>>>do you earn commissions from EIA sales?<<<

For the record, no. But, I'd like to add that this is totally irrelevant to the discussion (a red herring).

I used to sell them. I also have experience selling mutual funds, which I also don't do anymore.

EIA commissions run the gamut. Some commissions I've seen go upwards of 7 percent on the first year (called FYC or "first year commissions"). Some states, like NY (where I am from) cap commissions at 5 percent (or at least they did when I was selling). The commission is on the deposit in the contract. But, no money is deducted from the annuity account to pay commissions. The insurer uses surrender charges on the annuity to make up for the commissions but those fees are only charged if the client cancels the contract within the surrender period. Usually, there are no other commissions paid out after that first year.

Mutual funds vary too depending on the class share you sell. It really depends on whether you get an upfront commission plus trails or just trails. You could get 5 percent up front on money invested in mutual funds and then earn trailing fees on top of that. Maybe .25 percent annually whether we did anything or not. Maybe .5 percent. As long as the client was still a client, we made money.

RE: Cherry Picking–OK, then the salesman cherry picked his data (rather poorly at that, I think), but, you used the same data. My only point with that is that the date ranges are completely and totally arbitrary. There's no objective reason to analyze returns from 1950 until today.

I don't think the EIA was overly favored in this example. You didn't deduct fees because there are no fees to deduct. I think you're confused on how EIAs charge fees. There are no fees and expenses for an EIA unless the insurer charges a spread. They only charge a spread when there is no cap. Now that you're on it, you also assumed a flat cap rate. Those things go up and down with the price of options contract fees and the cost to hedge. So, in good times, you'll see those cap rates rise. That's hard to predict so I won't go on about that too much. 1.5% fee on the mutual fund seems high for an index fund, so I'll give you credit for that.

But, you DID favor your S&P assumption VERY heavily. You compounded the return every year on every dollar invested. What mutual fund does this? None that I know of. What stock investment earns compounded interest? None that I know of. But then, I've already brought this issue up to you. You measure only dividends when compounding returns, and even then, you're simply buying more shares in that year for more price appreciation. If you're not earning dividends, then you're not compounding. You should be measuring the total return if you're looking at stocks.

Yes, I agree EIA salesmen shouldn't be comparing the S&P500 to an EIA. I understand the appeal of doing sales pitches that way. Heck, even the insurance companies say "earn the upside of the stock market without any of the downside risks" I've said that myself before, but with several caveats. You have to explain that there are caps on these things, that those cap rates change, and that you don't earn dividends and….and…and…

Far too often, I think what's being sold is the idea that you can have your cake and eat it too, and that's just ridiculous as well as a contradiction in terms. EIAs do exactly what the contract says it will do. But it's not a miracle investment product.

Let me ask you this: do you earn commissions from EIA sales? If so, please share with us how much you make on a typical sale and also tell us how that compares to a mutual fund sale.

I did not cherry pick. Cherry picking would have occurred had I chosen a date that backed up my point of view. I did not do that. I used the date that the annuity salesman used.

HOW can you say I didn’t favor the EIA? I didn’t deduct fees and expenses and I took out 1.50% for fees on the S&P 500 Index. The EIA was HEAVILY favored in this example.

I understand why insurance agents don’t like me comparing an S&P 500-based EIA with the S&P 500 Index. But, if they don’t like those comparisons then they shouldn’t be selling the product because you can bet that they are using the S&P 500′s underlying numbers to make their sales pitch.

I’ve seen some really bad annuity presentations. I think my accusation is proper. You are comparing apples to oranges.

It is cherry picking regardless of how you look at it. Annuity salesmen do it, but so do those on the other side of the fence. You used the salesman’s data, but assumed his premise was correct to begin with. I don’t think it is.

I’m not saying that the EIA should have won. I think an analysis of an EIA going back to 1950 is not realistic and neither is assuming an IRA return or compounded returns from that time period either. It’s not realistic because they didn’t exist.

You didn’t really favor an EIA. Any annuity I’ve looked at with a cap doesn’t have a fee on top of that. They use spreads (fees) when there is no cap. The other point you brought up about locking in investment principal isn’t really favoring EIAs either. They are designed to protect investment gain plus principal. You’re just illustrating how EIAs work. But, on the stock market side, you weren’t demonstrating how stock returns work. You were demonstrating how a hypothetical compounding investment (stocks don’t earn compounding returns unless they are dividend stocks and even then not all of the return is compounding) that also gets all of the gains and losses of the stock market works.

To say that EIAs are based on the S&P is sort of true, but doesn’t tell the whole story. They are handicapped on purpose. The product derives some of its interest from the S&P. It used bonds and index call options to generate the returns. Obviously no dividends are paid. The cap rates you seem to understand. Sometimes there is a fee, but not when there is also a cap.

…and when I say you are comparing apples to oranges, you are comparing the stock market with dividend returns and 100% compounding tax-free vs a product that tracks just the upward movement of an index. That doesn’t mean you can’t compare them. It just means that you have to understand that there is necessarily going to be a difference in the return potential. You put Ali in the ring with the kid in the golden gloves and then when Ali won you said “stay away from the EIA.”

That’s not “apples to apples.” Apples to apples would be “Look at this corporate bond. Look at this other corporate bond. Which one pays more?”

If the purpose of the comparison was to say “well, if an IRA and index mutual funds existed in 1950, they would have beaten an indexed annuity if it had also existed.” my question would be “how can you possibly know that?” When you have money flowing to different investments, it affects how people invest in them, how those assets are priced, and the fees generated and so on (i.e. supply and demand drives asset pricing and affects returns on the secondary market where these assets are bought and sold). But, there’s no way to go back in time, invent either hypo investment or assumption and then sit back and watch who comes out on top.

I think the best you could have done is said the EIA salesman is wrong, the only analysis that can be done is from the time EIAs were first introduced until now. How does it compare to the stock market returns during the same time period? That would be a historical comparison. It still wouldn’t be apples to apples, but it would compare how EIAs perform as versus a direct investment in a stock index.

“Why did you choose 1950? Why not 1974? Why not 1900? You’ll get wildly different results when you change the date. Seems like cherry picking to me.”

This was a follow-up post to the previous day’s post, which you can read here. I got the start date from the ANNUITY SALESMAN who conducted the seminar! I assure you there was no attempt to cherry pick.

Finally, if comparing an EIA that’s BASED on the S&P 500 Index can’t be compared with that index, then what can it be compared with. Did you not read my assumptions which favored the EIA?

I don’t appreciate the accusatory tone in your comment. I can assure you that had the EIA come out on top, I would have printed that.

I see your comparison. I am not a champion of EIAs. But, I think your analysis is very seriously flawed.

1) You don’t specify what the “non-annuity” account is other than an IRA investment. But, you started the analysis in 1950. IRAs weren’t introduced until 1974. If you’re going to compare the “reality” of an EIA, don’t compare it to puff the magic dragon.

2) Why did you choose 1950? Why not 1974? Why not 1900? You’ll get wildly different results when you change the date. Seems like cherry picking to me.

3) You compounded the return. Stock returns are NOT compounded unless you invest in dividend stocks, and then you need to know the capital gains rates for the appropriate years because it WILL affect the return (assuming you’re not cheating and showing a return that you could never have gotten in an IRA in 1950 to 1974). Also, index mutual funds didn’t really exist until the 1970s either so that’s out as an investment assumption until then. That kills your 11+% compound return assumption.

4) You really are comparing apples to oranges. The types of people investing in EIAs have different goals than people who invest in the stock market.

It seems as though you set out to prove that the EIA is a piece of crap instead of setting out to analyze which investment would have produced more money over the long-term. What you ended up with is a misleading analysis.

How much do you get paid when you sell someone an EIA?

That being said, I think EIA commission rates are too high.