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  • VOICES: Chris Hobart, On Hybrid Annuities

    June 14, 2010 by Mike Miliard

    By Mike Miliard

     

    Chris Hobart

    Chris Hobart, chief executive of Charlotte, N.C.-based Hobart Financial Group, spoke to WSJ Financial Adviser about “supercharging” retirement accounts with fixed-index annuities.

    Say somebody takes a million dollars and puts half in stocks and half in bonds. If the stock market goes up, you’ve got 50% of your money subject to that upward trend. But the problem is you’ve got $500,000 in the bond market not doing anything, or just getting a fixed-rate of return. On the other hand, a big concern with our clients — who are focused more on preservation than accumulation — is that the same 50-50 strategy leaves the $500,000 in stocks subject to a big downturn in the market.

    The “supercharge” strategy is good for those who want to participate in the market but want to limit that exposure to a big downturn. The strategy involves taking that same million dollars and putting it into what’s called a hybrid annuity, or a fixed-index annuity — a unique type of account that a lot of advisers don’t talk to their clients about.

    It’s a form of fixed annuity, so the account’s principal is guaranteed. But the interest payable every year is based upon the returns of an index — usually the S&P 500, the Dow or the NASDAQ. The nice thing about these accounts is that they often have what we call an up-front bonus, depending on the length of time you commit your money to them. The bonus ranges from 5% to 10%.

    The bonus is a dollar amount you have to vest into, but here’s where the strategy gets pretty exciting. You invest a million dollars and get a 10% bonus. So now you have $1.1 million: a million dollars, plus $100,000 from the bonus. We peel the $100,000 off the top, leaving $1 million safe and sound in one of these fixed index accounts. That $100,000 is essentially house money, so we can use some sort of leverage with it. Some people use options. Some people use leveraged exchange-traded funds. Some people just buy regular old stocks. We like to use a little more leverage.

    So we say, “OK, let’s buy options with this money.” We can buy either puts or calls, it doesn’t matter, but we’re going to buy longer options. We’re looking for long-term investments. By taking this approach, we can make that $100,000 act like it’s a lot more.

    Let’s say this economy continues this strong recovery. Well, you have a million dollars that’s crediting interest based upon the returns of the index, and on a yearly basis that interest locks in. That other $100,000, since it’s in some form of leveraged money, has ballooned.

    On the other hand, say we see another 50% dive in the market. With the fixed index annuity, you won’t lose any principal on the million-dollar portfolio. Meanwhile, the $100,000 you have is definitely subject to volatility. And if it’s leveraged you’re going to lose a lot more than just 50%, especially if you’re not paying attention to it. But the key is you’re only risking $100,000.

    Originally Posted at Wall Street Journal on June 10, 2010 by Mike Miliard.

    Categories: Positive Media
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