Letters to the Editor

To the editor,

Your article on GLWB guarantees on variable annuities has many flaws and fails to take into account several important features of some of the variable annuity offerings.

For one, the writer used Vanguard as his example.  The GLWB is based on 5% of the amount of the purchase.  The better annuity products offer a withdrawal on the purchase plus a minimum growth rate, often guaranteeing a doubling of the amount deposited in 10 to 12 years. 

Secondly, the author failed to take into account the reality of what happens to retirees in a bad stock market.  The majority of them want to pull all or most of their money out of the market when there are large drops in the market. They do not want to take a chance on losing what assets they have accumulated.  This is a critical component of the importance of these guarantee riders.  Without them, a large percentage of retirees would have little or no money in the stock market due to fear and uncertainty.  They do not trust the current stock market because of the poor performance of the last 10 years and the crash of 2008. Without the guarantee, they would likely have the majority of their retirement assets in money markets or CDs paying 1% or less. 

If the author is going to dismiss the importance of these riders, he should do a hypothetical analysis based on clients taking their money out of the market and putting it in CDs at %1 or 2% for five to 10 years.  That is the reality of what would happen.  These guarantees give retirees the peace of mind to be able to stay in the stock market even when things are really bad and they would otherwise have jumped ship. 

There is no cost-of-living adjustment in savings accounts or CDs or even bonds for that matter.  The only way to keep up with inflation is to be in the stock market.  Therefore, having a guarantee that allows you to stay in for the long haul is certainly better than having to spend the rest of their retirement worrying if they are going to lose their money and be without income.  This is critical and should not be ignored.  Taking client emotions and fears into consideration is just as important if not more important than just crunching numbers based on performance.

Regards

Mark E Bilodeau, CFP
Commonwealth Financial Resources
Chelmsford, MA 

Wade Pfau responds:

Thank you for the comments. I don't think that my choice to model the Vanguard GLWB is a flaw in the analysis. I was upfront about that. Other GLWBs may offer more attractive return opportunities, but they also must have a more complicated fee structure than Vanguard's relatively simple offering. I have not analyzed other GLWBs and cannot provide any overall conclusion about the tradeoffs between their features and their fees.

Regarding your other point about asset allocation, it is interesting, but I am not necessarily convinced it is right. It is a hard research question to investigate. GLWB owners may behave differently after a market drop, but that could be either because of the guarantee provided by the GLWB or because the people who purchase GLWBs otherwise have a different psychological demeanor than those who don't. To show your point, we would really need to run some sort of randomized experiment in order to see the impact of the GLWB guarantee on asset allocation. That being said, for clients whose behaviors fit your description, then this certainly should be viewed as an additional benefit of GLWBs. I do not dispute that.

The following is in response to Michael Edesess’ article, Did Congress Cash In on Insider Stock Trading?, which appeared last week:

Dear Editor,

Michael Edesess missed the point.  The issue is that members of Congress and their staff unlike the rest of us are permitted to trade on non-public inside information.  The insider trading laws should apply to everybody, even Congressmen and their staffs.  By the time Martha Stewart went to jail, ImClone, the stock she sold on inside information, had gone up.  The insider trading laws don’t discriminate between profit and loss.  Any trading on inside non-public information is illegal.  Members of Congress and their staffs have access to information that members of the public do not have and should be held to the same standard of disclosure as officers of publicly traded corporations. 

It’s not a matter of math; it’s a matter of ethics.  Any time I seen the term “cherry picking” leveled at a study, my knee jerk reaction is check the source.  Cherrypicking is a common term of art used by academics who create theoretical mathematical models but have absolutely no practical experience in applied ethics.  Edesess doesn’t get it.  Moreover, he is overreaching.  He is an economist and a mathematician.   This should be a legal analysis and Edesess is not a lawyer.

Bedda D’Angelo, CFP®
President
Fiduciary Solutions
Durham, NC

Michael Edesess responds:

I don’t think I missed the point. I recommended in my article that readers of Schweizer’s book skip to chapters 8 and 9, and said: “There you can read a good account of Congress’s failure to regulate itself legally and ethically, and the crony-capitalist culture that results from it.” Later I said, “What is incredible – Schweizer explains this very well in chapters 8 and 9 – is that none of this is illegal. Virtually every other public and private citizen has a plethora of restrictions imposed on his or her legal ability to trade securities, but for Congress there is no restraint except a congressional ethics rule that members can’t use their official positions for personal gain. This restraint is too weak and vague to prevent members of Congress from cashing in on their access to the levers of power through their stock portfolios.”

At the end, I argued that Congress must pass the STOCK Act (Stop Trading on Congressional Knowledge).

I addressed myself in the article not so much to whether Congress should be bound by the same rules as everyone else (though I did recommend that they should be) but whether Schweizer’s heated claims that they had actually benefited by the omission were valid. That is a matter of math, and Schweizer’s claims are not valid.

Michael

The following is in response to Robert Huebscher’s article, Can this be Serious?, which appeared last week:

Kudos to Advisor Perspectives for refusing to include a link to Amazon.com for those interested in purchasing a copy of the book, 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day reviewed in your most recent newsletter. The litmus test for "advice" of this kind for me has always been whether or not the author is a professional Investment Advisor, subject to regulations and limitations on the publication of outrageous or otherwise unproven claims. When such advice is "incidental" to the author's real profession (and consequently, unregulated), it rarely rises to the level of seriousness worthy of an advisor's consideration. It's simply entertaining, at best, or it's outright dangerous, at worst.

Timothy M. Hayes, CFP®, President
Landmark Financial Advisory Services, LLC
Pittsford, NY

The following is in response to the commentary, The Center Cannot Hold, by John Mauldin of Millennium Wave Advisors, which was published on December 17:

Dear Editor,

I read John Mauldin’s commentaries regularly.  Unfortunately, he often throws in comments and arguments that need much more discussion.  In this commentary, the logical discussion on energy matters is completely undermined by his apparent arguing from conclusions.

1. Now, let's circle back to the Keystone Pipeline. We started this section with a reference to trade deficits. And this is Canadian oil, not US oil. So it does not help our trade deficit directly, although a large portion of US dollars that go to Canada come back to the US. Canada is far and away our largest trading partner and major energy supplier.

   Why does he make a clear statement about the pipeline not helping our trade deficit (in bold) and then make a ridiculous modifier about Canadian trade? The Canadian oil will always be charged at the international rate, just like Alaskan oil, Texan oil, etc.   Is he worrying about global chaos so that the US would at least have some access tooil from Canada?  How about the argument of using oil from everyone but the US, so after kicking the energy can down the road, we could start extracting more of the US oil (and I am sure that US suppliers would give us a discount in a crisis!).   To me the last sentence indicates how much your thinking is distorted by arguing from conclusions.

2. The problem is that the opposition is mainly of the "I don't like any carbon-based energy" variety. Whether it is coal or oil or natural gas, it is not as "clean" as solar or wind.

   Here he establishes his glibness.  How many "accidents" have to happen in oil transport and gas fracking before we do responsible and long-term development?  We killed the nuclear power industry’s public support because of rushing into designs that were not ready for long-term and less expensive operations (Nuclear power has become a "local" plumber's nightmare rather than the continental problem that pipelines pose.  We are just beginning to see the pipeline problems!) .   Conservation has had the greatest impact on US oil use over the last 30 years.  Opposition to another pipeline is much more nuanced than you believe.  Those economic "externalities" that never get totaled up are important to many people who breathe and drink the externalities.

3. The problem is that solar and wind simply cannot produce enough energy without huge government subsidies, at least with current technology (although that will change over time). In the meantime, if we want to balance our budget in the US (and we must!), we are going to have to become energy independent as one part of the solution. In the short term (10-15-20 years), that means carbon-based energy. If we can produce our energy in the US, and we can, then why not create the jobs here rather than elsewhere, if jobs are our #1 political concern, as they seem to be, according to the polls? Further, in the short term, as Mexican production is falling rather fast, we are going to need that Canadian oil if prices are not going to rise.

   If we can produce our energy in the US, and we can...

   How much oil do we import and for what purposes?  How much oil can the US realistically produce?  Maybe his mind is actually thinking about shifting to a natural gas economy?  Is that realistic?  For someone who purports to use quantitative reasoning in his perspectives, this whole paragraph is incredible.  I can only conclude that just like the rest of us, he often doesn't let facts get in the way of his conclusions.  He certainly must realize that there are many implicit and hidden subsidies to the existing energy system based on oil, gas and nuclear.  Add them up!

4. (Note: in my book, I actually call for a slowly rising energy tax on gasoline usage, to be solely used for rebuilding our decaying infrastructure, so I am not against higher prices per se. I just want the reason for higher energy costs not to be shortages. But that's another story for another day.)

   I have concluded, based on a number of his articles, that Mauldin does an admirable job of keeping his ear to the ground by talking with large numbers of financial people, and trying to keep their biases out of his syntheses.  He also uses simple algebra (with variables, whose adequacy is rarely questioned) in supporting different arguments.  Biases are still coming through in not very subtle ways, and I suspect they are derived from the people he speaks with and his own background.  Try harder to eliminate bias. 

Mauldin is doing a great disservice by not accurately presenting the complexity and difficulty of the global energy problem.  This problem does not have a "technical fix" due to the world population growth and linked environmental issues.   He should understand something about science.  There are natural phenomena (like global warming) that are essentially irreversible.  The reasons are often the cost and the absence of a technological fix that can beat the cost.  Reducing the carbon dioxide in the atmosphere by man-made efforts is not going to happen based on thermodynamic energy calculations, although we might enlist the aid of long-term natural processes over perhaps the next 3,000 years.  People with economics training often think that everything is reversible with enough expenditure; he should remove that hidden bias.  Thermodynamics at the freshman chemistry level can put some reality into our discussions of incredibly complex and important issues. 

Sincerely,
Kenneth (Ken) G. Spears

The writer is a semi-retired professor in chemistry and physics, and has been a personal investor for 25 years.

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