Why Alternative Assets In VAs Make Sense – variable annuities

28 Jun

Before rushing to a mutual fund, exchange-traded fund, managed futures platform or hedge fund, advisors should help clients evaluate another option: variable annuities with alternative asset classes and strategies.

A strong understanding of the benefits of holding alternative investments within a VA will go a long way in helping you assess the suitability of this kind of product for clients, and explain why it may be a good fit for their portfolio.

We all know that precious metals such as gold and silver have been hot alternative investments in recent years (until very recently, of course). So it should be easy to remember the term “M.E.T.A.L.S” when evaluating alternative investment VAs. Here’s how you can use this acronym to help yourself and your clients understand some of the key benefits of this type of product:

“M” is for Minimums. Many alternative investment VAs give investors access to alternative investments for as little as a $10,000 minimum investment. Compare this to purchasing alternatives though managed futures platforms or hedge funds, which typically require a minimum investment ranging from $50,000 to as much as a quarter million dollars.

“E” is for Expenses. Expenses for alternative investment VA products are relatively low when compared with managed futures platforms and hedge funds, which typically layer a performance fee on gains on top of an asset management fee. The most common hedge fund fee structure is “2 and 20,” a 2 percent asset management fee plus an additional 20 percent fee on gains over a hurdle rate. These fees can be as high as 6 percent on assets and 50 percent on gains for some hedge funds and managed futures platforms, according to Morningstar.

The expense of an alternative asset VA can be more than offset by tax savings uniquely available in VAs (see below). The base product fee for an alternative asset VA can be as low as 1 percent, with additional fees on funds typically varying between 1 percent and 1.5 percent.

“T” is for Taxes. This is a product benefit that has become more attractive since the beginning of the year, particularly for affluent investors who are now facing capital gains tax rates of 25 percent and a new 3.8 percent Medicare tax. Annuities provide tax-deferral and tax efficiencies, allowing clients to take advantage of compounded returns. Trades within alternative investment VAs do not create a taxable event. Taxes are assessed only upon distribution.

VAs also have a simplified reporting process, so K-1s for limited partnerships are not required when investing inside an annuity. On the other hand, trading mutual funds and ETFs can create short-term capital gains or losses, which remove the effects of compounding and can create tax inefficiencies.

“A” is for Accreditation, which is not a requirement when selling or buying an alternative VA. These products are considered a “know your client” sale. To qualify for hedge funds or managed futures platforms, clients are typically required to meet certain asset or income minimums. Some require as much as $1 million or more in investable assets and more than $200,000 in annual income.

“L” is for Liquidity. Most alternative investment VAs allow clients to exchange or transfer funds at any time, and some products do not even have penalties for early withdrawal of some portion of the funds. Managed futures platforms and hedge funds often limit withdrawals to quarterly or even annual windows, and such withdrawals come with substantial penalties.

“S” is for Spousal Protection. VAs are the only alternative investment platform that can offer a death benefit. Some alternative investment VA products can offer riders that provide additional protection for spouses such as a lump sum death benefit or the option of continuing on as contract owner at the full value of the death benefit with no current income tax consequence. In other words, alternative asset VAs can help surviving spouses maintain financial stability after the owner’s death.

The M.E.T.A.L.S. acronym is a great first step to enhance understanding of how alternative investment VAs compare to other alternative investment platforms.

At Nationwide Financial, we’ve found that the “T” is really resonating with the advisors we’re talking to right now because tax deferral is top of mind for many affluent investors. Advisors are starting to recognize that alternative asset class VAs can position a client’s portfolio against rising taxes like no other alternative investment platform.

Any advisor worth their “metals” should be prepared to help clients interested in alternative investments to evaluate the benefits of alternative investment VAs. With continued education about the benefits of this type of product, I’m confident that demand will continue to expand.

Keep in mind that federal income tax laws are complex and subject to change. Neither Nationwide nor our representatives give legal or tax advice. Please consult an attorney or tax advisor for answers to specific questions.

A variable annuity is a long-term investment issued by an insurance company. You should consider the investment objectives, risks, features, charges and underlying investment options carefully before investing.

via Why Alternative Assets In VAs Make Sense.

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