I don’t like index annuities, and I especially dislike variable annuities with complicated riders that supposedly promise you’ll never lose money. With these products, you get lots of smoke and mirrors, high fees, surrender charges, very little liquidity, and no transparency whatsoever. You would be wise to steer clear.

However; savvy investors fall prey to them all of the time. Why? Primarily because the protection they promise sounds very appealing.

What they promise is partial participation in market growth with a buffer or limit on losses. Awesome! Who doesn’t want that for at least a portion of their portfolio? Especially after a decade-long bull run up in the market.

How do they do it?

Way back in some nondescript corner of the insurance company’s big shiny home office building, traders execute option strategies to support the insurance company’s claims and promises. Problem is, the traders little corner is a long long way away from your results. In between the traders and you there lies a minefield of fees, complicated contract language and profit centers that must be met and fed. Their products are designed to be appealing to you, but profitable to the insurance company so a lot of the benefits never quite make it into your account. 

Structured notes operate in a similar fashion with the same goal in mind: sizzle for you, steak for them.

Cutting Out the Middleman

These options strategies that create buffers and protection have been around for a long time. Problem is, they are difficult if not impossible to implement properly or efficiently on anything but a large scale. In the past, if you weren’t a billionaire, chances were the only way you could gain access to these protections were through expensive and illiquid package products.

Recent innovations have made these protection strategies available through what are called Defined Outcome ETF’s (Exchange Traded Funds). These are complex securities that still require careful oversight and implementation, but they don’t require the scale previously needed. This means we can bypass the insurance companies and investment bankers, and buy straight into an ETF that trades everyday.

I know, I’m getting too technical now so I’ll stop. But you should be aware that a good protection strategy exists for you now. I think it’s a big deal, and that a thoughtful implementation into a portfolio can improve risk adjusted return. If you want to discuss further, we can do a full analysis of your investments to see if there is room for improvement. Just call us.