2021

Episode 114: We Love Annuities with Sheryl Moore

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Summer is almost over. What’s the outlook for the annuity industry as we head back to our (virtual) offices? Sheryl Moore is the perfect guest to provide us with predictions and savvy forecasts. She graciously joins us today to talk about changes in carrier ownership, product design changes and regulatory evolution.
Also, do you want to get regular updates on news from Jerry and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.
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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

EPISODE TRANSCRIPT:

Paul Tyler:
Summer is almost over. What’s the outlook for the annuity industry as we head back to our virtual offices? Sheryl Moore is the perfect guest to provide us with predictions and savvy forecasts for the rest of the year. She graciously joins us today to talk about changes in carrier ownership, product design changes and regulatory evolution. Also, do you want to get regular updates on news about Sheryl and other guests of our show? Go to thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.

Paul Tyler:
SE2 and elders business is a leader in the US life and annuities, insurance technology and services industry. SE2 uniquely combines the maturity and peerless industry knowledge of its 125 plus years of life insurance industry heritage with its end to end digital platform to enable the rapid launch of new and innovative products through existing, as well as digital channels. They also happen to be great partners of Nassau Financial Group, the anchor sponsor for That Annuity Show. SE2 is helping them transform their company for the next generation of service.

Paul Tyler:
We’d also like to thank our sponsor CUNA Mutual Group, built on the principle of people helping people, CUNA Mutual Group is a financially strong insurance investment and financial services company that believes a brighter financial future should be accessible to everyone. Through its company culture, community engagement and products and solutions, the company works to create a more equitable financial system that helps to improve the lives of those they serve and our society. They’ve been also been great collaborators on this show. For more information, visit cmannuities.com.

Paul Tyler:
Finally, we want to thank our primary sponsor and my employer by day, Nassau Financial Group. Our tagline is working harder to be your carrier of choice. We you with best in class service, we seek to keep things simple and we’ll have your back in the years to come. We’re headquartered in Hartford, Connecticut with 27 billion in assets and over half a million policy holders. We’ve been doing this a long time, 170 years, but we remain humble enough to always try to improve.

Intro:
Welcome to That Annuity Show, the podcast that will make you an expert in explaining annuities to your clients. Give us 30 minutes each week and we’ll shave hours from your client presentations. Now here’s your host, Paul Tyler.

Paul Tyler:
Hi, this is Paul Tyler and welcome to another episode of That Annuity Show and we’re rapidly approaching the end of the summer. I tell you, it certainly doesn’t feel like that from the pace activity in the industry, at least our company. But Ramsey, good to see you.

Ramsey Smith:
Always glad to be here.

Paul Tyler:
Excellent. Well, I don’t know. It feels like I’m living in Atlanta here in New York today with the storm weather coming through here. Mark, how are you?

Mark Fitzgerald:
Well, I’m doing great. How are you doing today?

Paul Tyler:
Excellent. Excellent. Ready to sell more annuities here in the next… When everybody gets back from Labor Day with you. So mark, we have a great guest. Do you want to do the honors this time?

Mark Fitzgerald:
Absolutely. And speaking of the ability to be able to sell more annuities, we have none other than the annuity rockstar with us, Sheryl Moore, who’s been on our show a couple times in the past and I think everybody in the industry really knows the work that she does and the research that she provides and appreciates all of her insight in the marketplace. So Sheryl, very, very happy to have you out with us again today.

Sheryl Moore:
Thanks for the warm welcome mark. I appreciate it. And Paul Ramsey, I appreciate you too. Letting me on the show gives me another opportunity to educate people about these products and make sure that people understand how they really work. So thank you. I’m very appreciative.

Paul Tyler:
Oh, thank you. Yeah. And I don’t know, Ramsey, do you want to lead off?

Ramsey Smith:
Sure. So first thing I want to say is Sheryl, it’s just great to have you on the show. So the key thing about the show is we’re lucky enough we provide a platform and we’re lucky enough that great voices like yours come on. So you are doing us a service here. Thank you. Thank you very much for that. So look, you have the benefit of, of seeing so much of this industry, you have a fantastic network, you have unparalleled data and so that there’s a level of access that you have that many of us don’t. So we’re hoping to sort of tap into some of that today and hear your thoughts on so many things that are going on.

Ramsey Smith:
So one of the things that we talked about just prior to the show was what’s happening in terms of the change in ownership structure in the industry. So we’re seeing some movement away from traditional stockholder companies. For example, we’re seeing a greater footprint for private equity companies. What are you seeing? What do you think are some of the pros and cons there for the industry going forward?

Sheryl Moore:
Well, I got to be honest with you Ramsey. This is a scary time for me because I’m seeing so many companies getting out of the annuity market and out of the life insurance market too. And just to help benefit our audience, I’ll give a simple example of why this is. So when I got started in this industry about 23 years ago, the insurance company that I worked for had fixed annuities that had minimum guaranteed interest rates of 5% and they were crediting double digit interest rates at that time. Now, since then, the double digit interest rates have come down just because the investments have required that. But if you’re an insurance company that has a block of annuities on their books that’s paying a 5% minimum guaranteed interest rate, But the 10 year treasury, I think when I looked at it this morning was at 1.26%, do you really want to be taking a loss of almost 4% on that business?

Sheryl Moore:
Now take into account the structure of a stock held company and ask yourself do your stockholders want that? Are they comfortable with the idea of you losing money on this huge block of business? So we’re seeing insurance companies shed those in force blocks of business and sell them off. Private equity firms often have the ability to achieve higher returns on their investments because of their expertise. So we are seeing some more PE come into the business, but quite honestly, I’m scared because when we see less companies, that means less choices and less competitiveness as well.

Paul Tyler:
Well, and Sheryl, do you think that the timing is driven by the nature of the capital or do you think just to continue where you were headed, is it really a matter of timing like who owned the companies and blocks of businesses that were issued 10 years ago in a totally different marketplace and really the only option is to exit and let somebody else sort of manage the block from here?

Sheryl Moore:
I think it’s really a perfect storm of the market environment. I mean, we have so many investment companies that are not able to achieve of same returns that they used to be able to more than a decade ago, certainly before 2008 when the market collapsed. But we also have these historical low interest rates on safe money instruments, general accounts are not kicking off a lot of interest for insurance companies. And that spells opportunity for a lot of these bigger investment firms that think that they can get in here and create a higher return and create some value. So I also think that a lot of insurance companies are just getting to the point where it’s like we’ve been hoping it’s going to be get better, we’ve been hoping it’s going to get better and things are not improving.

Sheryl Moore:
And especially when you look at come countries like Japan where they’ve been in a negative interest rate environment for years. So looking at that as a potential for the future for us, a lot of stock held insurance companies are just saying we can’t do it anymore. There’s got to be another solution. And if you’ve got a bunch of investment firms that are saying woowoo over here, we’re interested in buying, it’s really a unique and symbiotic relationship that’s occurring, but market environment is really what’s driving it in my opinion.

Mark Fitzgerald:
How much play do you think demand is coming into it as well? So if you look at the demographic out there and more and more folks going to retirement, obviously the demand for these products is increasing. You think that’s going to bring a lot more private equity in looking to wire or start up even?

Sheryl Moore:
Well. I’ll tell you where I see more of that, Mark. Right now, one of the biggest trends in the indexed annuity market and starting to creep into the structured annuity market is what I call hybrid indexes. These are often proprietary, sometimes bespoke or created specifically for the annuity, often volatility controlled, but I call these hybrid indexes because they usually are multi acid indexes which are created from one or more other indexes and then have a cash or a bond component in them. And the reason these are popular is because these are usually brand new indexes without a lot of history and so the option pricing is favorable and we’re seeing a lot of investment banks that are sponsoring those indexes or creating those indexes and certainly companies that have private equity ownership have been able to achieve some economies of scale with those hybrid indexes because of their investment arms and what they can kick off in terms of returns.

Sheryl Moore:
So I tend to see a correlation between private equity backed companies and those hybrid indexes being more popular. But I’ll say that’s a trend that’s affecting the entire index annuity industry as a whole and creeping into the structured annuity market.

Paul Tyler:
So Sheryl, if I’m an independent agent, how should I feel about private equity firms? Should I be worried?

Sheryl Moore:
Paul, I think it’s basically like any other insurance company. I mean, personally speaking, I don’t like to say who I do business with, but I have business with companies who have private equity backing and I have one of them who does a fantastic job. And in fact, I’ve owned business with them since before pro private equity firm bought them and I’ve never had problem with them. And everything has been run since they were bought by the PE firm like it was prior to the PE firm buying them out. So that said, I also have some business with a company that I used to work for who is now owned by private equity and they lost my annuity at one point, so. And let me tell you that was a really interesting conversation when they were trying to convince me I’m an old lady and I don’t know what I’m talking about because I don’t own an annuity with them.

Sheryl Moore:
So I would just say it’s just like choosing any company. Doesn’t really have to do with the private equity backing. There are good companies and there are bad companies. I think if you’re an independent agent, the best thing you can do is really network with other agents and ask them hey, I’m considering getting appointed with this new company that I don’t previously have a contract with. What’s your experience with them? How have they treated you? How have they treated your clients? What has been your experience with them crediting rates on the in force business that exists with that company? So really independent agents have to advocate for themselves today and this is no exception to that.

Mark Fitzgerald:
So how about going back to the bespoke indices that you were talking about a moment ago, I mean, in the last four or five years, they really exploded in the marketplace, really hitting broad bases of product lines out there. Do you think that those will continue to evolve, develop, go into more and more products out there?

Sheryl Moore:
Yeah. When they first came out, I was telling everybody, this is a fad, this is a trend. It’s going to go away as soon as the market comes back and the 10 year treasury is up to a reasonable level because the way that our businesses is very cyclical and the index annuity market has shown in the past. You remember when we had like 145 different ways of crediting interest on an indexed annuity? I remember at one point, I’m not going to name the carrier, but they start with an A, and they really needed visual aids to help describe how their indexing method work. And I’m like ugh, come on guys, it shouldn’t be that hard. I mean, we need to keep this story simple.

Sheryl Moore:
Well, eventually everything went back to the S&5 500 annual point to point with a cap because that’s what’s most simple in our market in terms of indexing. So that’s where I was projecting things will go and I’ll still stand next to my prediction. It is going to go back that way. It’s just going to be a lot longer time before we see that, Mark. So for anybody who’s saying I don’t understand these and I’m just sticking to my S&P 500 or my Dow Jones Industrial, I’m going to say, this is going to be a trend that’s here to save for quite a long while. And if you start to see the 10 treasury ticking up in a meaningful and significant way, we may see less of it, but keep it real, Mark. I mean, when you have your insurance company’s name associated with a product like an annuity that most people have never heard of, but then you can get a big popular brand name stamp of approval from a giant investment bank that almost all Americans have heard of, what seems bad about that from the insurance company standpoint?

Paul Tyler:
Yeah. Well, look, let’s talk about one other market and markets seem to just be going up and up and up, right? I think that certainly is going to fuel the indices. Same time, we talked about this before the show, Sheryl, there’s a lot of inflation. Go out for dinner, it’s gone up. Go out, try to do any home pair, prices have gone up. Question one, is this permanent, right? Or is this a short term effect in your estimation two. How’s our industry going to respond to it because if you’re living on a fixed income, what do you do in a situation like this and can we deliver products that actually help cushion what may be a longer term event we’ve got to prepare people for?

Sheryl Moore:
Well, I’m not an economist, but I did take econ, several different econ classes in. And so I can tell you this is cyclical too. I mean, we’re going to have an end to interface eventually in regards to your question out? Can we get the message out? Can we help more people? Man, we’ve been really crappy at that. I mean, telling the annuity story and educating people on what annuities not and then what they really are instead of what they think they are, I mean, I’d love to see a concerted effort from the whole industry to band together and just have this big campaign. But even the trade groups that we have that are supposed to be doing that in my estimation are still falling short of what I’d like to see. So there’s never been a better time to be selling annuities, but does that mean that you’re going to get a receptive response to your message? Not anymore today than a year ago, but I am grateful for this secure act.

Sheryl Moore:
Now people aren’t necessarily really excited because they’re going to be able to have annuities in their 401ks, but one really great positive effect of secure is that it has resulted in more annuity educational content in the public domain, in the newspapers and the trade journals like Wall Street Journal and New York Times. So at least it’s saying the word annuity and people are like whoa, well, if the Wall Street Journal is bringing up annuities, maybe I should look into that. What is that?

Sheryl Moore:
But can we address those needs for people with fixed incomes who are suddenly having to do more with less? We can, because I’ve seen the product innovation already kind of transition to help with that. So we have income writers that have increasing income features. We have income writers that offer more income if you’re taking income right away in the early years than in the later years. There’s so many different features that I’ve seen over the past five years that have really been targeted to help people in that situation. So I’d say the positive thing is that we have really outside the box thinkers and very creative people and product development in this industry. I would just say that from a communication standpoint, we’ve still got a lot of work to do.

Ramsey Smith:
So you mentioned the secure act and we used to talk about the secure act and awful lot on the show, maybe like a year and a half or so ago. It virtually has not come up in a while, which is too bad because everything that it has to offer is still there.

Sheryl Moore:
Right.

Ramsey Smith:
It just sort of has moved down, moved out of focus, but I’m glad you brought it up because you know, there’s two parts to the puzzle, right? One is that the there’s the legislative support for it. And then you actually have to have 401k providers and HR departments kind of all over the country actually making the products available on their platform. And so I’m curious if you’re seeing any of that, because sooner or later, to make those decisions, they’re going to need data? And I imagine when you start getting those calls, that’s probably a good sign that things are heading in the right direction. So curious to find out what you’re seeing so far.

Sheryl Moore:
I would counter Ramsey that there’s actually a third arm that we need to take into consideration. And that’s the product manufacturers. And I say that just because for example, so many people got excited about fee based annuities and it’s like woo, we have this new type of annuity that we’ve never had before in the fixed insurance market. And hopefully this new distribution will embrace these annuities and that really didn’t happen. And it’s because we need to tell that, we need to do a better job telling the annuity story. I would say, likewise, for the secure act we need to see sales happening or insurance companies aren’t going to be developing these products.

Sheryl Moore:
Now we do have a few companies who have already developed implant annuities and certainly Wink is looking to track that data once we have a significant amount of data to be tracking. But what’s interesting is you do have to wait on all of that administrative groundwork to be laid and you do have to wait for the sales to start coming in. So it’s kind of like this hamster wheel, right? And we’re not seeing that yet. But as I said, when secure first passed, whoa, hey guys, temperate. Don’t get too excited. We have a lot of groundwork we’ve got to do before this is actually going to go off without a hitch. And I would say, just dealing with the requirements for RISA, from an insurance company standpoint is a huge lift. And you have to take that into consideration with all these other priorities that you guys have been talking about on the show.

Paul Tyler:
Yeah. So, okay. Ramsey, you opened the door so regulation. Okay? So secure act.

Ramsey:
That’s what I do, Paul

Paul Tyler:
Best interest and now DOL. So what’s in store here?

Sheryl Moore:
So when the DOL first proposed the fiduciary rule, I kind of felt that little bit of anxiety in my heart again because I remember all those late nights and hard work that I did on 151a from a grassroots legislation standpoint. And I was like oh man I’m not ready to go through this again. But now that we’re so far out from that date, I’m really to the point where I’m like it’s okay, because if there’s one thing that our industry has proven over the past 23 years that I’ve been doing this it’s that we’re resilient. We can handle challenges, but we continue to swing with the punches and figure it out and thrive. Annuity sales have continued to increase despite all of those things. We might have hiccups here and there, but like I said, more people are living longer and have the need for guaranteed income for the rest of their life lives than we’ve ever had before and more people are hearing that story than they ever had before.

Sheryl Moore:
So those sales are ultimately going to come through. We’ll have some interruptions, some distractions to prepare for some of this DOL business, but eventually we’ll get back to normal and we’ll do even better than we did before. I’m optimistic. And for the people who are saying oh no, I might have to disclose my commission, I think most Americans are pretty reasonable. I mean, Mark, are you aware of the fact that the last time you bought a car that the salesperson got paid a commission when you bought it?

Mark Fitzgerald:
I think everybody has to realize to some extent there’s profit in any sale that goes on out there. Right?

Sheryl Moore:
Yeah. And you felt okay about it, right?

Mark Fitzgerald:
Absolutely.

Sheryl Moore:
Yeah. I mean, Paul, when you bought your last home, didn’t you realize the real estate agent got paid a commission and you felt all right about it?

Paul Tyler:
Yeah. There’s something about commission. It’s interesting, commission and financial services are just, it has this energy and the media and conversations they have with people. No, Sheryl I’ve had the same thing where I had, well, share a story. A good friend of mine who’s a oral surgeon said he is going to buy some survivorship life insurance. He said Paul, but you believe the commission is going to be like $6,000 or something on this? I said, well, how much did it… If I go to an orthodontist and put get my kids’ teeth, get them in braces, how much did the wire cost? She said you can’t compare that. I’m like but it is.

Sheryl Moore:
Yeah.

Paul Tyler:
People need to make money. People have to make a living. Would it feel reasonable for, if somebody comes out to your house, a plumber shows up in my house, they cross, the minute they walk in the door, I’ve got a bill for $300. Right? So how much are you willing to pay for somebody to actually think about your future, your family’s future and protection? I think you’d probably pay a lot more than what you’d be paying if you actually saw what they’re making.

Sheryl Moore:
So you’ve probably noticed I have some ink on me. I like to tout that I am insurance because I don’t fit the typical stereotype of the older white guys that represent this industry unfortunately. No offense, white guys.

Paul Tyler:
None taken.

Sheryl Moore:
But I like to compare it to tattoos, right? Because I go into my tattoo artist and let’s say he charges me $150 an hour. There are a lot of people who’d be like whoa, $150 an hour, that’s crazy. I’m not going to pay that. Well, you know what? This is going to be on me until the day I die and then some. I’m paying for it one time. Do I think it’s worth more than $150 an hour? I do. So what do you think peace of mind for getting a paycheck every month for the rest of your life is worth? I mean, you’re paying that commission one time, but how much is that piece of mind worth? And we’ve all seen the research on how people who own annuities have happier retirements, live longer, are able to spend without having anxiety. So Ramsey, what was that statement that you made just before our call? I thought it was brilliant.

Ramsey Smith:
Wow. I’m trying to remember.

Paul Tyler:
I think there were a lot of statements. [crosstalk 00:24:23]

Sheryl Moore:
… price worth or something like that.

Ramsey Smith:
Oh. Oh yeah, yeah, yeah. Yes, of course. So yeah, one of my frustrations and I’m a capital markets person by training, right? So I always think about things in terms of fair value. And what’s interesting to me is that people react so viscerally to sometimes discussions of annuities. They do it without really having sort of a benchmark for where quote unquote fair value would be. So you could go to you go to two advisors, right? And you could give one of them something priced below fair value, meaning you’re actually buying, you’re paying less for it than it’s worth meaningful. Meaningfully, you can do the same thing with another advisor and give them something that was priced at fair value or might has some commission in it.

Ramsey Smith:
And my belief is you’d probably get more or less the same response from both of them, right? Because they don’t really… They’re reacting to sort of a perception as opposed to having the ability to actually calculate what the true value is. And to be fair, the true value is actually is not a simple thing to determine for a lot of reasons, but I think that’s what sort of frustrates me is that people react without really understanding where value is. And going back to your point about the value of peace of mind, I think that there’s very little understanding about just how valuable and unusual a true guarantee is.

Ramsey Smith:
So when you talk to people, we talk to people that are advisors and put people into the stock market and they make a lot of money in the stock market. I think that’s great, you give people the peace of the peace of mind to actually take the risk, but ultimately, it was client who took the risk that really earned those access returns because they took the risk. The person that told them to do it didn’t take any risk. Right? So the life insurance industry actually takes on a lot of risk in order to relieve clients of that risk. And I think that that is undervalued. I think that’s service is undervalued and that’s something that’s always frustrated me a little bit. So a long winded answer to your question.

Sheryl Moore:
No, I loved it because it actually brings up another issue for me that I think is really important. A lot of people look at annuities as an investment alternative. So they’re comparing it to bonds and stock fund and saying well, I can do the same thing and it’ll cost less money or it won’t have surrender charges. And it’s like hold on guys, you’re losing one important fact. This is insurance. This is guaranteed lifetime income. Can you do that with your bond and your fund? No. And so I think that you have to make sure you understand what the annuity is before you make that statement and it’s intangible. How do you put a dollar amount on that? I absolutely agree with you.

Paul Tyler:
Yeah. Sheryl, how do you think the combination of best interest standards in DOL will change the relationship between the carrier and the agent? Now, go back to the example you told us where the company lost your annuity. Why as insurance agent do I put… I probably represent 10, 15 carriers. I probably put most of my business with five, line share with one. The one I recommending to you is one where I know that if it gets lost, I can pick up the phone, call the vice president of something and they pick up my phone. They solve the question for you quickly. Now, going forward, is this all going to be spreadsheet? And I’m looking at the sharpest right at the sharpest time. Forget about the relationships, forget about the ability to go and fix things if things, God forbid, go wrong.

Sheryl Moore:
I’m scared that it will get to that point, Paul, because the people outside of our industry are going to think that is the answer, right? Because they don’t understand that sometimes some companies lose your annuities. I have life insurance with a company who suspended my policy and I didn’t get premium notices or annual statements for over four years. So it’s like I don’t think those people understand our business much less those things that can happen. And really, you need to take those things into consideration because the company that put those policies in a suspended status for four or five years, they had the most competitive life insurance product in the entire industry.

Sheryl Moore:
And so spreadsheeting in that situation put me in a really precarious situation. And in fact, one of my employees owns business with that company and was supposed to get a call from them two days ago and is still waiting. So what’s the value of that, Paul? How do I put a dollar amount on that? How do I spreadsheet that? I hope that doesn’t happen. But the other thing is, I will tell you that I largely believe our independent agents don’t even realize that they shouldn’t be spreadsheeting, that those things should matter.

Mark Fitzgerald:
Do you think it’ll ever revert back to, I guess in general less because the dynamic of spreadsheeting is definitely broadened, right? It started off with the income riders, now it’s looking at all the different indices and spreadsheeting them on a weekly basis. It seems like looking at the back casting on it. You think that will ever revert back where that’s going back to the fundamentals of a product structure?

Sheryl Moore:
Mark, that’s a really good question, but I’m very pessimistic about that because the independent agent distribution is about competitiveness and competition fuels innovation. And spreadsheeting, really it’s about that. And I would say even back in ’98, ’99, when I started in this business, insurance agent sees what actually spreadsheets migrates. Does anybody remember that? You’d have the Excel spreadsheet that got PDFed and it’d have hot annuity rates and list maybe the company’s rating and the surrender charge and the withdrawal provisions and the rate. So at least they recognize at that point, it’s not all about rate. There are other things you’ve got to take into consideration, but we’ve complicated this product. We really have, especially with adding income riders.

Sheryl Moore:
And so the easiest way to sell anything is to mention a rate, right? I mean, CDs are sold on rate, [inaudible 00:30:59] are sold on rate. Man, do you really want to have to explain that benefit based value compared to that account value and how you can’t access the one, but you can the other? Probably not, but you could talk about the 7% roll up or the 5% of the benefit base you’re going to get for the rest of your life. So I don’t want to make it sound negative. It’s the easy way to sell. Does that make sense?

Mark Fitzgerald:
Yeah. I guess. And the challenge I think is with when you had a standardized indice, let’s the S&P, right, and you had a standardized measuring point of participation rate or cap, pretty easy to spreadsheet. Who’s got the best power rate? Who’s got the best cap? With the bespoke indices, obviously there’s a lot of different variable components to it. How do you think the best way for an agent to really grasp and understand the differences between all of those is in terms of making their selection process?

Sheryl Moore:
So I’ll just say when I benchmark products, I go through two part process. Really I want to see the product features not withstanding the indexing. So what’s the company ratings? What are the surrender charges? Is there a market value adjustment or not? What’s the commission on the product? But then I want to go into a second level of benchmarking and look at the indexing. Now, two year point mark, there are 126 different indexes that are bespoke or hybrid indexes today. That doesn’t even include the gold commodity, the S&P 500, the Dow Jones Industrial Average, the Russell 2000. So there are so many choices today. How do you even benchmark those? I would say the best way to do it if you really are dead set on doing it is don’t compare a product with a participation rate to a product with cap rate.

Sheryl Moore:
I mean, you have to make sure you’re using the right moving part and grouping them together from that standpoint. But I’m going to tell you if you are comparing the price of rice in China index to the S&P 500, that’s not a fair comparison because the Price of Rice in China index was created less than a year ago and the S&P 500 is what? Like 75 years old. Does that sound right? I mean, so it’s not a fair comparison just because we don’t have experience for the option seller to rely on on a lot of these bespoke hybrid indexes. And here’s how I’ve seen that make a difference and where insurance agents should pay attention.

Sheryl Moore:
So one big company who I’m not going to name had a cute little acronym for their hybrid index because they had a super long name like most of them do. And an initially when it came out, it had 100% participation rate, no cap rate, no spread rate. Who couldn’t sell that? I mean, hey, I’m on it like blue Bon. I’ll sell that all day long. You get all the markets gains, not subject to a limit. But what happened was the option seller saw some experience coming in on that index all of a sudden before you know it, it’s like oh, we’ve got to add a 1% spread rate to that product. I’m sorry guys.

Sheryl Moore:
And as the market environment continued to get more and more challenging, that 1% spread rate went up to two and three and four and five and then finally 6%. And then the product manufacturer is like wait a minute, we signed this exclusive deal with this big investment bank to be the only ones who get to use this special index that was made just for us until XYZ year and now they’ve got us locked into this 6% spread. What were we thinking?

Sheryl Moore:
And so what they did was they worked with the investment bank to reprice the index and change the components around so there was different ratings on the bond index maybe before the bond index or the bond part of the index only took up 10% waiting and the stock index is accounted for the other 90%, but now that we’ve retooled it, the bond index takes up 90% of the constituents on the index and stock part, or the equity is only 10%, but the participation rate is 100%, the cap rate is nonexistent and the spread rate is nonexistent. Is that the same annuity? Is that the same index? I don’t think our insurance agents know. Do you guys think so?

Ramsey Smith:
So I can tell you, so first of all, good getting back to the hybrid industry. So I can say that I’m responsible for a few of those, so full disclosure, right? In my prior business. To answer your question, no, that’s a different index. I mean, mean, there may be some similarities in the calculation methodology, but if you change the weightings, that drastically then it essentially becomes a different index. And so, I mean, that’s one of the challenges. Again, I used to sell those indices and I believed in what I saw and still do in the indices that I was focused on. But at the same time, there’s just so many of them and it is. I remember when there was one way back when in 2012 and now there’s 126. So it’s not an easy thing to sort of figure out how to evaluate that many indices because they are complex and I can see why it would be a challenge for an agent who’s not necessarily of a capital markets background to be able to navigate those.

Sheryl Moore:
Don’t get me wrong. I don’t think they’re a bad thing. I don’t. I just think that you need to do a little bit of research on them because they’re so brand new and certainly what I am suggesting is don’t just say because the S&P 500 has a cap of 4.5% that this hybrid bespoke index that has no cap but a participation rate of 55% is going to outperform it because that’s not necessarily true.

Paul Tyler:
Yeah. Yeah.

Ramsey:
Well, that’s where marketing comes in. There’s a lot of marketing there.

Sheryl Moore:
You bet.

Paul Tyler:
Yeah. It’s how to make complex things simple, right?> That’s our career/.

Sheryl Moore:
Right.

Paul Tyler:
Wait, well, Sheryl, this has been great. We’re sort of at the top of the half hour here. I don’t know, Mark, final thoughts, questions for Sheryl?

Mark:
Yeah. I guess kind of a sneak peek, what do you see kind of Q3 ending up and Q4 coming into play given everything that’s going on right now?

Sheryl Moore:
Well, we’re getting into conference season here and from what I’m hearing from everybody, they’re looking forward to actually going face to face at some of these conferences. That’s going to have an impact on sales in itself just from people being out of the office. But we talk about the Delta variant coming up on COVID 19, that’s going to have a negative effect. Certainly the S&P 500 is at the highest point that I’ve ever seen it and anytime the market’s headed up, we actually tend to see money flow away from them fixed insurance products and over to variable or securities products like structured annuities or VAs. And so that’s going to affect the fixed side of the business.

Sheryl Moore:
But the other thing we can’t dismiss is that the 10 year treasury is at 1.26 guys, and that’s not really conducive to [inaudible 00:38:17] sales or fixed annuity sales or even really indexed annuity sales. So I would say as a whole, looking forward. Sales are still going to be down. They’re going to be up from this time last year just because it was a crummy time, but they’re going to be down. It’s going to take a while for us to rebound.

Paul Tyler:
Yeah. Ramsey?

Ramsey:
So I share your concern about the outlook for interest rates in the coming years. On the inflation side, I do think inflation will be an issue for the next year or two, I think we’ll sort of settle back in and that will also sort of create that additional gravitational pulling rates down the road. Yeah. I just hope that… I hope that despite all that we find different ways to sort of leverage the connectivity insurance companies have to the needs of clients, right? So sometimes there are other services provided that aren’t necessarily as balance sheet intensive. So there’s maybe room for exploration there. And I have high hopes for what the secure act will bring with in plan annuities, so, and as I said earlier, I think that you are going to be part of that, Sheryl. Full confidence. And as that grows you to be a factor. So we look forward to seeing that.

Sheryl Moore:
Thanks Ramsey.

Paul Tyler:
Yeah. This is great. Well, Sheryl, first of all, we love annuities and we love you. So hey, thanks for sharing your time. Yeah. Listen, thanks for sharing your time, your wisdom and expertise. We love it. We love your LinkedIn posts. These are great. It’s like Sheryl, I’m actually getting alerts now. Sheryl Moore post. Okay, go Sheryl. So anyway, hey listen, thanks for all you’re doing. Thanks for coming on here and look forward to having you come back. I’m sure this fall we’ll have some interesting topics where we love to get you on and get your discussion, either your opinion or get you to help discuss with some of other friends in the, in the industry. So thank you.

Sheryl Moore:
Well, I would always love to come back on so say the word and I’m back fellas. Thanks so much for having me.

Paul Tyler:
Okay.

Mark Fitzgerald:
Awesome.

Paul Tyler:
Excellent. Hey, thank you Sheryl. We’ll put links in the show notes to your site and thank you for all the research you’re providing us as well as a customer of yours and all of you listeners, listen, stay tuned and tune in next week for another episode of The Annuity Show. And if you’ve got questions for Sheryl, you know where to find her. Thanks. Thanks so much.

Outro:
Thanks for listening. If you’ve enjoyed the show, please rate and recommend us on iTunes, Stitcher, Overcast or whatever you, you get your podcast. You can also get more information at thatannuityshow.com.

Nicholas BreniaEpisode 114: We Love Annuities with Sheryl Moore
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Episode 113: Income Allocation Planning with Jerry Golden

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How do you create more income with less market risk and lower fees and income taxes than traditional retirement income plans for your client? Jerry Golden, President & CEO at Golden Retirement joins us today to talk about Go2Income and the service that his tools provide for advisors that do just that.
Also, do you want to get regular updates on news from Jerry and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.
Special thanks to Bruno Caron for joining us as a co-host!
Links mentioned in this episode:
Find Bruno’s book here:

Thank you to our show sponsor, The Index Standard!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Nicholas BreniaEpisode 113: Income Allocation Planning with Jerry Golden
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Episode 112: Medicare ABGFs with Terence Martin

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Healthcare typically is the biggest expense facing retirees. However, can you help your clients navigate the complexities of Medicare, Medicare Advantage and Medicare Supplement plans? I’m sure we will all get a lot of questions from clients as open enrollment begins in a few short weeks. To get a little smarter on the topic, we invited an expert on the industry to our show.  Terence Martin, Head of Life, Annuities, and Healthcare Research at Conning joins us today to talk about consumer choices and macro industry trends in the senior healthcare market.

Also, do you want to get regular updates on news from Terry Martin and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.

Links mentioned in this episode

https://www.conning.com/insurance-research

Thank you to our show sponsor, The Index Standard!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

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Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersEpisode 112: Medicare ABGFs with Terence Martin
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Episode 111: Know Your Client’s Personality To Provide Better Advice with Dr. Preston Cherry

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The regulators make us attest we know our clients. However, do we really know what makes them tick? Dr. Preston Cherry joins us today to discuss personality models and how they can improve how we deliver advice.
Do you want to get regular updates on news from Dr. Cherry and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.
Links mentioned in this episode:

Thank you to our show sponsor, The Index Standard!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

 Watch

 Listen

Receive Updates



Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersEpisode 111: Know Your Client’s Personality To Provide Better Advice with Dr. Preston Cherry
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Episode 110: Creating Happiness For Your Clients with Tom Hegna

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How can we create more happy retirement planning clients? Tom Hegna joins our show today to share his insights on how to make this happen in your practice. Also, do you want to get regular updates on news from Tom and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter.
We hope you enjoy the show!
Links mentioned in this episode: https://tomhegna.com/

Thank you to our show sponsor, The Index Standard!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

 Watch

 Listen

Receive Updates



Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

EPISODE TRANSCRIPTION: 

Paul Tyler:
How can we create more happy retirement planning clients? Tom Hegna joins our show today to share his insights on how to make this happen in your practice. Also, do you want to get regular updates on news from Tom and other guests of our show? Go to thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.

Ramsey Smith:
SE2, an Eldridge business, is a leader in the U.S. life and annuities, insurance technology and services industry. SE2 uniquely combines the maturity and peerless industry knowledge of its 125 plus years of life insurance industry heritage, with its end to end digital platform to enable the rapid launch of new and innovative products, through existing, as well as digital channels.

Ramsey Smith:
They also happen to be great partners of Nassau Financial Group, the anchor sponsor for That Annuity Show. SE2 is helping them transform their company for the next generation of service.

Paul Tyler:
We’d also like to thank our sponsor CUNA Mutual Group. Built on the principle of people helping people. CUNA Mutual Group is a financially strong insurance, investment, and financial services company that believes a brighter financial future should be accessible to everyone.

Paul Tyler:
Through its company, culture, community engagement, and products and solutions, the company works to create a more equitable financial system that helps to improve the lives of those they serve in our society. They’ve also been great collaborators on this show, for more information, visit cmannuities.com.

Ramsey Smith:
Today’s show is sponsored by our friends at the Index Standard. As many of you who listen to our show, certainly know fixed index annuities and RILAs are getting more complex and technical, just when fiduciary rules are getting stricter. So how do you choose the right indexes and allocations?

Ramsey Smith:
You should consider the Index Standard. They’re an independent provider of ratings and forecasts on all indices and ETFs used in the U.S. insurance space. Their process is designed to be systematic and unbiased, with the goal of identifying robust and well designed indices. We all know finance is complex. The Index Standard has a clear rating system and users approachable language to demystify this complexity. Visit theindexstandard.com for more information.

Paul Tyler:
Finally, we want to thank our primary sponsor, and my employer by day, Nassau Financial Group. Our tagline is working harder to be your carrier of choice, we support you with best in class service, we seek to keep things simple and we’ll have your back in the years to come. We’re headquartered in Hartford, Connecticut with 27 billion in assets and over a half a million policy holders. We’ve been doing this a long time, 170 years, but we remain humble enough to always try to improve.

Intro:
Welcome to That Annuity Show, the podcast that will make you an expert in explaining annuities to your clients. Give us 30 minutes each week and we’ll shave hours from your client presentations. Now here’s your host, Paul Tyler.

Paul Tyler:
Hi, this is Paul Tyler and welcome to another episode of That Annuity Show. Ramsey, how are you?

Ramsey Smith:
Fantastic. Always glad to be here.

Paul Tyler:
Good to be here. Yeah, I know. You’ve had some interesting discussions and stuff we’ve talked about over the last couple weeks here and I’m sure you’ll weave some of these themes into conversation. Today, we don’t have Will. We don’t have Mark, unfortunately, because it is a shame, we’ve got a great guest. If you’re listening to us and you’ve been in the business, I think you’d have to be under a rock, maybe there are five people who are listening, who don’t know or have read or listened or seen our guest, Mr. Tom Hegna.

Paul Tyler:
Tom, thanks so much for spending time with you. You’ve written an enormous amount of great books. I see them on everybody’s shelves. I’ve heard you speak on video and webinars. I have not had the great fortune to hear you in person. You worked at New York Life for a number of years. I know people, New York Life who worked with you and some people at one of my former companies who have had relationships. I know you did a lot of seminars, you’re a Lieutenant Colonel, thanks for your service and welcome to our show.

Tom Hegna:
Thanks, Paul and Ramsey. Great to be with you both.

Paul Tyler:
Yeah, well, I’ll start off with a question and really it’s almost the prerequisite, Tom, which is, for people who may not be familiar with your… I guess it’s probably not your first book, maybe you can tell us a little bit of the backstory Paychecks and Playchecks. Can you just explain the concept that you’ve just been so effective in delivering to our industry and to consumers over the years?

Tom Hegna:
Yeah, so, I spent eight years with MetLife. I spent 15 years with New York Life. I retired from New York Life in 2011 and I went out and I wrote my first book Paychecks and Playchecks. And that was really the title of my million dollar round table main platform talk that I spoke.

Tom Hegna:
I spoke Top of the Table in 2009 and I spoke Main Platform on in 2010. And the name of that talk was Paychecks and Playchecks. And it’s just a simple way to explain to people that when they retire, they should make sure that their paycheck is covered with guaranteed lifetime income. So their housing, their food, their clothing, their internet, their cell phone, all their basic living expenses should be covered with guaranteed lifetime income.

Tom Hegna:
Now that’s not what I say. That’s what all the PhDs who study retirement say the Dr. David Babbel of Wharton, Dr. Mosvoleski of Toronto, Dr. Manak Yari, Dr. Michael Finka, Dr. Wade Pfau, Dr. Robert C Merton, Nobel prize winners. So what I did was I took all these white papers of PhDs that the average person does not read. And I put them into English in a way that people can understand it, that your paycheck needs to be covered with guaranteed income. And then your playcheck, that’s your travel, your cruises, your fun stuff. That can be in the stock market, real estate and all these other investments. And it’s just really a simple way of trying to explain to people how they should just manage at a high level, their finances in retirement.

Ramsey Smith:
I totally agree, and I think that is a framework. That one, it manifests itself a number of different places. Some folks call it bucketing and there’s lots of different ways it’s expressed, but I think it is a very, very important principle. The trick that the challenge that we all face in this industry is getting people to that conversation, getting people to the place where they will actually engage in that particular discussion. And so I’m very curious to hear how you get people to that point, how you get people pass reacting to the word annuity instead of focusing on the value proposition.

Tom Hegna:
So I try to play a role in that because I don’t sell any financial products. So I don’t sell annuities. I tell people right up front of my seminars, “I don’t sell any financial products. I don’t get compensated on the sale of any financial products. What I’m going to share with you is the math and science behind a successful retirement.” And I think what advisors need to do is use disinterested third party references, because look, when you’re an advisor and you’re talking annuities they say, “Well, okay, you make a commission, you make money.” You got to say, “Well, let me give you some research of people who don’t make any money on annuities, okay? Let me share with you. And you can use paychecks and playchecks. You can use, don’t worry, retire happy. You can use white papers at Dr. David Babler, Moshe Milevsky or Michael Finke, Wade Pfau.

Tom Hegna:
And then protectedincome.org, is another great organization. People say, “Why aren’t there any positive articles on annuities?” They got a ton of them and they went and they put it through the FCC. So they’ve got those FINRA statements, the FINRA letters, so that people can actually use this stuff. And so I would say use disinterested third party references. My stuff is good. The PhD stuff is good and protectedincome.org.

Paul Tyler:
Interesting. Well, I’m kind of fascinated in the backstory of paychecks and playchecks, right? Because you’ve been this industry a long time, I think back, early two thousands. When I got involved in the variable industry… Annuity space. What’s the value of an annuity. What stuck with me was, Paul, when you get closer to retirement, you can take some of those chips off the table. Protect them over here. Now they’re safe. The market starts to go up and down as you get closer retirement, there’s some safety, now. I would almost say people have a little bit of market downturn blindness today. It’s shocking. People say, oh, market went down. I’m going to buy more. Why? Because it worked, until it doesn’t. You took a tact though, that said, “don’t focus on the worry, focus on, what you already created, a paycheck for yourself, a payment, and this is what the annuity can do for you”. How did you get there?

Tom Hegna:
Well, New York life was a big seller of variable annuities, and I was an annuity wholesaler. And eventually I ran all the wholesalers. I became their national guy, but so we sold billions of variable annuities and New York life had a cash value guarantee. So not an income benefit, not a withdrawal, but if you put in a 100 000 your guaranteed, not to have less than your 100 000 over a 10 year period of time, and you could… Anytime the market went up each year, you could raise that. So, I mean, that was an incredible feature. And I remember people saying, oh, the fees are too high at the time. It was 25 basis points to have that guarantee. Now, where can you get guarantee that you’re not going to lose any money in the market for 25 base points?

Tom Hegna:
Now, I think it’s maybe 65, 95. I mean, they’ve had to raise it, but people were saying the fees were too high. And I was saying, no, this is the best deal in the world that you can invest in the market. If the market goes up, you get that. But if the market goes down, you don’t lose. And by the way, I use that, because at the time you were able to put all your money into any fund you want. I put it into emerging markets and I put it all in there. And my money, tripled in a period of like 12 or 18 months, I locked that in. And then of course, when the market crashed 10 years later, I got that, tripling of my value. There’s nowhere I could have put my money that would’ve done better over that 10 year period of time.

Tom Hegna:
And yes, I took a lot of risk, but I had a protection, so I could take more risk. And that’s, if people learned to use annuities to their advantage and take as much risk as you can, if you got a downside risk protection, that type of thing. And now in the fixed index annuity, there are uncap strategies. There were fixed index annuities that were up double digits, 12, 14, 18. I heard 20, I never saw, but I heard there was some over… Indexes up over 20% with no downside risk. I mean people should be looking at this and if nothing else not to replace their stocks, but to replace their bonds. You know, Roger Ibbotson did that whole white papers and a PhD on a person with a 60% stock, 40% bond portfolio versus person who had 60% stock, 40% index annuity portfolio.

Tom Hegna:
And he found the second portfolio outperform the first portfolio for the last 40 years and is likely to do so for the next 40 years. So even if people just move their bond portfolio into annuities, their portfolio’s likely going to do better. They’re going to be more relaxed. They’re not going to have as much stress and it’ll be better for their retirement.

Ramsey Smith:
So I think that’s a critical thing there. Is just that… This idea that… what are you replacing with an annuity? And we often get to these conversations where it’s a discussion versus stocks, which it shouldn’t be. Sometimes it’s a function of… maybe you’re having a discussion with a financial advisor who is particularly dedicated to stocks in a portfolio, which is totally fine. But I guess my question there is again. How do we get past that? How do we get people focusing on the right sort of comparables and in particular with financial advisors. So I’d love to find out how your conversations with financial advisors flush out versus the ones you have with insurance agents, for example.

Tom Hegna:
Well, what’s kind of interesting is there are a lot of people out there who claim they’re fiduciaries. They always do what’s best for the client. And yet they don’t use annuities. And I say, well, you can’t be a fiduciary and not use annuities. And they go, “well, I don’t do commission products”. And I say, well, commissions have nothing to do with it. I can show you many cases where a commission product will be a much better deal for the client than paying an annual fee forever. I call them forever fees. Now I’m not against fees and I’m not against commissions. But what I’m saying is people need to do what’s best for the client and the same people who are complaining that agents make commissions. They’re the ones who aren’t using annuities, because they don’t want their assets under management to go down.

Tom Hegna:
And so what I’ve got to do with these financial planner, fiduciary types, who don’t like annuities is… I just challenge them. I say, if you think I’m wrong, then prove me wrong. I haven’t been proved wrong in 30 years, but maybe you can do it. I’ll you call in Susie Orman, Ken Fisher and Dave Ramsey to help you if you need it. But all you got to do is build a portfolio. You think I cannot beat. Yeah. Put all your good stocks in there. Yeah, you do that. You know what I’m going to do? I’m going to reach into portfolio. I’m going to remove some of your bonds. I’m going to replace it with some guaranteed lifetime income from an annuity. Do you know what that will do to every single one of your portfolios, every single one of them. It’ll lower the risk and increase returns. And if, I’m wrong, you should be able to prove me wrong just like that.

Tom Hegna:
But nobody can. And here’s why. Inside of the portfolio, the way that, that income annuity functions, it functions like a AAA rated bond because it’s guaranteed every single month, as long as that per person is breathing, that check is coming with a CCC rated yield. The payout rate is much higher than what you can get in a money market fund or a CD or bond with zero standard deviation. It never fluctuates. So all of the annuity haters out there, they would all love to have a AAA rated bond with a CCC rated yield with zero standard deviation. And that’s how I penetrate that market. And what’s so interesting is when I’m… Let’s say I’m in front of a thousand annuity haters. Attorneys, accountants, CFPs or whatever, that don’t believe in annuities. By one hour into my presentation, I can convert 85 to 90% of them to say, whoa, I just learned something about annuities I didn’t know before.

Tom Hegna:
The other 10%, you know what they do, they attack me personally. They don’t go after what I’m saying. They don’t argue with what I’m saying. They attack me. Oh, you’re just a shield for the insurance companies. Oh, you were in the insurance business. You are a retired executive. You have an agenda. I don’t have an agenda. I just want people to retire, happy and successful. And you can’t do it as well if you don’t have an annuity. And that’s a fact, it’s not an opinion that’s a mathematical scientific and economic fact.

Paul Tyler:
Yeah. Well, as an attorney never practiced, three rules I remember, Tom, was first argue the facts, then argue the law and then just argue.

Tom Hegna:
Right.

Paul Tyler:
That’s interesting. It’s… I think we are seeing breakthroughs in annuities. Clearly in some of these other sectors. RILAs I would say is… Tom. I mean, if we were to point to qualitative, quantitative success… Right? I’d point to RILAs, is that right…

Tom Hegna:
Well, yeah. Let me think about it. They hit on variable annuities. Their fees are too high. Well, you got RILAs out there that have no effect… that don’t have any effective fees and that’s very powerful. Now you don’t get a hundred percent protection, but you can get 10 or 15 or 20%, which will take out 85, 90% of all the market crashes that are out there. And you can either have a buffer. You can have a floor buffer. You get your choice. It’s a very flexible product and I think for a lot of people, it makes a lot of sense.

Tom Hegna:
It’s almost like a variable annuity on training wheels, if you think about it. For the fiduciaries who don’t like annuities, because the fees are too high. Well, it’s a training wheel product for them. I think it helps get them into the annuity space because they can see, okay, well I can see where I can take some protection here and have this upside here. It makes sense. Especially when you don’t compare it to stocks, compare it to bonds, compare it to some other things. And I think it makes a lot of sense for a lot of people.

Ramsey Smith:
Well, yeah. I thought when you said before, when you… We challenge people to put whatever stocks they want in, because you weren’t going to touch the stocks.

Tom Hegna:
I know. I don’t care about the stocks.

Ramsey Smith:
You didn’t focus them at all. Yeah.

Tom Hegna:
Because the average person should not have all their money in annuities. And I think that’s… some advisors are out there every… If all you got is a hammer, everything looks like a nail and they just sell their annuities, sell their annuities. No, we need to be more holistic. We need to do what’s best for the person. But the average person is going to have 20 to 40% in their portfolio in annuities, not a 100%.

Ramsey Smith:
Yeah.

Tom Hegna:
20 to 40. Now I’m going to have more than that because I don’t want to just have guaranteed paychecks. I want to have guaranteed playchecks. So I own 11 annuities. I don’t sell them I don’t care if people buy them but the research shows you should.

Ramsey Smith:
Yeah.

Paul Tyler:
Okay. What one word in question Tom inflation. How worried should I be?

Tom Hegna:
It’s step four in my don’t worry, retire, happy book. Protect yourself against inflation. I think you’ll always have to protect against inflation, but I may see the world a little different. I mean, I look at the 30 year U.S. Government bond. That is my crystal ball on interest rates and inflation. And the 30 year government bond is still under 2%. The bond market sees no inflation. The bond market still sees deflation and there’s still what? 14, 15, 16 Trillion Dollars of government bonds around the worlds paying negative interest rates. The world is still facing deflation. All right. Now oil price are up. Gas prices up lumber price are up. Copper price are up. I mean, we’re all see in the price are going up. I mean, you can’t, you go to, McDonald’s now used to buy something at McDonald’s for like six bucks.

Tom Hegna:
You can’t get out of there for 12 or 13 bucks. I mean, for one person it’s ridiculous. Taco Bell, they used to have three tacos for 99 cents. Now they’re like 9.99 a piece and there’s no meat in them. I can’t go there anymore. They don’t put any meat in their tacos. I mean, so obviously prices are going up, but what I’m telling you is economically the bond market does not see it. They say, okay, there’s a lot of funny money. It’s making things go up. But once the funny money ends, look out below, this thing could crash at some point. I don’t know when I’m not saying it’s imminent, but I mean you can’t have 28 trillion dollars of debt climbing at 3 to 4 billion. They’re talking about spending another 3, 4 trillion. And we have 200 trillion of unfunded obligations for social security, Medicare, Medicaid, government pensions, military pensions. Some day somebody’s got to pay the Piper.

Ramsey Smith:
So I’m going to, I’m going to dial back to one thing you were talking about earlier, which is the AAA credit, you called it, versus the CCC yield. At the end of the day… First of all, obviously everybody, all three of us believe very strongly in the credit worthiness of the life insurance industry, generally, and life insurers individually. And I think our track record supports that, but it is a challenge that you will get… So if you were talking to a financial advisor and you talk about it being sort of AAA, they will say, well, ultimately it’s the claims paying ability of the carrier. So how do you address that conversation.

Tom Hegna:
That’s true.

Ramsey Smith:
And different carriers, why they should go with a lower rated carrier versus a higher rated carrier.

Tom Hegna:
And I’m very clear in my book, all insurance companies are not the same, and I do encourage advisors to work with higher rated carriers. Now I let them determine whether that’s a B plus or an A minus or an A plus. I leave that up to them because the case can be argued against me. And it has many times. That look, Tom, “it doesn’t matter what the insurance company rating is. Nobody’s ever not gotten paid their income annuity because income annuity, reserve requirements are so high. So you should really go with the lowest carrier to get the highest payout”. I don’t subscribe to that, but there are people that do. I say the past is not the future. And just because things happened some way in the past doesn’t mean they would necessarily will happen that way in the future. And for me, I stick with higher rated carriers. I mean, I always worked for AAA Mutual Life Insurance company, Metlife. When I was there it was AAA mutual. Then they de-mutualized. New York life was AAA Mutual. So that’s my own natural bias, is to stick with higher rated of carriers. But I work with carriers of all ratings out there. And I let the advisors really determine which annuity is best for the client. I don’t get into picking products or picking companies.

Paul Tyler:
Yeah. So just to, also fall back on your comment about rising prices, now, it’d be great if my Taco Bell… Taco Does go down, right? Let’s see. I don’t think my taxes are going to go down. I don’t think fuel costs… Oh, who knows? Maybe I… A lot of expenses, I can see Tom, either flat or going higher, what should I be doing, or what should I be telling my clients.

Tom Hegna:
So you’ve got to help your clients plan for inflation, regardless of whether we’re in deflation inflation, they’ve got to have increasing income. We can’t just give them income. We got to give them increasing income for the rest of their lives. There’s really three ways to do it. Number one, you can buy annuities where the paycheck goes up by 3 or 4 or 5% every year. SPIAs do that. Some DIAs do that. Some type of inflation protection. You can do what I’ve done. I bought an annuity that kicks in when I turn 60, I bought another one that kicks in when I turn 62, I bought another one that kicks in when I turn 65, I bought another one that kicks in when I turn age 70.

Tom Hegna:
So I’m guaranteed of that increasing income, or you can cover those basic living expenses and retirement with a guaranteed lifetime income, and then invest the rest of your money in things like stocks and real estate, things that typically go up in times of inflation. So if we get inflation, the portfolio goes up, there’s more money to take out more money, but we’ve got to give them a way to have a increasing income for the rest of their lives.

Ramsey Smith:
So I like that. So it’s essentially laddering, you buy say a SPIA at first, then you buy a series of DIAs further out so that you have additional layers coming in, down the road.

Tom Hegna:
Yeah. And I mean, you don’t have to even use a SPIA or DIA. You could buy different annuities, fixed index bearer and then just kick them in at different times. But I bought a bunch of DIAs for my income. I also own some index [inaudible 00:22:56] I also own some variable Annuities. So I’m pretty well diversified across the annuity space, but each of them function a little differently for me.

Ramsey Smith:
Okay. Well, that’s interesting, Tom. So the choices that you made, what were the… We don’t need to know carrier names, but the ones you did choose. What distinguished the specific choices you made?

Tom Hegna:
So I own three variable annuities. Now those are the ones with the high fees, the bad ones that people don’t like, why would I do that? Well, I’ve announced that I’m retiring. Okay. So I’m not just talking the talk and walking in the walk. I have enough money, now to retire for the rest of my life. So I always asked people if I have enough money to retire for the rest of my life, what would be the stupidest thing I could do? Lose my money that would be the stupidest thing. Can you imagine? I work? I save, I invest. I do everything right for 60 years. And then I retire and the market takes a dump. It stays down for 15 or 20 years. See people don’t realize the European stock market has been down for over 20 years. The Japanese stock market has been down for over 30 years.

Tom Hegna:
What would happen to me if I retired and my money was in the market, market crashes, stays down for 15 or 20 years. That would be the stupidest thing I could do. So what I tell people is, I say, “I don’t think I’m any different than any of you. You know what I want to do”. I want to make as much as I can make. If I can make 10%, 20%, 30%, I want to make as much as I can make, but just as important. No, for me more important, I don’t want to lose what I’ve already got. Well, Vanguard can’t do that for me, Fidelity can’t do that for me, Ken Fisher can’t do that for me. That’s what a variable annuity can do for me. And by the way, there were hundreds of variable annuity and variable life sub counts. Last year, there were up over 20 and 30 per percent after fees.

Tom Hegna:
So if I can make 20 or 30% after fees and then be guaranteed that if the market crashes, I don’t lose all my money because I either have an income benefit guarantee or withdrawal benefit guarantee or a cash value guarantee that matters to me. And then I own three fixed index annuities. Why? Because, that study of Roger Ibbotson. If you just move your bond portfolio to fixed index annuity, your risk is going to go down. Your returns are going to go up.

Tom Hegna:
And then I own multiple income annuities. Why? Because retirement’s all about income. I want to be able to play golf and tennis and pickelball and go on cruises, regardless of what the market’s doing, regardless of what interest rate’s doing, regardless of who’s in the White House, regardless who’s in Congress. And that’s what that income allows me to do. And what many people don’t realize is I have converted many of my IRAs and 401(K)s to Roth, they’re in income annuities. So I get tax free income for the rest of my life. And I think tax free income is going to be very important because taxes are going to have to go up. It’s not a Republican or a Democrat issue. It’s a math problem. We need a Math Party, quite frankly.

Paul Tyler:
We do. And it’s shocking how many people don’t understand math, Tom. So tell me, it sounds like you are prepared to live, be happy in retirement. Tell us about being happy and what Alliance…

Tom Hegna:
Yes. So look, I took a trial retirement two summers ago. I wanted to see, could I really do it? I mean, I spent 200 days a year on the road for 30 years. Could I actually retire? Would I drive my wife crazy? I loved it? So I retired the next summer as well. And now I’m kind of entering into full-time retirement. I’m not going to… I’m still going to do webinars and stuff, but I’m not going to do 200 days a year on the road. I am not going to do that anymore. Okay. Now I’m worried. I really worked on my golf game. I won the club championship at my country club. I’m the oldest club champion, in course history. I mean, it was an incredible… And I put that as one of my life events, as high as speaking main platform at MDRT.

Tom Hegna:
And so that’s now my new goals. I’m playing tennis, I’m playing golf, I’m doing all these things that I want to do. And that takes the priority on my calendar. And then I have to fill in my webinars around my golf game and my tennis schedule and that. And so now I’m in control rather than the world being in control of my life. And that’s what retirement’s all about. It’s really about freedom. It’s about being able to do what you want to do when you want to do it. And Dr. Michael Finka and Wade Pfau, they’ve done a lot of research and people of this guaranteed income, coming in, they spend more money and spending money is the key to success of retirement. It’s the dinners out. It’s the bottles wine with your friends.

Tom Hegna:
It’s the cruises. It’s the travel. That’s how you enjoy your retirement. See too many people have millions of dollars stashed in some accounts somewhere, but they don’t touch it. They won’t touch it. Oh, I’m not touching it. Not touching it, not touching. I say, wait a minute, you told me where you were going to join the country club. You’re going to buy new boats. You’re going to see the world. Have you done that yet? Oh, no. Interest rates are too low. The market’s so volatile. Bitcoin crashed. And so they don’t touch their money. Don’t touch their money. Don’t touch their money. Then they die. Money goes to the kids. What the kids do with it. They join the country club. They buy a new boat. They go see the world. And I’m trying to tell people, I want you to join the country club. I want you to see the world.

Tom Hegna:
I do not want you to live at just in case retirement and having annuities in your portfolio helps you do just that. And now the research shows you’re likely to live longer as well. So you’re going to be happier in retirement. The wall street journal had the headline, “The secret to a happier retirement is friends, neighbors, and a fixed annuity.” And now all the research shows you’re likely to live longer as well. So I mean, good grief. If you’re going to be happier, you’re going to be more successful and you’re likely to live longer. Why would people not buy an annuity?

Ramsey Smith:
Very compelling on a lot of fronts, but in particular, this idea of feeling the freedom to live your best, right? Your best retirement, because you don’t have to worry about what comes next? I want to shift gears a little bit, because you’ve mentioned some of the critics, some of the more vocal critics a couple times you mentioned Ken Fisher, you mentioned Dave Ramsey. You mentioned Susie Orman. Have you run into them? Have you sat on the same stage with any of those three, have you found yourself in direct debate with them, I’m just…I’m very curious if you’ve had that opportunity.

Tom Hegna:
Yeah. I mean, Susie Orman now has changed her tune. So she’s pro annuity now pro income annuity at least. I mean, we were both on PBS at the same time. We never really crossed pats.

Ramsey Smith:
Yeah.

Tom Hegna:
Dave Ramsey. I’ve met him. He actually preached in our church one… Sermon in our church one time, but I’m not going to get in a direct debate. I did that as an advisor a couple times where I debate the other advisor and all it is, is like a pig fight. You’re both in the mud and by the time you’re done, you’re both dirty. You’re both feel dirty and nobody really wins. So I’ll just beat them on math and science and I will stick with the PhDs on my side and they can stick with whoever whatever thoughts they have, but they’re dead wrong when it comes to annuities.

Tom Hegna:
And Dave Ramsey of course is also dead wrong when it comes to only term and life insurance. Less than 2% of term policies, ever pay a death claim. And I say the only policy that matters is the one that’s enforced on the day that you die. You know, I don’t care if you buy term life, whole life, verbal life index life. The only policy that matters is the one that’s enforced on the day that you die in less than 2% of term policies are ever enforced on the day that you die.

Ramsey Smith:
Got it. All right. So you said that you’ve been easing your way into retirement. So here’s a, here’s a tricky question. Like who’s the next Tom Hegna, who’s the sort of up and coming… Who are some of the up and coming commentators that… I mean…

Tom Hegna:
There’s a lot of good… Yeah. There’s a lot of good young people out there. You know, Curtis Klug, he’s not that young. He’s about… He’s Just few years younger than me, but Curtis does a great job. David Ressegue, he’s a young guy he’s doing well. David Kinder has a wealth of information on social media. I don’t know that he does a lot of speaking, but you know what, there’s room for a lot of a selfie tailors coming up. There’s a lot of people out there that can step up and I’m just going to, I’m just going to move over to the side. Look, Gary Kinder was one of my heroes. Okay. Gary Kinder was speaking until he was 82 or 83. I’m not going to be that guy. Now, maybe if MDRT calls me and they want me to take my walker out on the stage for five minutes, maybe I’ll do it, but I’m not going to be traveling the world doing this. Joe Jordan is now 70 something.

Tom Hegna:
And he’s still going strong and van Miller’s 70 and he’s still going strong. I’m just not going to do that. Like I said, I don’t want to be the richest guy in the cemetery and I want to enjoy my life, and we’re having the time of our lives right now. I mean, I have a guy that we’ve… Now we just hit three times in a row. We won the member at the golf… At the country club. I’m playing in match, play team match play. I’m the captain of the Rim Cup. We play all the Northern Arizona courses. I mean, I’m just having fun, doing other things. Okay. I’m retiring to that. And I will do some virtual stuff, but I’m not going to do three a days across Philadelphia and Pennsylvania winter when the slush is that thick and I ruin my shoes, I’ve done that so many times. I’m not doing that anymore.

Paul Tyler:
Yeah. Well, Tom. This is great. I guess just switching gears to advice, to advisors who are at the market if you were talking to your former self, back when you were just sort of… Either in the business or starting the wholesale… What advice would you give people who are at that part of their career. Embrace digital, focus on conversations, what’s the…

Tom Hegna:
Well, I mean, if you’re a wholesaler, you better know your products inside and out, you better know them better than anybody. I mean… When I got hired by New York life, I asked for all the prospectuses of all the products and all the product brochures. And I went through every one of them with a yellow highlighter and I highlighted anything I did not understand. What does this mean? What does this mean? What do you mean that after two years, this can happen or after five years. And they thought I was crazy. I come in with a big stack of prospectuses and I go through line by line, but I wanted to know my stuff. If I’m representing something, I got to know it inside and out. And then you got to know your competitor’s products. And I would say this for advisors too, you better know your products inside and out.

Tom Hegna:
You better know what’s guaranteed. What’s not guaranteed. What fees are real, what fees are hidden. There’s a supplemental thing to the prospectus. A lot of times people don’t know that. There’s an investment statement. You got to get all these documents and go through it. So you really know what you’re doing. And then I would build a social media presence and I would try to connect with everybody I can. I would post powerful content every day. And then I would watch my social media. They’ll tell you when they got married, when they’re having a baby, their mother died, all these life events and people do things at life events. They’re retiring, they’re doing… You want to know that. And then I’d reach out to them on those life events. You have a much higher chance of selling something to somebody if they’re having a life event, because they got to change some things in their life.

Paul Tyler:
That was great. Ramsey we’re nearly at the top of the half hour. What are your thoughts? What questions?

Ramsey Smith:
So, a number of things. Look… I think it’s great in a number of fronts. One is, you’re an evangelist, you’re a carrier neutral and you’re product neutral in a certain… in many senses, but also you eat your own cooking, right? So, you’ve committed personally and you’ve made your own personal financial decisions that have been quality of life decisions, which are the ones that we care about most. And you’ve used annuities to get you there. So I think that’s great. But overall, I just very much appreciate your sharing with us. How you communicate, how you’ve dealt with those objections, how you’ve traveled the country 200 days a year. That is remarkable for all that time. So a lot of shoe leather there. So thank you for that.

Tom Hegna:
You bet. And I’ll just conclude this way. You know, physiognomically people, if they have… For their entire working career, they got a paycheck every two weeks. And what do they do with that paycheck? They spent it, they pay for their housing, their clothes, their food, their internet, their cell phone. But then they were saving money in a 401(K). And I always ask people, when was the last time you took 200 grand out of your 401(K)? Oh, no, we can’t do that. We got to save it. We got to grow. We got to protect it. We can’t touch it. Well, you do that for 45 years. Do you honestly think on your 65th birthday, you’re going to wake up and say, by golly, I’m going to blow my 401(K) today. People can’t do it. They can’t touch their assets. They’ve been physiognomically programmed, and most people are going to go to their graves, never touching their assets.

Tom Hegna:
And all I’m saying is take a portion of that. Turn those into guaranteed paychecks and playchecks, because you’re used to spending that and it’s spending of money that will allow you to enjoy your retirement, not the accumulating of assets and holding this money… Kiplinger just had the article just yesterday and said, “Use some of your nuts in retirement”. They compared retirees to squirrels and squirrels will save nuts for the winter, but then the winter, they eat their nuts. But then people are saving this money, but then they get to retirement. They don’t touch it. And it said, no, you’re supposed to spend that down. You’re supposed to spend all your money. And if you have a life insurance to go to the kids, it gives you the license to spend all your money. That’s what I’m doing. And it seems to be working out pretty well.

Paul Tyler:
Well, it sounds like it has. And Tom, thank you for all you’ve done for the industry and for joining us, appreciate it. What’s the best way for people to find your books, find where you’re speaking, get you… To invite you to speak.

Tom Hegna:
Sure. tomhegna.com our phone number 855-T-O-M-H-E-G-N-A, and they can schedule me to speak or do whatever. Books are there. You can use the code 15 OFF to get 15% off. I’ve got five free webinars at Tom hagner.com/webinars. I have a free YouTube channel, so I have a lot of free resources for people as well.

Paul Tyler:
Excellent. All right. Tom thanks so much. Ramsey it was great. And for all of your listeners, thanks for joining us, send us your comments, send us your suggested guests and join us again next week for another episode of That Annuity Show.

Outro:
Thanks for listening. If you’ve enjoyed the show, please rate and recommend us on iTunes, Stitcher, Overcast, or wherever you get your podcast. You can also get more information@thatannuityshow.com.

Ashley SaundersEpisode 110: Creating Happiness For Your Clients with Tom Hegna
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Episode 109: Using and Improving Your RISE Score On The Way to Retirement with Sheila Jelinek and Peter Sun

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Many times when planning for retirement we often try to lock onto a specific date. However, it may be more productive for some to focus on their actual level of preparation for retirement. Today, Sheila Jelinek and Peter Sun from Milliman join us to talk about the genesis of the RISE tool which does exactly that. They explain how to get either your score or that of your client, and more importantly, how to use it to improve your plan over time. Also, do you want to get regular updates on news from Sheila, Peter and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter.

Links mentioned in this episode:

Learn about the methodology behind the RISE Score: https://frm.milliman.com/-/media/frm/pdfs/3-17-21-frm-milliman_rise_score.ashx

Access the RISE Tool here:

https://alex.fyi/rise/

https://www.therisescore.com/

https://www.protectedincome.org/rise-calculator/ – The Alliance for Lifetime Income – client version

https://www.protectedincome.org/rise-calculator-fa/ – The Alliance for Lifetime Income – advisor version108 Using and Improving Your RISE Score On The Way to Retirement to with Sheila Jelinek and Peter Sun

Thank you to our show sponsors: CUNA Mutual, The Index Standard and SE2!

Built on the principle of “people helping people,” CUNA Mutual Group is a financially strong insurance, investment and financial services company that believes a brighter financial future should be accessible to everyone. Through our company culture, community engagement, and products and solutions, we are working to create a more equitable financial system that helps to improve the lives of those we serve and our society. For more information, visit cunamutual.com/annuities.

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

SE2, an Eldridge business, is a leader in the US life and annuities insurance technology and services industry. SE2 uniquely combines the maturity and peerless industry knowledge of its 125+ years of life insurance industry heritage with its end-to-end digital platform to enable the rapid launch of new and innovative products through existing as well as digital channels. Learn more at https://se2.com/

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersEpisode 109: Using and Improving Your RISE Score On The Way to Retirement with Sheila Jelinek and Peter Sun
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Episode 108: The Next Five Years In The Business Will Be Thrilling with Jim Kerley

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The next few years promise to bring more change to our business than the last 50, according to our guest Jim Kerley. He should know. Jim has worked for carriers, launched businesses, and played a leading role at LIMRA. Today, he is the managing partner of Clearview Partners and shares his perspective of change not only in the U.S. but around the world. Do you want to get regular updates on news from Jim and other guests of our show? Also, keep up with news from our guests and sign up for our email list at thatannuityshow.com.

Thank you to our show sponsor, The Index Standard!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

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Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersEpisode 108: The Next Five Years In The Business Will Be Thrilling with Jim Kerley
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Episode 107: Finding Extra Savings Through Better Social Security Planning With Jack Sharry

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When to take Social Security could arguably be the single most important decision you will make in retirement. Jack Sharry, EVP and CMO for LifeYield joins us today to talk about technology’s role in helping us all make the optimal call. Also, do you want to get regular updates on news from Jack and other guests of our show? Go to https://thatannuityshow.com and subscribe to our newsletter. We hope you enjoy the show.

Thank you to our show sponsors, The Index Standard and SE2!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them? The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices. We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

SE2, an Eldridge business, is a leader in the US life and annuities insurance technology and services industry. SE2 uniquely combines the maturity and peerless industry knowledge of its 125+ years of life insurance industry heritage with its end-to-end digital platform to enable the rapid launch of new and innovative products through existing as well as digital channels. Learn more at https://se2.com/

 Watch

 Listen

Receive Updates



Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersEpisode 107: Finding Extra Savings Through Better Social Security Planning With Jack Sharry
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Episode 106: Getting Ready to Step Out on the Risk Spectrum with Byron Boston

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Are you ready to take a step out on the risk spectrum? Special guest Byron Boston, Chief Executive Officer, and Co-Chief Investment Officer of Dynex Capital, joins the conversation to share insights on Real Estate Investment Trusts (REIT): another potential source of income in retirement. Do you want to get regular updates on news from Byron and other guests of our show? Subscribe to our newsletter under the Receive Updates section, below. We hope you enjoy our conversation!

Thank you to our show sponsor, The Index Standard!

Fixed Index Annuities and RILAs are getting more complex and technical just when fiduciary rules are getting stricter. How do you choose the right index and allocate to them?

The Index Standard is your answer. They are an independent provider ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is systematic and unbiased, identifying robust and well-designed indices.

We all know finance is complex and The Index Standard has a clear ratings system and uses approachable language to demystify this complexity. Visit theindexstandard.com for more information.

 Watch

 Listen

Receive Updates



Show Sponsors

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

EPISODE TRANSCRIPT:

Laura Dinan Haber:

Are you ready to take a step out of the risk spectrum? Special guest Byron Boston, Chief Executive Officer, and Co-Chief Investment Officer of Dynex Capital joins the conversation to share insights on real estate investment trusts, another potential source of income in retirement. Also, do you want to get regular updates on news from Byron and other guests of our show? Subscribe to our newsletter under the receive update section below. We hope you enjoy our conversation.

Ramsey Smith:

Today’s show is sponsored by our friends at The Index Standard. As many of you who listen to our show certainly know, fixed index annuities and [inaudible 00:00:38] are getting more complex and technical, just when fiduciary rules are getting stricter. So how do you choose the right indexes and allocations? You should consider The Index Standard. They’re an independent provider of ratings and forecasts on all indices and ETFs used in the US insurance space. Their process is designed to be systematic and unbiased with the goal of identifying robust and well-designed indices. We all know finance is complex. The Index Standard has a clear rating system and users approachable language to demystify this complexity. Visit theindexstandard.com for more information.

Intro:

Welcome to That Annuity Show, the podcast that will make you an expert in explaining annuities to your clients. Give us 30 minutes each week and we’ll shave hours from your client presentations. Now here’s your hosts.

Laura Dinan Haber:

Hello, and welcome to another episode of That Annuity Show. Paul Tyler is traveling this week, so I’m your co-host today. Let me introduce myself. I am Laura Dinan Haber, Innovation Program Manager for Insurtech Incubator, Nassau Re/Imagine. On with us today, we have some familiar individuals. Mark, how was your weekend?

Mark Fitzgerald:

Weekend was great, Laura. How are you?

Laura Dinan Haber:

I’m doing well. Thanks so much. Ramsey, always nice to see you.

Ramsey Smith:

Always glad to be here.

Laura Dinan Haber:

Absolutely. We’ve had the opportunity to kind of cross paths in a few different ways. This is my first time on That Annuity Show. Happy to be here and congratulations again to all of you on being over 100 episodes. We’ll be curious to see how many hundreds of more come down the pipeline. It’s exciting.

Mark Fitzgerald:

Absolutely.

Laura Dinan Haber:

So with that, Ramsey, I’ll turn it over to you to introduce our guest.

Ramsey Smith:

All right. Thanks a lot, Laura. Look, we’ve got a fantastic guest today. We’ve got Byron Boston, who’s the Chief Executive Officer, and Co-Chief Investment Officer of Dynex Capital, which is a mortgage REIT. So what we’re going to do today is we’re going to learn a number of things. We’re going to learn what a mortgage REIT is, we’re going to learn what it takes to run one, and we’re going to learn what one of the best is doing to make it work.

Ramsey Smith:

Now, I’ve known Byron for a very long time. I first met Byron in the 80s when I was a summer intern at First Boston and Byron was one of a handful of African-American professionals that I, as a young guy looked up to and dreamed of someday having a career on Wall Street, which ultimately ended up happening.

Ramsey Smith:

Byron has been a leader for a very long time. He worked at, after leaving Credit Suisse, well, first Boston became Credit Suisse. After leaving Credit Suisse, he went to Lehman Brothers and worked in a number of areas. But the two things think are most significant. One is joining one of the major GSCs and helping them launch one of their retained portfolios and then ultimately taking over Dynex 14 years ago. With that, we’re very lucky to have you on Byron today. We’re going to learn about another type of income that we haven’t talked about as much. So with that, I’ll turn it over to you. And I guess first off, tell us a little bit about your journey and how you got here.

Byron Boston:

Well, it’s been a very fortunate journey because I’m one of those lucky college students who found this way into a career that really fits. So when I introduce myself, I say, I’m a fish in water, and I’m very happy. I’m an economics nerd from an undergrad at Dartmouth College. And I came straight to Wall Street in 1981, where I was trained very well in credit at Chemical Bank. That was my first job as a banker. I went back to grad school after that, to the University of Chicago and studied finance and account, and came back to Wall Street again, this time as a mortgage-backed security trader, and one of the best mortgage-backed securities trading desks at the time, which was that First Boston and it was run by Larry Fink who eventually left to start BlackRock.

Byron Boston:

And then after 11 years on Wall Street, I always had a desire to go to the buy-side. And I moved to the buy-side by going to one of the GSCs that really was in the process of developing a securities’ portfolio strategy. I wrote a comprehensive business plan to increase the diversity of assets that were owned within the portfolio. That was a major point in my career because I learned how to be a public company senior officer. And that’s very, very important. A lot of people believe they can do it. It is a skillset. I learned how to, I got board exposure while I was at Freddie Mac. I got extensive senior management type of exposure in running a public company.

 

Byron Boston:

In 2004, when I had an opportunity to start my own company, I was ready. And I started a mortgage read in January 2004. We took it public in March of 2004. It’s called Sunset Financial. And a couple of years later, we received a takeover bid from Wachovia. And ultimately we sold the company to another entity in October of 2006. That was about a three-year run with that first IPO. The great thing about Dynex Capital and one of the things I’m most proud of is that 40% of my shareholders in Sunset were investors in Dynex Capital and they invited me to join them at Dynex and help them rebuild Dynex Capital. So I came, wrote again a comprehensive business plan for building out this mortgage REIT, starting in January of 2008. And for the last 14 years, that’s what I’ve done here at Dynex and it’s been successful and we’re pretty excited about the things that we’ve done, not only just for ourselves, but for our shareholders and for the community.

Laura Dinan Haber:

Oh, that’s fantastic. And Byron for our listeners who may not know what a mortgage REIT is, what is it and how does it work?

Byron Boston:

First and foremost, we’re a real estate investment trust, just like other REITs. The real differential is where do our assets sit? Where do we deploy our capital? Versus an equity REIT that owns buildings and they generate their income from whether it be some type of a brand or some other type of fees off of real estate. We are a lender. If you take back in my career, I started my career as a lender with Chemical Bank. That’s what I’m still doing today. In effect, we lend money to the housing finance system and to other parts of commercial real estate. So our assets out of our balance sheet, they’re either loans or security against the real estate. And Dynex is the oldest mortgage REIT. We’ve been doing this since 1988. We were one of the earlier innovators in the non-agency securitization space, which means we made direct loans between 1988 and 1998, and we financed ourselves with non-agency debt or non-agency securities.

Byron Boston:

Today, our balance sheet is all securities, a very minimal, just residual loans on the balance sheet, but the securities all backed by loans that are either to a residential real estate or generally multifamily properties today.

Ramsey Smith:

Can you talk a little bit about if one buys a mortgage REIT, what is the investment rationale and what is delivered?

Byron Boston:

Let me continue on with your first question, Laura, because I didn’t totally complete it with that. If you compare Dynex to a bank or compare Dynex to a REIT that owns property, we’re in between because we’re lending money against the property. And in effect, we’re looking to borrow money, just like a bank, at a lower cost, the interest rate than we actually lend money or where we ultimately buy a security. If an investor is looking at a Dynex, how do you place a Dynex in a portfolio of annuities, a bank or an equity REIT? Dynex is another entity generating income, understand that we are using leverage to increase the cash return to our shareholders. And the unique skill set that we bring to the table at Dynex Capital is we’ve got a long-term track record in our personal careers and as a company in lending money. And most importantly, we’ve got a long-term track record in managing leverage and using leverage to increase returns to our shareholders.

Ramsey Smith:

I’m going to nudge a little bit more on that. There’s a transformation there, right? You’re buying mortgage-backed securities, which yield roughly what, like two and a half, three, 4%, what is the general range there?

Byron Boston:

Look, I’ll call it between 1% and 3% you can find security.

Ramsey Smith:

So 1% and 3%, and you borrow money to buy those and to get that leverage. And then what is the typical dividend yield one can expect when one buys a mortgage REIT? That’s the transformation-

Byron Boston:

[crosstalk 00:10:13] Let me go back. Let just say this again. 1% to 3% above, let’s say a treasury rate. If you look at a treasury tenure, the yield, maybe 150. So we may be 100 basis points or 300 basis points above it, but let’s put in street man’s language, we’ll call that 250 to 450.

Ramsey Smith:

So two and a half to four and a half percent total yield?

Byron Boston:

Right. That’s correct.

Ramsey Smith:

So treasuries plus the spread, total yield. Got it, got it.

Byron Boston:

That means our dividend, if you compare it to our dividend, which is your question, that dividend now is 8% on our common stock. And it’s about, call it 670, 680 on our preferred stock. I think your question was, well, how do you get there? How do you go from a bond that yields 250 to get to that level? We use leverage. We take the capital of a company. We have a total balance sheet today of equity plus preferred of like 761 million. But the size of our balance sheet will range between four to 6 billion. So we own more securities than we actually have issued in terms of stock and preferred stock. And the way we do that is simply borrow money to own more securities. And we’re still earning a spread between where we borrow the money and where we actually lend the money. And then the next thing that our shareholders depend on us is to manage that balance sheet that we have created.

Mark Fitzgerald:

So Byron, for a typical investor that’s looking to supplement income in retirement, how are the dividends paid out? Is it quarterly? Is it monthly? Is there also a capital return that goes along with that?

Byron Boston:

There are all of the above. We have a preferred stock that pays dividends on a quarterly basis. We have a common stock that pays dividends on a monthly basis. And we structured our dividend payment trying to be more attractive to the individual who is managing his money on a monthly basis. So we offer both. There are times where there’s capital gains, that the dividends may be classified as capital gains. There are other times when they’re classified as ordinary income, and it’ll vary depending on how that income is generated. And for the average investor, I’d say over the long term, you may find the income falling in either of those buckets over time. And it will change from year to year.

Mark Fitzgerald:

And how about from that perspective of liquidity? How does that structure work if the client were to try to redeem shares of it?

Byron Boston:

Well, that’s the great thing. Because we’re a public company, a client can buy and sell our shares at any point in time. There’s great liquidity in our stock for a customer who wants to say I want to own a mortgage REIT. Because we’re public, there’s not a mutual fund, there’s not a funky price at the end of the day or anything of that nature. You simply buy our stock. We are a public company, we’re transparent and we’re regulated by the SEC. So we have to provide you with information regarding the risks that we take. But from a liquidity perspective, an investor can come in and out of our stock, I don’t want to say in a nanosecond, but it is close to that. It’s trading any other equity.

Laura Dinan Haber:

How would someone know whether or not a REIT is right for them? We talked about investors can use it as supplemental, but how do I know if it’s right for my personal portfolio?

Byron Boston:

Obviously, when there’s an individual, you have to think about your risk tolerance. Let’s start with where an annuity starts. Annuity is a guaranteed income. I’m going to think about my dad. Let me just plug my dad. I always like to plug my dad, World war II vet, decorated World War II vet, didn’t really finish high school, but a great American citizen. He did the right things. He came out of World War II, got one job, a union man, worked there for the next 35, 40 years. Now he retires. And what he is looking for, he’s at his retirement at this US still sub. He’s looking for this check every single month that’s paying him a certain level of income.

Byron Boston:

Now, my dad wasn’t on the wealthy end of the world or to some substantial amount, but he was really great. He saved a lot of money. His other money that he could have had in his portfolio away from that guaranteed money, he may say, I’d like to live a little better. I’d like to get a little more money and I’d like to diversify. So you think about a REIT being further out the risk spectrum. You are taking more risk. We’re not guaranteeing you this income. I’d like to look back in hindsight, 10 years from now, look back at hindsight and you say, boy, Byron, you delivered me a steady stream of income. That’s our goal, but I can’t guarantee you that beforehand. And so you should be thinking of it as a step out on the risk spectrum. Because we use leverage, I like to put us in a bucket of really an alternative asset, meaning that you want to really understand the strategies that we’re using as a management team. I think you want to understand the resumes or the backgrounds of the professionals who’s managing your money.

Byron Boston:

And please understand, when you buy the stock of Dynex Capital, you are giving your money to Dynex to manage, and we take that responsibility very seriously. The first thing you’ll see in our purpose statement is we are careful stewards of individual savings. And we take that role very, very seriously. But as an investor, you should be thinking of us as moving out the risk spectrum away from a guaranteed income of an annuity. But again, put it in my dad’s perspective, my dad had had a guaranteed income from all of his years, working all of his service to the United States in the military, his savings, which he was very good at saving money, he could have moved out the risk spectrum, added more income portfolio and lived a better life. But he was a simple man. He wasn’t really interested in living too much of a flamboyant lifestyle.

Ramsey Smith:

Is that the typical profile of your investors? Are your investors typically retirees or are they in some cases, institutions? Who are the folks that buy Dynex and other mortgage rates?

Byron Boston:

For us, 50% of our investors are individuals and then 50% are institutional. And within the institutional bucket, you’re probably half passive and half active. And so if you look at our top shareholders, our top shareholders is an active manager, Fidelity, and then followed by BlackRock, Vanguard, [inaudible 00:17:15]. Then we have another active manager, which is LCM Capital. And then I would’ve liked everyone to know that if you add up the amount stock owned by our total employees of Dynex and our board, we’re probably one of the top five shareholders in Dynex Capital. So we’ve got skin in the game. I want to make sure everyone understands that.

Byron Boston:

So we think about our investors very carefully. We know the individual investors are really looking for income. So just like with you with annuity, the individual, you’re not buying us to compete against Tesla. You’re buying Dynex Capital for income, and you’re buying Dynex Capital because you trust the management team that will generate that income and likewise protect your capital over the long term.

Byron Boston:

The next couple of buckets, generally, when I look at the fund that we sit in at Fidelity, that also is an income fund. My guess is, ultimately, that ultimate borrower at the end, I’m sorry, the investor in that fund is someone that’s looking for income. And we found in many of the other active management funds that we may be part of, that their ultimate investor is actually looking for income also. Then you get back to the passive funds which would be the BlackRocks, the Vanguards. That’s very important to understand that that is a force to be reckoned with within the equity world today, but their goals, their ultimate evaluation methods are very different than the individual stockholders in Dynex and the active managers. So we think about this very carefully because we want to make sure we-

Mark Fitzgerald:

[crosstalk 00:18:53] So your objective is really to keep your share price very stable and then just generate the income off of that going forward. Correct?

Byron Boston:

I want to say it a little different than you, because when we start using words like stable, I don’t want to mislead anyone because we are using leverage, which means we do have the probability of some book value volatility. What I like to say is we are over the long term, what you just described, Mark is correct over the long term. Our goal, our sweet spot, we can generate eight to 10% over the long term and keep with that, including keeping your combination of your book value and your dividends. And that’s what you say, 10 years from now, you look back and say, I got eight to 10%. That’s pretty good deal and it generated cash income for me, that’s a winner for us.

Byron Boston:

There are times when we can generate more income than eight to 10%. For example, last year we had a, I think a 17% total economic return. It was a great time to be invested and generate income. But in other situations like when the fed was tightening in 2018, returns are smaller. So over the long term, we are looking to keep that book value and share price relatively stable and generate an eight to 10% off of that from a theoretical perspective.

Mark Fitzgerald:

Very different environments in the marketplace. Going back to the 80s, very high-interest rates. 2007, 2008, the crisis that took place. Currently, long-term, low-interest rates. What does the current environment look like from your perspective and going forward if we start to have rising rates upon us?

Byron Boston:

I will say this, let me say this about myself. Let you get to know me better. One, I think my career has been fascinating. I’ve loved it. I am an economics nerd. I am a history nerd. I think that’s the only way to be great at the job that I do and that my team does. It is important. Things have changed quite a bit. My first mortgage-backed securities that I traded were probably anywhere from 12% to 18% coupons. And for the last 40 years, we’ve been on a steady, downward move in interest rates and a steady or lumpy refinancing of the American homeowner. That American homeowner had an 18% mortgage, got an opportunity to refinance to a 12%, then an opportunity to refinance until a nine, then a seven, then a five. And low and behold, we’re inside of 3% for many of our mortgages, mine will be struck at 2.65. And for those who want floating rates or mortgages down to under 2%, maybe like 1.75. These are fascinating levels for mortgages.

Byron Boston:

The one thing I will say about the 2020s in general, at Dynex Capital, we believe we are in a transitional period as a globe on many fronts, on the economic front, on international, country relationships. We are in a major transitioning period, and just individual relationships amongst people. We are in a major transitioning period. And these, I don’t know where it will go. At Dynex Capital, we believe we can make money in any of those environments, given the strategy we’re running today, which is emphasizing liquidity and emphasize high-quality assets. But we are leaning upon our past history to understand what has taken place.

Byron Boston:

Ramsey, you mentioned March, 2020, what happened in March, 2020 was not new. Similar thing happened in the great financial crash. Similar thing happened in the fall of 1998 for long term capital crisis. I could take you back to the 1980s, and I can point out similar risk situations, where if you look at the SNLs, who were leveraged and were not edging and whatsoever, and they became a problem. So history and understanding these other situations would’ve allowed you to realize in March, 2020, we don’t consider it a black swan event at Dynex Capital. It was a risky event. It was a surprise, but it was not a black swan event.

Ramsey Smith:

How do you prepare for that? What had you done leading into that event that softened the blow? And then once it happened, what were the actions you took to manage risk once the wave was hitting?

Byron Boston:

First off, and I appreciate Mark’s first question. It was history that led us about five years ago to go up in credit and up in liquidity.

Ramsey Smith:

What does that mean to go up in credit and up in liquidity?

Byron Boston:

Here is what it means. In 2008, we bought lower credit assets. We bought BBB rated assets. We bought a single A rated assets, we still had loans on our balance sheet. We brought a broader set of assets. We were very innovative coming out of 2008, because there were just so many opportunities to invest money. Spreads were very wide. And from a street man’s perspective, what I mean is the opportunity to earn more yield versus a treasury across multiple asset classes was a mortgage board of opportunities. So we use more illiquid assets in our strategy.

Byron Boston:

Now, when you are using leverage in any investment strategy, you must be concerned about liquidity. So as the war became more complex, I just told you that we believe we’re in a transitioning period as a globe. We became concerned probably five years ago, and we started to talk about the world being more complex, the risk environment being more complex. And therefore, we sold our illiquid assets and we went from triple B to single A and to agency back, our government back assets. And then we left the AAA sector for the most part except for the small sector. And we’re pretty much all in a government-backed security. That’s what I mean by we went up in credit quality of the assets.

Byron Boston:

We also started to carry more liquidity on our balance sheet. At the end of 2019, going into 2020, we had about 225 million of either cash or unleveraged assets, liquid assets on our balance sheet. If you compare that to call it 2012, 2013, that number may have been between 75 million to 100 million. We were more than twice as much liquidity on our balance sheet. That was a respect for the macroeconomic environment. We believe the globe has become more complex and very much so interconnected in ways that I haven’t met that many, I met very few people who fully understand, no one understands the connectivity. Let me just say that right off the bat. No one fully understands it. But I’ve also haven’t met a to lot people who are acknowledging the risk of the connectivity across the globe, across assets. And so we’re not afraid at Dynex Capital, we’re just respecting the risk environment. What we do is we don’t make large market calls, we adjust our risk profile.

Byron Boston:

What happens is in 2020? Coming in 2020, we’re up in credit, up in liquidity. We are also saying that we’re concerned. We’re saying surprises are highly probable. That’s a phrase we use over and over within Dynex. In January, 2020, what happens, a general is killed in Iraq, Iranian general. We bombed a general way. That’s a major, potential risk flare moment that took place simultaneously, there was this virus that had broken out in China. Well, at Dynex Capital, we had talked about the movie Contagion. You familiar with the movie Contagion? The movie Contagion outlines a pandemic just like the pandemic unfolded last year. That’s why I say this was not a black swan event, because there were those amongst the medical community, especially after the Ebola and the SAR situations who were concerned about a pandemic. So as that pandemic unfolded, these are public statements we made. You can listen to our first quarterly conference called the 2020 and you’ll hear us talking about this concern of ours. So now, we start with more liquidity and we start becoming more liquid.

Byron Boston:

When the 10 year interest rate broke below 136, which had held for years, we increased our liquidity again. We sold all of our agency, residential pass through securities, because we were now at new interest rate lows, we were concerned about what’s going to happen with prepayments. So our first move was generally near the end of February, 1st of March, we sold most of our residential pass through securities. We increased the liquidity on our balance sheet. Now we’re prepared for March, 2020. We didn’t know what was going to happen. We were still surprised by the amount of risks that unfolded. I applaud the Federal Reserve Bank. The system was going to fail without their help and all the other governments around the world that really stepped in to save the global economy and the financial system.

Byron Boston:

But again, we had liquidity, we were operating in a situation from a position of strength. The only negative is, and it’s positive, negative. The Federal Reserve stepped in and saved the system, but they also stepped in front of us. So we didn’t get a chance to buy as many assets really, really cheap, like we did back in 2009, 2010, 2011, but the whole system survived and it’s better for everyone around the globe. That’s the case. I hope I gave you a better understanding of what’s up in credit and up in liquidity, you really want to look at us coming out of 2008. We had a completely different strategy based on a different risk environment.

Laura Dinan Haber:

To drill down a little bit deeper and the current market environment, what would you say the best opportunity is right now?

Byron Boston:

From our perspective, we’re making really solid money in the most liquid high quality real estate assets. Let me say this. most of the 14 years I’ve been at Dynex, we’ve generally run a combination of commercial, so assets backed by commercial properties and assets backed by residential. We’re mainly running a strategy today backed by residential. We’re concerned on the commercial side, that we’re still not sure that the result of all of these moratoriums or what we call in street man’s language, what happens when someone doesn’t pay rent. We’re not sure what happens when someone doesn’t pay rent, somebody has to take a loss someplace. So we moved ourselves out of the position of taking that loss on the commercial real estate side. We reduced our multifamily portfolio last year, and now we’re probably 98% to 95% in the residential real estate space.

Byron Boston:

Because when people don’t make their mortgage payments, we’ve got an idea of what happens, because we’ve got the great financial crash as an example. But when governments tell renters, you don’t have to pay rent, or when stores and malls decide I’m not going to pay rent, I’m going to sue the landlord so I don’t have to pay rent, we don’t know where this goes yet at Dynex. I’m sure there’s some smarter people out there in the world. They know exactly what’s going to take place. We believe this is still an evolving health and economic environment, so we believe the safest place for us to be is to be invested in assets that are backed by residential properties.

Mark Fitzgerald:

Do you see any impact, obviously recently existing home prices have gone up pretty substantially in the last several months. The cost of lumber for building new homes has gone up close to 40%. A lot of times people are looking at, from the home value standpoint, like what’s my monthly expense. And luckily we’re in very low rate environments right now. Do see that impact changing going forward if rates start to rise?

Byron Boston:

Let me just say, if rates start to rise, there will be an economic impact. I know you hear fed officials and other government talking heads, they all talk about let’s normalize rates. Let’s raise rates. There will be an economic impact if rates go up. And it depends on how high that happens to be. Why? Because there’s an enormous amount of global debt, and the debt is higher today than it was before the pandemic. So there is an impact. From a housing perspective, here’s the way I like to look at housing.

Byron Boston:

I am a 62 year old man. I’m a baby boomer, and I’ve got two adult men now. But 10 years ago, 15 years ago, they were two young sons. Now, 10 years ago, 15 years ago, we were one household, four people. Today, we have the potential to be four people, three household. I’m still married and happy to be married by the way. But I do have friends and they are already, 10 years ago, they were one household, four people, today they’re four household because the husband and wife got divorced and the two kids are now out of college and they now have their own households. They’re either renting or they have bought a home.

Byron Boston:

So there’s more people. There’s a larger amount of household formation. It’s been there in the numbers for years. We saw it. Tip my hat to Mike, Fred and Tony at the Mortgage Bankers Association, who’s done phenomenal research on this housing industry where he showed that about five years ago, and that was the first place I took notice of this huge wave of people now who are in the system, all the baby boomers and baby boomers kids are in adulthood at this point. There’s a lot of people here looking for either rental properties or homes. So there are some real numbers behind the growth and housing values.

Byron Boston:

On the other hand, global asset prices are high, and that is a major risk in our opinion at Dynex Capital. The global asset prices, whether it’s housing, whether it’s cars, whether it’s stocks, whether it’s Bitcoin, art, baseball cards, there’s an enormous amount of liquidity in the global system. And global asset prices are high and they’re being supported by an enormous bed of debt and large Central Bank balance sheets.

Byron Boston:

So when you ask the question, Mark, what will happen if interest rates go up, with a situation like that, if you say I’m freely increasing the amount of global debt and, Hey, by the way, I’m going to increase the cost of that debt. Well, you know what? You’re going to have an economic impact and that economic impact is not going to be positive. It’s just how much of an impact will it be? How high will rates go? What will that look like? Any academic who tells you any conversation about normalizing rates, and it’s somewhere around 3% on the short end, they’re out of their brains. There’s no way in the world that the global economy can handle it. Something will break before they ever get there.

Mark Fitzgerald:

Interesting. Thank you.

Ramsey Smith:

So are we in a bit of a trap?

Byron Boston:

I don’t know. I don’t know the answer. I ask people this all the time. I asked the very [inaudible 00:34:15], how does the Federal Reserve and the other central banks get out of this? They built these huge balance sheets. The entire global asset price structure of the world is sitting on top of huge amounts of government debt, corporate debt, and these large central bank balance sheets. That’s what’s supporting the price levels. So why are we up and credit and up in liquidity at Dynex? Because we can’t answer the question you just asked, Ramsey. And I want our shareholders to understand that our goal is to take care of them, no matter what happens in the future. No matter what.

Ramsey Smith:

All right. So you’re talking to the fed chairman and you’re saying, look, if you bump rates up too much, it’s disastrous. You can’t take rates down too much lower because that that creates other issues. If you were advising the fed, what is the path you would recommend? I assume it’s like sort of maybe slow gradual rising interest rates or see if you can have extension on your mortgage backed securities or, what works?

Byron Boston:

Well, it is slow and gradual because we don’t know. We’re in an experimental period that we’ve never been in. And so I would, if they want to be slow. They’re saying and they have to be slow. And when they see something breaking or cracking, be prepared to adjust your thought process. Don’t get yourself so wedded and don’t believe all the academics. Academics sit in a classroom. They don’t feel the pain of the actions. I’m sitting here as an investor. I’m playing the game. I’m a football player, I’ll use this example. I’m on the field playing the game. Academics are sitting up in the top of the stands, trying to write what they think they see on the field. What I would say to the chair is be very careful, make sure you understand how much risk there is today in this system. A lot of it starts from the fact that so much debt and a lot of the asset price levels are there because of your buying of assets. So be very careful as you try to withdraw that process.

Byron Boston:

The other thing I would advise is to say in that withdrawal process, there’s probably someone who’s going to lose money. Someone will have to take some plane somewhere in the global system. And at some point they’re going to have to allow someone to take that pain, but I would also urge them to protect the financial system as a whole. Their actions last year were correct. It’s not over. They’re fully involved in the capital markets. They’re a major player in the capital markets. They cannot go to sleep, but their actions could generate some real pain.

Byron Boston:

I know there’s a lot of conversation around leverage and leverage players. And since I’m a leverage player I’m concerned of about that. I don’t know that the world can handle all this debt without leverage players actually being willing to take some risks, to own some, whether it’s treasuries or mortgage-backed securities or corporate debt or Lord knows those who want to buy the emerging market debt in other places around the globe.

Byron Boston:

So what did I say? I said, it said go slow, make sure J Powell you understand or try to understand the risk in the system, and keep telling yourself that even though your mighty powerful central bank, you have a lot of information, the central bank have been caught off guard. They were caught off guard in 2008, they were caught off guard again in March, 2020, they were caught off guard in 1987. And we can go back on and on and on. And so be very intellectually curious about what is the risk that exists in the system and, big one is, how is it interconnected across borders and across industries and across from corporates to individuals, to the government.

Laura Dinan Haber:

Let’s pretend you have a magic ball or a lens into the future best case scenario, three to five years from now, what does that look like?

Byron Boston:

You’re still going to have a ton of debt. Interest rates are going to be low. The fed will never have been able to raise rates as high as the academics have talked about. You’re not going to be able to do it. I don’t believe you’re able to do it. Not without paying. I don’t believe. And at Dynex, we are going, right now again, I like a diversified portfolio, but we’re up in credit, up in liquidity. I can’t see when we’re going to exit that position because I believe this could be a potentially rocky road in the central banks doing something they’ve never done before.

Byron Boston:

Remember, every one of those central bankers put their pants on just like you and I do every single day. They’re just a human being. They’re another human being. They make mistakes. They have good intentions. So at Dynex, we are managing other people’s savings. We take it seriously. So we are well aware we don’t know everything, but we do with a liquid position, a liquid strategy and being embraced and prepared for surprises. We believe we can carry our shareholders through any of these environments. But three to five years, rates, everyone talks about normalization. They’ll realize that the normalized rate is much lower than they think today. Our star is they all like to talk about it in the theoretical academic terms, our star may be zero.

Ramsey Smith:

All right. I think we’re coming up on time here. Any closing thoughts or questions, Laura, Mark? I have one more for Byron before we go.

Mark Fitzgerald:

No, I just think, number one. Thank you, Byron. I think it’s been great for our listeners. Obviously you’ve got a lot of things, changing the environment. You’ve got a lot of baby boomers going into retirement where the need for securing income in retirement is more and more critical, whether it be guaranteed income through annuity products or dividend income from portfolios like your structuring. And I think that more and more people need to take a look at different ways to generate income.

Byron Boston:

We agree with you. And I would welcome anyone to look at our website, dynexcapital.com. And I would say go first to our mission and objectives page and look at, we take this seriously. We’re managing other people’s money. And it’s not just their money, it’s their savings. The reason I like to think about my dad, because again, my dad is America. We didn’t come from the privileged side of the railroad tracks. So I like to think of it as his money. It’s my money. It’s our retirement plan, Dynex Capital, but we are different than an annuity and we should just be part of a portfolio. We shouldn’t be all of the portfolio, and we are generating income. We don’t need to hit home runs. By 2030, Dynex doesn’t need to hit a home run to make its shareholders happy. We need to generate a solid level of cash income and a solid total return experience. And we’re going to have to hold their hand through other risk flares, which are bound to happen given the structure of the world.

Byron Boston:

We’re not afraid. We’re working tirelessly to prepare ourselves for potential surprises in the future to guide our shareholders through that, whatever may come our way.

Ramsey Smith:

You anticipated my question, the retirement plan comment you made. One of the things that you had said in a prior conversation with me is that at the end of the day, this Dynex will be your retirement plan once you retire from being CEO. And so, just very curious how you think about one, having skin in the game and keeping skin in the game for something that’s meant to be a really long term investment. And then two, how that drives the team you’re building or you have built to be there for the long haul?

Byron Boston:

We have a 30 year vision looking out into the future here at Dynex. And the reason it’s 30 years is because we celebrated our 30th year on a New York Stock Exchange in 2019. So we developed this vision. And the vision was personal for us. It was a dream of mine. I said, wow, what if I can create Dynex to succeed for next 30 years? I’m 62. And if God blesses me to live, I’ll be 92 and I will have been living off of this income the entire time. That’s a great idea. Then I took it to my team at the office and everyone bought into it. So everyone now we all have a 30 year vision. So when we think about markets, we think short, medium, long term, and we think about other strategies. We’re always thinking, well, is that going to be good from a long term perspective?

Byron Boston:

So what other things would I have to do? One, I have to be very serious about the succession plan, because otherwise I won’t make it 30 years. And when you talk about retirees, especially the baby boomers, it’s not only in the US. There’s a ton of older people in China, in Taiwan, in Singapore, in Korea, in Europe, there’s a ton of people in the globe who will need cash income. And so, for me to succeed at this, I have to train my team. I have to hire the right people and I have to think about the ages. I have to think about the ages.

Byron Boston:

We promoted Smriti Popenoe to president of Dynex Capital last December. Smriti is probably 10, 11 years younger than I am. She’s in a perfect position to ultimately succeed and rise through the company. She believes in the same philosophy. She’s been part of building Dynex for years. And then we have to think about the next generation below Smriti and the clump of people who were here after her. So we have to think about the ages and we have to think about training our people. I am a coach. I’m an athlete. I grew up an athlete. I grew up with great coaches.

Byron Boston:

So I am a coach. You work for me. I guarantee you, you will never do it with something wrong and I’m not going to say something. I’m going to say something, not that it is wrong, but I’m going to try to tell you here’s how to do it the right way. So I am a coach. For me to succeed with a 30 year team, you have to have a system where it’s focuses on the people. You have to build the right culture across the people. We have a no asshole policy.

Byron Boston:

So no assholes are coming in the door. None, zero. We’re drawing the line. We’re not compromising. You don’t have the right ethical standards. You’re not coming in the door. And I’m going to be pretty tough on this. And I’m not wavering on. I don’t give a damn how smart you think you are. We’re not wavering on this issue of an asshole. We don’t want our shareholders to feel at all concerned about who’s managing their money. This is our retirement plan. When I say our, I mean, everyone at Dynex Capital. We’ve all bought into this thought process and it aligns us with our shareholders because that’s what they want. They want to go to sleep every night, believing that there’s someone ethical at Dynex Capital looking out for their needs.

Ramsey Smith:

Before I hand it back off to Laura to wrap this up, we always look for like the quote of the day. And may be no asshole. I don’t know if we can get away with that.

Byron Boston:

We have a no asshole policy.

Mark Fitzgerald:

We [inaudible 00:45:59] on the front of the show.

Laura Dinan Haber:

I think it’s a great policy though, because honestly, when you build something that’s important and this strong, the people truly matter. So Byron, thank you so much for joining us today. Thank you for sharing your long term version, your insight, your experience. It’s been quite the conversation and I’m sure it’s the beginning of many.

Laura Dinan Haber:

Best way to reach you, we heard you mention it before, dynexcapital.com. Reach out, learn more. It’s such an interesting conversation and I’ve learned a lot today, myself. I look forward to having the next phase of it, but if you want to stay in-touch with us at That Annuity Show, please go to thatannuityshow.com and sign up for a weekly newsletter that we’ve just started sending and it’s insights and other information and news from guests just like Byron. Again, thank you all for listening today. Mark Ramsey, Byron, great to have you here and we look forward to our next episode. Thank you so much.

Byron Boston:

Thank you so much for having me.

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Ashley SaundersEpisode 106: Getting Ready to Step Out on the Risk Spectrum with Byron Boston
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Episode 105: Finding Higher & Safer Interest Rates With Gary Zimmerman

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What prevents clients from earning higher interest rates on their savings? Three factors – awareness, apathy, and inertia create roadblocks according to Gary Zimmerman, Founder & CEO of MaxMyInterest.com. Gary joins us today to discuss the savings problem he solved for himself and is now sharing with clients and their advisors. Also, do you want to get regular updates on news from Gary and other guests of our show? Subscribe to our newsletter under the Receive Updates section, below. We hope you enjoy our conversation!

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Nicholas BreniaEpisode 105: Finding Higher & Safer Interest Rates With Gary Zimmerman
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