
• 4:50
  business for has to go into an immediate annuity. He'd done
• 4:53
  some research, and I will call him box. We call every client
• 4:55
  Bob. I said, Hey, Bob, you know what? About inflation? This was
• 4:58
  a few years ago, before rates had come up. I said, you're
• 5:01
  locked into this thing. There's no way out. There's nothing for
• 5:03
  your kids. And he says, Hey, listen, Jarvis, I have been an
• 5:06
  entrepreneur my whole life, super high risk every single
• 5:09
  day. How am I going to be payroll? I want to lock this
• 5:12
  money into a pension, and you can help me do it, or I'll find
• 5:15
  someone else to help me do it. I am going to do this no matter
• 5:17
  what. Now, thankfully, I had someone I could say, you know,
• 5:20
  what great news, Bob, I've got someone who's an expert in this.
• 5:23
  But had I tried to argue with him, had I tried to say, this is
• 5:26
  a dumb move, I would have lost the entire relationship, and I
• 5:29
  wouldn't have been doing him a service. But in a situation like
• 5:32
  that, right? That's where I could then call you of it
• 5:34
  foundational income Associates, and say, Listen, I got his
• 5:37
  client. He's 72 he's got a million bucks. He wants to get a
• 5:39
  spiel like, what do we do here?
• 5:40
  Brian Smith: Exactly, yeah, well, and particularly with
• 5:43
  spears, you know, it's basically a commodity product. It is. So
• 5:47
  I've got software on or a DIA or an indexed annuity, I've got
• 5:52
  software that I can look across the industry and say, Okay, this
• 5:56
  is how much premium we're going to put into it. How much is it
• 5:58
  going to generate? And people like to know that you've done
• 6:02
  your research, and we can actually send you client facing
• 6:05
  bill that say, Listen, I looked at the top 300 products. Here's
• 6:09
  the top three. Here the ones that I think we should consider,
• 6:12
  you know. And then the client goes, Okay, well, he really did
• 6:15
  do his research. So I like to be the guy behind the guy. I like
• 6:19
  to be the expert that that holds up the advisors. The advisor can
• 6:23
  move forward with confidence with the client. So it's the
• 6:25
  perfect role for me.
• 6:27
  Matthew Jarvis: Yeah, having that market analysis and having
• 6:29
  someone that can do it right, like I don't have that software,
• 6:31
  and I don't want to become the expert. I need to be the expert
• 6:34
  on other things. I had a different client situation. Just
• 6:37
  a year ago. They were trying to be sold by another advisor, a
• 6:40
  fixed, indexed annuity. And for this particular client, it did
• 6:42
  not make sense for their financial situation. It
• 6:44
  absolutely did not align with their goals. It didn't align
• 6:47
  with their financial situation, and it wasn't a very good
• 6:50
  product. And so I was able to reach out to at the time, my
• 6:52
  equivalent Brian of you, and say, Hey, shop this thing around
• 6:55
  for me so that we know how this even compares, back to the
• 6:58
  commodity comment. And so I was able to go back to client and
• 7:01
  say, Hey, listen, we need to chat about if this is a good
• 7:04
  idea or not, but just looking at this, it's not even competitive.
• 7:07
  If this is a goal, we want to guess this is not the way to do
• 7:10
  that. And so is able to say, hey, this person you're talking
• 7:13
  to, they're just a really slick salesperson, and we need to
• 7:16
  separate that from the pros and cons of this product. Brian, I
• 7:20
  would be curious. You've, you've been doing this now for a lot of
• 7:22
  years. You've met with a lot of advisors. I'm curious things
• 7:26
  that emerge of advisors who do really well, and advisors who do
• 7:30
  not so well, who do poorly, right? Like, what are you seeing
• 7:33
  the best advisors do, or conversely, the worst advisors
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  do? Because you've, you've now talked with 1000s of advisors,
• 7:38
  I'm sure.
• 7:38
  Brian Smith: Yeah kind of keeping in line with the
• 7:41
  previous podcast on The Perfect RIA by Tracy loans, he was
• 7:45
  talking a little bit about, you know, you don't have to have a
• 7:48
  securities license. I think there is a barrier to entry, and
• 7:52
  it provides, not only education, but rates, sure. So whether,
• 7:56
  whether it's a 65 or you're a registered rep, or you're a CFP,
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  those kinds of things. First of all, I think, because there's a
• 8:04
  barrier to entry, it's good, right, that the experts have a
• 8:08
  little bit more than than the average. Bear nothing against
• 8:12
  insurance, only, not at all. But I would say, generally speaking,
• 8:15
  that's the first thing when advisors can provide more of a
• 8:20
  financial plan, I think it provides a better reality for
• 8:24
  the client. They can look at estate planning, they can look
• 8:27
  at tax planning, they can look at income, they can look at
• 8:30
  accumulation. And so when I see that, I see advisors that are
• 8:35
  more well rounded, and then in that case, they understand
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  there's a there's a tool for just about every given need. So
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  be the first thing, yeah, to be able to across the industry, or
• 8:47
  if you're not strong in a particular area, they bring in
• 8:50
  another expert to say, You know what? We don't want to product,
• 8:54
  but I've got, I've got this strategic relationship that I
• 8:57
  trust him, and I want you to work with him or her, and then
• 9:00
  the best of the best know what they're not great at, and so
• 9:04
  they don't, don't have time to do all the things. They don't
• 9:09
  have time to look into all the product. They don't have time to
• 9:12
  look across the industry. So when you know what you're not
• 9:15
  good at, and then you sell. And that is, and that's a, that's a,
• 9:19
  I love to say advisors time, they don't have time to look
• 9:23
  across the industry. That's what I can do for them to know, know
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  where you're strong, play to your strengths, but also kind of
• 9:28
  insulate your weaknesses. And then I would say, you know, if
• 9:33
  you want to really pursue a large practice, not really does
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  right? You have to strike that balance between lifestyle of of
• 9:43
  working 60 hour weeks and the kind of you want to bring in.
• 9:47
  But if you really want to get bigger, a lot of the top five
• 9:51
  that we work with are managing money in some form and doing
• 9:56
  some sort of active recruiting, whether that's seminars or
• 10:00
  educational planning, or some way to bring in new blood, other
• 10:04
  than just referrals. And again, I'm not suggesting you have to
• 10:07
  do that. It's a, it's a balance between where you want to be and
• 10:11
  where you are and what you at home with you.
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  Matthew Jarvis: Brian, that's a, that's a good point. I mean,
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  we've had the luxury of being on just a massive bull market for
• 10:20
  Well, I mean, really, since the financial crisis, right? Like
• 10:22
  since 2008 2009 we've only had a few hiccups. And so advisors who
• 10:27
  got in the industry in the last, I don't know, 15 years, like,
• 10:30
  have only seen the markets go up. Like you could just sit
• 10:33
  around and your practice will go that will not always be the
• 10:35
  case, whether that's next week or 10 years from now, again,
• 10:39
  that will definitely change. Want to pull on a thread
• 10:41
  something you mentioned as you talk to top advisors, they have
• 10:44
  people they can reach to fill their gaps, right? So again,
• 10:49
  these two examples I gave of clients, limited is I could have
• 10:52
  spent dozens of hours and only got a super high level view of
• 10:57
  maybe a couple angles of this thing, dozens and dozens of
• 11:00
  hours. Or I can make one phone call. I call Brian and say, Hey,
• 11:03
  listen, I got this situation. What do I do here? And it's
• 11:06
  interesting when I do a lot of coaching, of advisors, my own
• 11:09
  advisors on my team, then across the industry, I'm always
• 11:11
  surprised how seldom people are willing to do that. But I say, I
• 11:14
  got this situation, I just call Brian Smith yet. Well, no, I
• 11:17
  didn't. If I have an insurance question, that's my very before
• 11:20
  I even spend 10 minutes looking at I could Brian a call, because
• 11:23
  odds are he's got the answer. If he does it like, why not start
• 11:26
  there? Why start investing a dozen hours of my time when I
• 11:29
  can call somebody who's who's already a pro?
• 11:31
  Brian Smith: Yeah? Well, there's, there's a spectrum,
• 11:34
  there's the advisor that doesn't understand annuities, maybe
• 11:37
  doesn't even like to, yeah, spend the time to understand why
• 11:42
  it might make sense for you know, particular part of the
• 11:45
  portfolio we have spent, I don't know, hundreds of hours this
• 11:49
  year reviewing old variables might even be a dead asset to
• 11:53
  the to the advisor. Hey, you know what? You can reduce the
• 11:57
  fees, eliminate the risk, and probably get 30 to 40% higher
• 12:02
  guaranteed income. Is that not acting as a fiduciary clients,
• 12:06
  you're actually looking at what they have. If it's great, you
• 12:09
  can go back and say, Hey, listen, this thing is still
• 12:11
  kicking. If not, maybe it's time to do a freshen up. We've got
• 12:15
  some clients here in Minneapolis that there's a particular
• 12:18
  company, I won't mention them, but they have a fairly average
• 12:22
  variable. It never really was great. It's not great now, and I
• 12:26
  could provide higher joint income than what the guarantees
• 12:30
  were on the single income for the product, product that they
• 12:33
  have. So I'm like, Look at, look at the assets in your book. Are
• 12:37
  they doing what your clients want them to do for them, if
• 12:40
  not, you know, particularly for for all variable annuities, old
• 12:44
  fixed indexed annuities, let's take a look at it. Let's, let's
• 12:47
  take it apart and put it back together. If it's great, it's
• 12:49
  great. If not, maybe you have ability to look at what, what is
• 12:53
  out there. Now, could we do something better for the client,
• 12:56
  you know, and then so that for the for the people that that
• 12:59
  don't like them, we'll spend the time to really dig in and help
• 13:03
  them understand. For the people that want to take a quick look
• 13:07
  and say, Hey, what you know, here's what I'm thinking. What
• 13:09
  do you think? Absolutely, that's a great product. However, we can
• 13:11
  help.
• 13:12
  Matthew Jarvis: No, I'm glad you had mentioned so those of us
• 13:14
  that have been in the industry a long time, right? We have
• 13:17
  variable annuities on the books that were like pre financial
• 13:19
  crises, which I guess for younger advisors. That's hard to
• 13:21
  believe there was kind of an arm kind of an arms race leading to
• 13:23
  the financial crisis of the A's, and for a long year time, like
• 13:27
  decade, especially low interest rates, they were the best thing
• 13:29
  available. But Brian, to your point, I know my office just
• 13:32
  went through and did this. You helped Micah's office go through
• 13:34
  and do this. All the old annuities on the book go back
• 13:37
  through and have now again, to have my team do it. Now, I
• 13:40
  wouldn't have been there was so much work and so much time, but
• 13:42
  to have your team go through and do it, because you've got the
• 13:44
  technology to do it, we went back to every client, about
• 13:48
  about two thirds of them we ended up replacing, probably
• 13:50
  close to 75% because your point higher income. Though, what's
• 13:55
  interesting, Brian is the clients that were the most
• 13:58
  appreciative, the ones we didn't end up changing. We went back to
• 14:01
  and said, hey, you know this old John Hancock account you've had
• 14:03
  for 15 years. We actually went and we had it shopped around,
• 14:06
  and it's still the best thing available for your situation.
• 14:09
  And clients were ecstatic about that. They were ecstatic that
• 14:12
  we're still taking care of that thing, that this thing they've
• 14:14
  had for 15 years, in their case, is still the best now, of
• 14:17
  course, the clients that we're able to go to and say, Hey,
• 14:19
  you're currently getting $2,000 a month guaranteed on this
• 14:22
  thing, and we can now get 2500 What do you want to spend the
• 14:24
  extra 500 a month on? They were they were equally ecstatic. But
• 14:28
  it's something that's got to be done across your book. Across
• 14:31
  your book.
• 14:32
  Brian Smith: No, absolutely. And the peace of mind of you knowing
• 14:35
  that you've looked through their entire portfolio and time is
• 14:39
  limited, I get it. There's so much that an advisor has to look
• 14:43
  at, so much they have to take care of, and to be able to know,
• 14:47
  okay, you know what I looked at that? We checked the block. We
• 14:50
  haven't looked at it. You know, maybe in a little bit with
• 14:52
  interest rates are right now, now is a perfect time to do that
• 14:56
  kind of deep dive. And we do get people that send us, you know,
• 15:01
  huge Excel spreadsheets. And obviously they send them secure,
• 15:06
  so we can go through those and look at them one by one. And
• 15:10
  yeah, it's probably 60% of the time. We can make the client
• 15:14
  better. You know, 30% of the time at the toss by probably
• 15:18
  leave it alone, 10% or maybe 10 to 20% it's like, wow. Whatever
• 15:23
  you got into back then was phenomenal. Don't, don't you
• 15:26
  dare move it, you know? And I've noticed advisors that tell me,
• 15:30
  Wow, you know what, when I, when I brought that back to my
• 15:32
  client, they were like, wow. So you're not going to try to push
• 15:36
  me into something for an additional sale. No, we, we're
• 15:40
  just looking at your situation. We want to make sure that you're
• 15:42
  set up. Your kids are set up for the perfect future that involves
• 15:46
  a new sale. Great, if it doesn't, great.
• 15:49
  Matthew Jarvis: Yeah, this is, again, for advisors that have,
• 15:51
  really, whatever you have on your books. It's annuities or
• 15:55
  life policies or long term care policies or wrap accounts, or
• 15:58
  AUM, whatever the case may be. I always wanted to go to clients
• 16:01
  every single year and say, Mr. Mrs. Client every year we look,
• 16:05
  we scour the entire industry to see if there's any investment
• 16:08
  options that are better than what you have right now. Now,
• 16:11
  for us internally, that might just be a high level look like
• 16:14
  for all the years after the financial crisis, interest rates
• 16:16
  were zero. Those old VA benefits were spectacular. It was very
• 16:19
  easy to go to clients and say, there's nothing like this
• 16:21
  available. And we could say that without needing to do a lot of
• 16:24
  deep research, but when interest rates came up, that's when we
• 16:26
  had to say, All right, there is, in fact, likely better products.
• 16:29
  Brian, to your example, probably about half of these people,
• 16:31
  maybe two thirds, they would be better off making a change.
• 16:34
  That's when we need to commit to doing that deeper work. Brian,
• 16:37
  if you don't mind, I want to shift gears just a little bit.
• 16:39
  You as well as your company, foundational income associates
• 16:42
  are going to be at the retirement at the retirement Tax
• 16:43
  Services Tax Summit, one of our values sponsors there. Let's
• 16:47
  talk about taxes as it relates to all these things, right? So
• 16:50
  we've got these old annuities. Let's assume that they're non
• 16:53
  there's some knowledge. Find ones in there, right? If they're
• 16:55
  inside of an IRA, and correct me at any spot if I'm saying wrong
• 16:57
  here, if they're inside an IRA changing from one to another.
• 17:00
  That's a pretty just straightforward thing. It's it's
• 17:02
  really an IRA rollover. But what about when we have non qualified
• 17:06
  money? Talk to us a little bit if you can about if it's an
• 17:09
  existing account you have, or it's a new client you're
• 17:11
  bringing in, they've got a half million dollars in a non
• 17:15
  qualified annuity that they originally put 100,000 in a
• 17:17
  million years ago. How do we deal with the taxes on that
• 17:20
  stuff?
• 17:20
  Brian Smith: That's a great question. Yeah, the the
• 17:23
  insurance companies are required to maintain what they call cost
• 17:27
  basis reporting, which is basically the original
• 17:30
  investment. So they have to keep reporting of not only the
• 17:33
  original investment, the gains on those products. So in the
• 17:37
  industry, you'll hear 1035 exchange thrown out a lot. But
• 17:42
  what the industry has they've made that a broad brush
• 17:47
  statement, and unfortunately, people talk about moving money
• 17:50
  from an annuity to an annuity, and they call it all a 1035
• 17:52
  exchange, actually a 1030 which is a very particular term, an
• 17:57
  IRS code for non qualified annuity to non qualified
• 18:01
  annuity, or cash value life insurance into a non qualified
• 18:05
  annuity. That's all 1035 exchange refers to. You're
• 18:09
  talking about qualified money. It's either a direct transfer,
• 18:11
  moving from IRA custodian to IRA custodian, or a rollover where
• 18:15
  you know somewhere in between the client might get involved,
• 18:18
  but back to your non qualified Yeah, if you move non qualified
• 18:22
  from one annuity to another, non qualified annuity that is
• 18:24
  considered a 1035, exchange and a tax free exchange, the seating
• 18:29
  carrier will send cost basis reporting to the new carrier so
• 18:34
  that they can maintain that separation of principal and
• 18:38
  earning, if that makes sense, and They don't always do a great
• 18:42
  job. So it's not a bad idea in the middle of that 1030 change
• 18:46
  to talk to the seating carrier and say, Hey, listen, you're
• 18:48
  going to send cost basis reporting. They are required to
• 18:51
  do it by the IRS, but you're also required by the to maintain
• 18:56
  the speed limit, which nobody does. So...
• 18:58
  Matthew Jarvis: So, yeah, no, no, that's that's No kidding.
• 19:01
  Yeah, so, so functionally, it sounds like it works similar to
• 19:04
  an IRA rollover, as long as everyone's done correctly. Let's
• 19:07
  say that you do this analysis on an annuity. We're gonna use the
• 19:09
  same, non qualified example, half million in it. They put
• 19:12
  100,000 a basis way back when, and for whatever reasons, their
• 19:15
  goals have changed, and they don't have a need for the
• 19:17
  annuity any longer. Like they're like, Hey, we're already just
• 19:19
  straight cash this thing out. Or perhaps they need the money.
• 19:21
  I've got a client right now. His wife is in a nursing home. She
• 19:24
  has a non qualified annuity that we're using to pay for the
• 19:28
  nursing home, but now her needs are exceeding the income that's
• 19:31
  available. So we're gonna catch this thing. And can you speak to
• 19:34
  us on how the taxation works on something like that?
• 19:36
  Brian Smith: You bet. You bet. So I think, since I don't
• 19:39
  remember the exact year, Matt, I was only says 78 or 79 a few
• 19:44
  years ago they came out. Yeah, a long time before I was in the
• 19:48
  industry. But they created annuities were LIFO, last in,
• 19:53
  first out. So on a non qualified, a new take, a
• 19:56
  distribution, the last thing is the first thing out. So if
• 20:01
  you've got that same example, $100,000 cost basis and $400,000
• 20:05
  of gain. If you take a withdrawal, the first thing that
• 20:08
  comes out are your earnings. So if you cash the whole thing out,
• 20:12
  she would have a $400,000 tax bill and 100,000 she'd already
• 20:16
  paid taxes on. And so when you're thinking about
• 20:19
  distributions from an annuity. You want to keep that in mind,
• 20:22
  because, let's say you put it into an income rider product,
• 20:26
  because you wanted to get lifetime distributions, then the
• 20:29
  first $400,000 would be taxable. The next $100,000 would be tax
• 20:35
  free. And if you get all of your money out and get into the
• 20:38
  insurance company's pocket, then it would be fully taxable again,
• 20:41
  with an IRA interest. Pretty simple, you haven't paid taxes
• 20:43
  on it's going to be taxable forever, but not qualified. A
• 20:47
  little bit different.
• 20:48
  Matthew Jarvis: For some of our listeners. This is going to be
• 20:49
  101, but it's, I see people make mistakes on this. So this life
• 20:53
  was important to remember. It's also important remember then
• 20:57
  annuity income is taxed as ordinary income, so even if it
• 21:00
  was invested in the s, p inside that and it had what we would
• 21:03
  deem as capital gains, same as an IRA doesn't how the income
• 21:06
  was generated, ordinary income coming up now, Brian, speak to
• 21:09
  us. So again, this client example, which we're dealing
• 21:12
  with right now. So your point, if they started taking out 100 a
• 21:14
  year, that first four years of distributions will be fully
• 21:17
  taxable as ordinary income. And then, for simple math, year,
• 21:20
  five days would come out. That year would be tax free. What if
• 21:23
  we were to annuitize this, right? What if, let's do a four
• 21:27
  year decision? How does that change the taxation?
• 21:30
  Brian Smith: It's a great question, you know, it's, it's
• 21:31
  interesting, when I first got into the industry annuitization,
• 21:35
  that was, was really all that was available? Oh sure, yeah,
• 21:38
  people, there was, there were no complaints about it. And then
• 21:41
  sometime in the last 10 years, annuitization became a curse
• 21:44
  word, but there are still purposes to use it. Sure
• 21:48
  annuitize a non qualified contract, you get an exclusion
• 21:52
  ratio. So in other words, the insurance company is going to
• 21:54
  take a little bit of principal and a little bit of gain and
• 21:57
  that over the length of the payment. So if it's a lifetime
• 22:00
  payment, they're going to take principle and basis, and they're
• 22:03
  going to spread it out. And what that does is spread out your tax
• 22:06
  liability, right? Versus if you just take the distribution, if
• 22:09
  you if you cash to render the policy, obviously, in that
• 22:12
  scenario, $400,000 needs to be paid in taxes. $100,000 is
• 22:16
  already basis. So there are times where annuitization can be
• 22:21
  a better benefit. The other time, we won't spend much time
• 22:24
  here, but you hear people that are are trying to be Medicaid
• 22:27
  friendly. Yes, you know, to try to, you know, shelter the money.
• 22:30
  That's another scenario where annuitization is helpful. But in
• 22:33
  order to spread the liability of a tax gain, annuitization on a
• 22:38
  non qualified product is something that is advantageous.
• 22:41
  Hardly anybody talks about it anymore, but it can, it can be
• 22:44
  worth it.
• 22:45
  Matthew Jarvis: And again, whether you're an advisor who,
• 22:47
  for whom insurance is a major component of your practice, or
• 22:50
  or you're not even insurance licensed, and it's not a piece,
• 22:52
  you've got to really understand this stuff, right? I was
• 22:55
  recently at a conference, and I was speaking, you know, provider
• 22:58
  that was there. And actually, I use them as well, great, you
• 23:00
  know, provider. And I always like to ask him, I say, hey,
• 23:02
  where Hey, where are you seeing your biggest claims? Where are
• 23:05
  you seeing the most claims right now? Because I always want to
• 23:07
  know, like, there's one thing for us to talk in the industry,
• 23:09
  and for you and I to speculate, it's another. It talks to the
• 23:11
  insurance company. They say, here's where we're writing the
• 23:13
  checks and their biggest claims right now. Brian, number one,
• 23:17
  biggest is wire fraud. So advisors get a fake wire
• 23:20
  transfer and they're sending, they're facilitating. That's
• 23:22
  number one. Number two, Brian is not advising clients on the
• 23:27
  taxation of things like this. So an advisor has a client come in
• 23:31
  perspective. Client, they say, oh, yeah, this old annuity, this
• 23:33
  thing's garbage. Let's cash this thing in. They cash it in. In
• 23:36
  our example, the client then gets a giant tax bill. Says,
• 23:38
  Hey, you didn't tell me this tax bill was going to come, and they
• 23:42
  file a complaint against the advisor, and this is becoming
• 23:44
  one of the top sort of, you know, claims. Now you might
• 23:47
  think to yourself, well, that's why I have, you know, insurance.
• 23:50
  If I start tip, when you make an Eno claim, your you know,
• 23:52
  premiums go through the roof. You can also lose whatever
• 23:55
  affiliations you have. So let's say you're you're with Schwab,
• 23:59
  if swab sees you're making claims that they can kick you
• 24:02
  off their custody platform the next day. No questions asked. So
• 24:05
  understanding how these things work. Or again, Brian, I don't
• 24:08
  feel like there's an endless plug for you to say, Listen,
• 24:10
  anytime I see an annuity come across my desk. Anytime I see a
• 24:13
  long term care policy or old cash value life policy, I get to
• 24:16
  send a copy over to Brian's team, if only because, if this
• 24:20
  turns into a problem for me, the tax thing, the beneficiaries,
• 24:23
  whatever the case may be, I can then show, hey, listen, I
• 24:26
  reached out to another expert. Here was the insight that they
• 24:28
  gave me that buys you so much time. So Brian, with with all
• 24:32
  that in mind, right with this idea that there's more claims
• 24:34
  than ever against advisors who are forgetting these tax things
• 24:38
  when an advisor sees an annuity come across their desk, life
• 24:43
  policy, a long term care policy. How do they fall into these
• 24:46
  traps, whether it's the taxation trap or just not understanding
• 24:49
  it like, are there other traps that they should be watching out
• 24:52
  for when these things come across their desk?
• 24:54
  Brian Smith: Yeah, you know, it's interesting that that does
• 24:56
  happen, Matt, and it happens with, typically, policies that
• 25:00
  an advisor didn't necessarily sell, but have taken over we
• 25:03
  don't necessarily know what they have, and if the advisor doesn't
• 25:06
  know what they have, and annuities are complex, it's
• 25:09
  pretty, pretty good chance that the client doesn't know what
• 25:12
  they have. So I would say, Let's pause. Let's take a look at it,
• 25:16
  send it to me and my team. We can do some scrubbing. We can
• 25:20
  dig into what it is, and you know what is supposed to do, so
• 25:25
  that we can make an educated decision. You know, you don't
• 25:28
  have to know everything. You got to know the right kinds of
• 25:30
  people, you know. And we don't know everything, but we know a
• 25:34
  lot about annuities. So if we can jump in and kind of
• 25:37
  ascertain all right, this is how the product works. This is what
• 25:40
  it was intended to do, and then maybe some of the pitfalls that
• 25:43
  you might get, particularly as it relates to distribution,
• 25:46
  brought it up, what's going to happen if my client does this,
• 25:50
  or is there another option at the entrance company offers that
• 25:54
  maybe isn't on the statement, that we could get to a better
• 25:57
  resolution for the client? So the statement, let's do some
• 26:01
  digging and have some discussion, so that you can be
• 26:03
  educated when you talk to your client and available.
• 26:07
  Matthew Jarvis: One other thing that comes to to mind, Brian
• 26:10
  will wrap this episode up, is clients with, and again, if
• 26:13
  you're working with retirees with old life insurance
• 26:16
  policies. So I see prospective clients come in, or new clients
• 26:18
  come in, and they'll have these old policy is that, in fact, I
• 26:21
  worked recently a client. He's in his 80s. He and his wife in
• 26:24
  their 80s, they had some policies they had taken out in
• 26:26
  their 20s. So 60 years earlier, they had taken out these old
• 26:30
  Whole Life policies and had just sent the $112 a month in, or
• 26:34
  whatever it was, and so on the get love your thoughts. Whenever
• 26:38
  I see those, I always tell clients, hey, listen, we need to
• 26:40
  see what's really going on, like we need to look behind the
• 26:42
  curtains here. We're going to call in together and get what's
• 26:45
  called the force illustration. Now that doesn't mean anything
• 26:49
  to you, Mr. Mrs. Klein, and the report that they send back is
• 26:51
  going to look like total Greek. It's really not going to make
• 26:54
  any sense. But great news, myself and the experts that I
• 26:56
  work with, we speak that same language. We speak that Greek,
• 26:59
  and we're going to decipher and figure out what makes the most
• 27:02
  sense. And then we have in Tracy and I talked about this on our
• 27:04
  last episode together on insurance. Want to see, hey,
• 27:07
  what is the best case scenario and what is the worst case
• 27:10
  scenario? What's everything in between? And again, back to the
• 27:13
  annuity example. Maybe it makes sense to make a change. Maybe it
• 27:16
  doesn't make sense, but either way, I'm the first person in 60
• 27:19
  years for this client who's ever said, Hey, let's take a look at
• 27:22
  what's going on here. Make sure this is still in line with your
• 27:24
  goals.
• 27:25
  Brian Smith: Exactly. Well, in you brought up a couple
• 27:27
  different things there that I really like Matt. Number one is
• 27:30
  sometimes to get the client on the line to call the insurance
• 27:33
  company and say, All right, literally, we want to know what
• 27:36
  the guarantees are. Yeah, the G word is important. We've all
• 27:40
  been burned by carriers that are promising, IMOs that are hyping.
• 27:44
  We need to find out what the guarantee what is this product
• 27:47
  really doing? If you pull back the covers, sometimes they're
• 27:50
  great, sometimes they're really not great. The performance that
• 27:53
  was promised has not been experienced. So I like to really
• 27:58
  focus on the guarantees. What is it? Guaranteed Income. Not
• 28:02
  hypothetical income, but guaranteed income. Oh, the s, p
• 28:06
  cap is currently 9% how long is that cap?
• 28:09
  Matthew Jarvis: I'm glad you brought that one up. That's
• 28:10
  like, my biggest beef with FIA illustrations, right? Like, oh,
• 28:13
  the cap's going to be 15% forever. No, what'll probably
• 28:17
  happen is, it's 15% year one and year two, it's 2% or some dismal
• 28:21
  number, but yeah, yeah, what is, what is the cap after year one?
• 28:24
  Yeah, big, big thing.
• 28:25
  Brian Smith: Well, and the insurance companies have learned
• 28:28
  from this, and now there are a couple carriers that will
• 28:30
  actually guarantee that that cap does not drop for the duration
• 28:37
  of the surrender charge date. And if I can get an A plus rated
• 28:40
  carrier with a good solvency ratio that guarantees that they
• 28:45
  won't drop their cap on me. That's where I'm going first,
• 28:48
  right up a little bit of the hype with some of the other
• 28:51
  companies. Maybe I could get 11% but what I don't want is rate
• 28:54
  attrition. Clients don't like to get statements where the
• 28:57
  opportunity next year is less than the opportunity at this
• 29:00
  year. So if guaranteed income, let's make sure it's guaranteed.
• 29:04
  Yeah, and if we're talking about accumulation, I want to make
• 29:07
  sure that I can, I can expect reasonable rate of return, and
• 29:11
  that the insurance company isn't going to, you know, cut my legs
• 29:13
  out from under me, because as someone that that works for the
• 29:17
  advisor, if that happens, the client is not happy, which makes
• 29:21
  the advisor unhappy, which makes me not look good. So I would
• 29:26
  like to under promise, over deliver and offer guarantees to
• 29:30
  the client, because ultimately, that's probably why they're
• 29:33
  going to the insurance product in the first place.
• 29:35
  Matthew Jarvis: Yeah, yeah, no, for sure is all right. One last
• 29:37
  question for you, Brian, we really got to wrap this time.
• 29:39
  Are a friendly annuities there. So this idea of of annuities
• 29:43
  that are, whether they're VAs or whatever, the people with,
• 29:47
  basically without insurance licenses can write, they can
• 29:49
  charge an AUM fee. What are you seeing in that space? Separate
• 29:53
  the hype from the reality here for us? What's going on there?
• 29:57
  Brian Smith: Yeah, the advisory annuity. Interesting for the
• 30:00
  first time this sell a multi year guaranteed annuity, a, my
• 30:05
  God, as an advisory annuity. Yeah, that was new to me. Yeah,
• 30:09
  it is crazy, yeah. But I think it gets it gets back to advisors
• 30:14
  that really just want to be able to say to their client, I don't
• 30:18
  receive commissions. Now, I don't necessarily see anything
• 30:21
  wrong with Commission, as long as it's disclosed. Yeah, but if
• 30:25
  that's what you want, there is a way, whether it's a fixed
• 30:28
  annuity or an indexed annuity, RYLA buffered product, or even a
• 30:33
  variable annuity. There are ways that you can sell an annuity
• 30:36
  that you charge a fee on, and in many cases, the opportunity that
• 30:41
  is given by the insurance company is better than some of
• 30:44
  the products with commissions. And when they first came out,
• 30:47
  Matt, it was a disaster.
• 30:49
  Matthew Jarvis: He didn't know they were priced the same. It
• 30:51
  was great. The insurance company loved them. They're like, Yeah,
• 30:53
  we have this fee only annuity. It's the same rates as the
• 30:56
  commission. Well, we're just going to keep the difference. I
• 30:57
  mean, they love that. And there were suckers all day long that
• 30:59
  were taking those things on.
• 31:00
  Brian Smith: But then the insurance company, the feed of
• 31:03
  the client, was under 59 and a half. They got a penalty issues
• 31:07
  there. So it's been about three years, and now they've really
• 31:10
  cleaned it up to where there is an opportunity for income and
• 31:16
  growth and protection, where you're charging a fee, whether
• 31:19
  that's, you know, 50 basis points, or up to a point,
• 31:22
  whatever your model is, there is, there's so much crossover
• 31:28
  now. There's so much opportunity. The products have
• 31:31
  never been better. And the insurance companies are learning
• 31:34
  that there are people that don't want commissions. Okay, all
• 31:36
  right, that's perfect. We offer those two. You just got to let
• 31:39
  us know what we what what your clients want, and what you want
• 31:43
  for your practice and and we'll find you one, but they're
• 31:46
  competitive now. It's been an interesting transition.
• 31:49
  Matthew Jarvis: You know, I love this, and Brian, I appreciate
• 31:51
  your discussion. I'm looking forward to seeing yourself and
• 31:54
  foundational income associates at The Retirement Tax Services
• 31:57
  Tax Summit at the end of September, for all of our
• 32:00
  listeners, two actions, one I hope, is abundantly obvious,
• 32:03
  that if you any annuities or insurance products on your
• 32:06
  books, these need to be gone back through. With the fine
• 32:09
  tooth combs, rates have changed dramatically. What you took out
• 32:12
  a couple of years ago or decades ago is likely not as good as
• 32:16
  what's available today. The second thing, if you're an
• 32:18
  advisor that has none of those products on your book, don't
• 32:22
  have a single annuity, a single insurance policy, nothing. You
• 32:25
  still need to be having this discussion with clients, right?
• 32:28
  The markets are at all time high. We're at a What are we on?
• 32:31
  A 14 year bull market that will change at some point, and if it
• 32:34
  changes in a bad way, real dramatically, let's say the
• 32:37
  markets go down 50% like they did at 2008 2009 and you've
• 32:40
  never had a conversation with your clients about mitigating
• 32:43
  risk that is going to bite you. Brian, and I've been in history
• 32:47
  long time. I remember 2008 2009 very quickly. And I remember
• 32:50
  advisors getting sued left and right by clients and saying,
• 32:53
  Hey, you never told me how to hedge this risk. Now that
• 32:56
  doesn't mean you need to put all your clients in an Fia, maybe
• 32:59
  does. Maybe does it. It means you need to have that
• 33:02
  discussion. Mr. Mrs. Client markets are at all time highs.
• 33:05
  We've been 14 years. 14 years. There are ways to take risk off
• 33:08
  the table. It's not free. It's going to cost us, but there are
• 33:12
  ways to take risk off the table. Do you want to have that
• 33:15
  discussion, which we document in writing and an email that way,
• 33:18
  at a minimum, as a CYA, but really, as a dishwasher rule,
• 33:21
  you are bringing more value to the table. And so when you have
• 33:24
  that discussion, and some of your clients inevitably say,
• 33:27
  actually, yeah, I would like to talk about that, that's when you
• 33:31
  call Brian. Instead of becoming an expert yourself, you said,
• 33:34
  Brian, I got this client. They got 3 million bucks. They're 65
• 33:37
  they want to take some risk off the table for politics, whatever
• 33:40
  reason. What are my options? And you can have someone like Brian
• 33:44
  shop that around for you and put you and put you in a good spot.
• 33:47
  So Brian, again, thank you so much for your time, for
• 33:50
  supporting our conference. For all of our listeners, you can
• 33:53
  find Brian's contact information in the show notes and at
• 33:56
  foundationalincome.net is his website. And until next time,
• 33:59
  happy planning. Today's episode is brought to you by Growth, not
• 34:03
  just anyone's growth, but your growth, more specifically, the
• 34:06
  growth of your net income, that depends on your tax return, the
• 34:09
  money that goes home to your family, growing your net
• 34:12
  revenue, doubling it in the next 12 to 36 months. Now, why that
• 34:15
  range? That is the range where Micah and I have, both in our
• 34:19
  own practices and in hundreds of advisor practices we've coached,
• 34:22
  been able to double their net revenue. That's a bold claim,
• 34:25
  but it's backed by a lot of experience our own. And again,
• 34:28
  the practices we've coached go to theperfectria.com/grow
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  G, R, O, W, to learn how we can help you double your practice
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  like we've done for so many others.
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  Unknown:
• 35:03
  Amber Kuhn: