An Independent Review of the Aviva Balanced Allocation Annuity 12 (BAA12)

Thursday, February 2, 2012 | 8 Comments

A couple weeks ago I reviewed an annuity (the Security Benefit Secure Income Annuity) that has become quite popular over the past year or so and got some very interesting feedback.  Most of the feedback was very good, but there were a few negative emails as well.  The negative email came from some insurance agents around the country that didn’t like that I singled out an annuity and openly reviewed how it works, what reasonable expectations should be for those contemplating buying it, and some of the mis-truths some advisors might use to get investors to buy in.

So much for full disclosure being good for investors.

Focusing on the positive responses, which were much greater than the negatives, I’ve decided to occasionally do independent annuity reviews of other popular products just so there is at least one truly independent voice explaining the real pros, cons, and inner workings of these rather complicated financial products.

Today I’ll be reviewing the Aviva Balanced Allocation Annuity 12 (BAA12).

Before I dig into the review let me clear the air with a little legal disclosure:

This is a review, not a recommendation to buy or sell an annuity.  Aviva has not endorsed this review in any way nor do I receive any compensation for this review.  This review is meant to be an independent review at the request of readers so they could see my perspective when breaking down the positives and negatives of this particular model annuity.  Before purchasing any investment product be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.  All names, marks, and materials used for this review are property of their respective owners.

Let’s begin.

The Aviva Balanced Allocation Annuity is a bit more complicated than the Security Benefit Annuity I reviewed a couple weeks ago in that it has multiple crediting options and more riders available.  For the sake of simplicity I reviewed just one of those options, called Option A.

Option A in the Balanced Allocation Annuity provides a S&P 500 linked growth method for calculating 1/2 of the annuity return and a 1% fixed account for the other 1/2 of the annuity return.  These percentages can change should the insurance company need to do so and the 50/50 mix is only current as of January 2012.

The way earnings are credited to the annuity are as follows:

  • For the S&P 500 linked portion the contract looks at 2 year time periods for crediting earnings.  So if purchased today an investor would need to wait 2 years from their purchase date and if the S&P 500 is up 10% – then the annuity would credit 5% of earnings before fees.  This excludes dividends of the S&P 500 like most index annuities when calculating the portion of return linked to the market.
  • For the fixed portion of the contract the current rate is 1% per year, which is also the current minimum rate.  So using the example above after 2 years there would be an additional 1% (1% per year x 50% of the account value) added to the 5% credited based on S&P 500 gains.

But that really only tells part of the story because those are gross returns – i.e., before fees.  And the Aviva Balanced Allocation Annuity 12 can have some pretty hefty fees if all the riders (extra benefits) are added onto the contract.  The fees for this indexed annuity are as follows:

Base cost for Option A – 2.95% per year
6% bonus rider – 0.95% per year
Guaranteed income rider – 0.95% per year
Death benefit rider – 0.6% per year

One thing I couldn’t find in print anywhere were if these were annual fees or semi-annual fees.  The reason I bring this up is because this annuity only pays interest (or credits) every 2 years.  Because of this I believe the fees are only charged every two years – but they might be each year.  Either way they are fairly high if all riders are elected.

For full descriptions of what these riders are and how they work just refer to the video overview I recorded below as well as be sure to read all the promotional literature from Aviva, the Statement of Understanding, and certainly review the contract should you already own one.

When fully loaded up with riders the costs of the annuity can get up above 5% – which is quite a lot.  That being said, you only pay these fees if your earnings are higher than the sum of the fees.  In other words, it can’t produce a negative return because of the fees – they only reduce returns by as much as the total fee when the return would have otherwise been above zero.

Like all annuities I’ve reviewed there are positives and negatives.  The positives are that if you really are a long term investor (12 years or longer time horizon) than you are guaranteed by the insurance company (based on their claims paying ability) to not lose money.  Because of the volatility and the number of really bad years in the stock market since 2000 that is important for some investors.  Plus if you choose the guaranteed income rider (called Income Advantage on this particular annuity) you are also guaranteed an income stream for as long as you and your spouse (if applicable) live.

The negatives I think are more based on the way this and other annuities like it are sold. Many agents go to great lengths to give the impression this will get “market like” returns.  That’s just not true.  If you watch the video I made on this you’ll see that based on current contract rates and fees over the last 60 years the average annual return is in the 3.5% neighborhood depending on the riders chosen.  So if someone is buying this annuity they should know that the liklihood of getting more than 5% average return is very, very slim.

The other negative, which again usually stems from either uneducated or flat out unscrupulous advisors is how the guarantees work.  Insurance companies are pretty smart, so advisors/agents who promote them as 6% or 8% guaranteed returns are not revealing the facts.  You’ll see this also in the video, as the maximum realistic upside is closer to 4% and you typically need to live 10 years or more past your life expectancy to even have a shot at those types of returns.

The ethical way to describe this (and others like it) annuity would be that it is a safe way to get low single digit returns over a time period of 12 years or more. Should income be a major priority it can guarantee income for life, but the effective rate of return on your money for that guarantee will be less than 0% unless you live close to your life expectancy, and could be as high as 3% to 5% if you live much longer than your life expectancy.

Any expectations higher than that are unfair for investors and very irresponsible of the agent/advisor if presented that way.

At the end of the day if agents and advisors are honest I think there would be a lot less bad press on annuities.  Given the compensation structure of many index annuities though I think this might be wishful thinking on my part (many indexed annuities pay 6% to 10% commissions and those commissions never have to be disclosed to the buyers).

My end analysis of this annuity is the following:

If you are looking for a very long term investment that is guaranteed to not lose money, get a return in the 2% to 4% range over 20 years or longer, and have some extra benefits for long term care expenses and potentially death benefit for your beneficiaries; the Aviva Balanced Allocation Annuity 12 could be a good fit.  If you will need access to your funds in the next 10 years outside of the income rider benefit then I would stay away.  If you’re looking for safe growth of capital – know that the risk adjusted returns for this annuity (and most like it) is not actually that good.  Testing this annuity against just buying 13 week Treasury Bills (which are more liquid and safer) shows that the annuity would produce a lower return and do so with more inconsistency as well.

For a more in-depth look just watch this 40 minute video I recorded that breaks down the entire test and shows how I arrived at the numbers in the post above:


What’s my motivation in doing this review?

I’m doing this review and others like it to help investors make more informed decisions.  Sadly I’ve seen clients of my own firm fall for sales pitches with very misleading promises for some annuities.  Once people see how these really work and see the amount of time it takes to fully understand the real pros and cons they almost always tell me the annuities sold to them are nothing like what should have been described.  For some people there is a portion of their money that still makes sense for annuities, but like all investments there are risks, costs, and important facts to consider before making long term commitments.

If you or someone you know is considering this or any annuity feel free to reach out to me for a personal review of the annuity so you can get all the facts before moving forward.  For those that are non-clients, I’m a Fee-Only advisor that doesn’t accept commissions for any work I do.  So when I review annuities (or any product for that matter) rest assured I’m doing so in an objective, conflict-free manner.

Thanks for bearing with me on yet another annuity review.  If you have been pitched an annuity and would like to see it backtested and explained like I’ve done for the Aviva BAA12 and Security Benefit SIA just let me know.  I’ll plan on doing about one review like this per month in effort to help people make better, more informed decisions so they can feel confident about their financial well being.

Best,

Jason Wenk

In Financial product companies Index annuities Investor Education The Wall Street System | | | | |

8 Comments to An Independent Review of the Aviva Balanced Allocation Annuity 12 (BAA12)

  • ray shead

    Mr. Wenk,
    How this compare to Aviva’s Lifetime Annunity?
    Thanks for your info!

    • admin

      Hi Ray,

      I think the full name of the product you mention is Aviva Multi-Choice Lifetime Solutions Annuity. There’s a few major differences but really a very similar outcome. Here’s the big differences:

      – The Lifetime Solutions Annuity (LSA) has a different death benefit guarantee – one that allows the income guarantee amount to be taken by beneficiaries over 5 years. I’d say that’s an improvement but you do pay 0.40% per year for it I believe.

      – The LSA has a different “income for life” guarantee also. It grows at 6.5% per year on deposits under $100,000 and 7.5% on deposits over $100,000. Keep in mind though just like most other index annuities you can’t actually get all that money at once – you have to take it out over your lifetime (based on age of income being turned on) so most people will actually average much, much less than those percentages as far as real rate of return UNLESS you live quite a long while after your life expectancy.

      – The “growth” value is also quite a bit different with 4 different ways you can get interest. 3 of them are tied to the S&P 500 (without dividends) and 1 is a fixed account with a minimum guarantee. I’m not certain, but I think that rate is 1.35%. On the S&P 500 based credits your return will be reduced by the total annuity fees which can be ast high as 1.15% if you choose all the riders (death benefit and income guarantee). This fee is quite a bit lower than the BAA annuity but the return potential is much more limited due to the caps.

      – There are provisions that provide extra money for nursing home care as well as liquidity if you are terminally ill or in a nursing home. Be sure to very carefully read the contracts/statements of understanding to make sure you know exactly how this all works. DO NOT rely on the explanations agents provide.

      Any way I dice it the easiest way to see if this or any index annuity is a good fit for you is that your money will be tied up for 10 years or longer and a realistic rate of return is in the 2% to 4% range. There is no risk so long as you keep the account at least 6-7 years (taking your money out early the penalties will cause you to lose money). If you’re completely happy with that scenario then you should look more closely at the product to determine if it fits your needs/goals. So much of the fit is based on your personal situation.

      If you don’t like the idea of a long term commitment with upside realistically in the 2% to 4% range then you may want to look at other options. History is no guarantee of future results – but most of the annuities I’ve reviewed would easily be beaten by just using laddered CDs and Treasury Bonds. The annuity sales people will have an argument against that of course, but facts are facts. Don’t let them scare you into a major financial commitment. Just do your homework and talk to the right people and you’ll be pleased in the long run. If you’d like to chat with me feel free to send an email to jwenk[at]retirementwealthadvisors.com and I can probably be more specific.

      Best,

      Jason

  • David S

    Jason,
    Thanks for your review. I find much of it to be accurate.

    I’m confused, however. I too am a “fee-only” planner. I don’t accept commissions, but I do get paid to manage assets…much like you.

    It’s how I choose to run my business, much like yours.

    However, I would NEVER say that because I’m fee-only that makes me “conflict free” as you put it.

    Let’s be honest here…if a client of yours (or mine) were to put money into an annuity, that’s less money that we have to invest and get paid advisory fees on. You consistently point out the “unscrupulous” people who sell annuities…but you fail to be transparent by stating that if a client of yours puts money in an annuity, that’s less for you to manage. It’s hardly “conflict-free.” But…it’s your blog.

    • admin

      David –

      Thanks for calling me out on transparency. One of the many reasons I write this blog is to help educate investors about products/strategies they might be considering as part of their financial plan.

      To me, being Fee-Only doesn’t necessarily mean you only get paid on the dollars you directly manage. It could also be via a retainer, flat fee, or hourly fee. Or, you could still charge an asset management fee on held away assets such as annuities.

      In any event – I’ve not met too many Fee-Only advisors who take their Fiduciary Responsibility (serve their clients interests before their own) lightly, myself included. I have many clients we advice keep money in cash (at their bank), in CDs, in investment real estate, or in annuities when the circumstances are right. I don’t expect to be paid for that nor do I worry about it. I would hope all Fee-Only advisors share this same Fiduciary responsibility.

      That said – you are correct. When investors buy products we don’t manage we don’t usually get paid for it. This would be a conflict of interest IF we weren’t acting as a Fiduciary. Just remember that our compensation as advisors should always be secondary to client’s needs.

      Thanks for checking out the blog and the constructive feedback. It’s one of the best parts of public domain research via blogging.

      Best,

      Jason Wenk

  • David S.

    Jason-
    Thanks for your response. I’m curious…you make mention that you occasionally recommend annuities to your clients when the. I’d instances are right. It seems that the three reviews you have done are about annuities that you would not recommend. I would be curious to hear your opinion on the following:

    1. What annuities would you recommend to your clients?
    2. What are the circumstances around why you would recommend them.
    3. Do you or any of the advisors in your firm hold insurance licenses? Have you or any of the advisors in your firm sold an annuity in the past 12 months?

    I agree with you. The fiduciary responsibility we have is of utmost importance. Transparency is key. While I am considered a “fee only” advisor, I don’t use that as a tool against those advisors who work under a fee or a fee/commission basis. In my mind, there is nothing wrong with a commission. Let’s face it, being “fee only” is simply a different way for being paid. It’s the model you and I have chosen, but it doesn’t necessarily mean it is the only/best way.

    Cheers,
    David

    • admin

      Hi David,

      I’ve recommended the Security Benefit to some clients as it can work very well when deferred for a few years and if the client has a high likelihood of needing long term healthcare but is not insurable. I have not recommended the other two annuities I reviewed and most likely wouldn’t. Here’s the other answers to your questions:

      1. It really depends on client circumstances. We have recommended no load annuities for some clients from companies like Vanguard and Jefferson National when appropriate and some income annuities as well, though not much in the past few years with interest rates being as low as they are.
      2. If an investor has no tolerance for risk or variance in return or long term healthcare needs when not insurable are the two reasons certain annuities might be appropriate. If an investor has an old and expensive variable annuity with deferred gains but no insurance or living benefit riders it is almost always beneficial for them to exchange their expensive annuities for a no load and low cost variable annuity given they are comfortable with a diversified but not guaranteed investment plan.
      3. I had an insurance license but let it lapse years ago to make sure there was no personal conflict of interest. We have one advisor with an active insurance license but that is completely separate from our RIA firm and he is not actively soliciting insurance or annuity products. We had an advisor in the past that did solicit insurance products and we found many of them to be unsuitable so we let him go.

      I completely disagree about being fee only. To me it ensures we are not motivated by potential commissions. I know plenty of very good commission based advisors but also plenty of horrible commission based advisors that sell primarily what gets them paid the most. That wouldn’t and couldn’t be the case if they were fee only. In a perfect world compensation wouldn’t matter – all financial advisors would just do what is best for their clients all the time. Sadly that’s not how it always works and clients are the ones who get the short end of the stick when bad products are used for the wrong reasons. Most of the time when that happens the client doesn’t even know it as they trust their advisor is representing their interests and even more often do nothing about it even when the facts clearly support they were duped.

      Thanks for all the discussion. It’s refreshing to have a financial advisor on my blog sharing experiences with how our industry works. If only there were more open dialogues about financial advice that clients could read to help them make better informed decisions about how their money is managed and the people they hire to help out.

      Best,

      Jason

  • Paul

    Jason-
    I am a commission based advisor and have been for a little more than four years. I would agree that in a “perfect world” the advisor would always look out for his/her clients first. It is sad how often it does not happen this way. I have often been surprised to see what some agents have done to sell a higher commission product/company. Having said all of that, I do have a question for you. I do my best to represent high quality companies (most often mutual companies.) I have a hard time selling companies that have lower index scores. What is your take on the importance of company strength?

    Thanks,

    Paul

    • Jason

      Hi Paul,

      Thanks for finding my blog and reaching out. Glad to hear you’re looking out for your client’s interest too!

      Suitability is always of utmost importance, in my opinion, and part of that equation is the financial strength of the issuer. However, insolvencies in insurance companies is quite rare, and due to the lack of leverage used by insurance companies, even when they do fail it is extremely rare for annuity holders to lose their principal. Also, mutual companies go belly up too, so there’s not necessarily a safeguard in just using them over stock/private companies. See here for all insolvencies the past 20 years: http://www.nolhga.com/factsandfigures/main.cfm/location/insolvencies.

      I can’t attest to this as fact, but I’ve scoured the web for hours trying to find an instance where a fixed annuity holder has actually lost money. I’ve found several websites that claim it has never happened, even in the event of insurance company insolvency (due to state guarantees making annuity holders whole). Perhaps it has happened and I just cannot find it, but this also should offer some level of comfort that if a reasonably solid insurance company is chosen, the investment (historically speaking) is safe.

      Thanks again for dropping by – and keep up the good work!

      Cheers,

      Jason

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