With this change in the planning process we are often left with two investment choices; Managed Portfolios or Annuities. Let’s take a moment to examine the pros and cons of each option.
With tactical money management, the consumer gives discretionary control to a money manager. With no transaction costs to the consumer, the money manager has free reign to adjust the portfolio as needed to seek to capture profits in up or down markets. With algorithmic trading, the money manager can establish stop/loss protocols to seek to protect against a major stock market correction. The portfolio remains 100% liquid so the consumer can make a change at any time with no penalties.
With the managed portfolio, the consumer is only charged an annual management fee. This fee can range from 1.5%-2% depending upon the size of the portfolio. That cost may be significantly less than a consumer would be charged in their existing brokerage account because there are no hidden fees within the portfolio. For example, most consumers are unaware of the expense ratio of 1-2% associated with the mutual funds they own or the commissions being charged per transaction, in addition to fees charged by the broker.
The negative associated with managed portfolios is that they are still in the market in some capacity and are not guaranteed. At some point the managed portfolio will lose money. The hope is to mitigate that risk through stop/loss drawdowns.
There was a time when “annuity” was a dirty word in the investing world. This was largely due to the long-term nature of annuities and annuitization requirements (forced lifetime income payments). Those two issues ultimately caused the consumer to lose control of their assets. We are happy to say that today most of those negative features have been eliminated from annuity products. In fact, mainstream financial research institutions such as Ibbotson and Morningstar have concluded that the addition of annuities as an asset class as part of the entire portfolio can reduce the portfolio’s overall risk and increase the entire portfolio’s efficiency.
Annuities today can provide unlimited stock market based returns and may help eliminate the risk of stock market losses. The negative side of annuities is that they are not as liquid as managed portfolios. Most contracts limit liquidity to 10% penalty free withdrawals each year. Those restrictions are lifted in the case of death, confinement, or terminal illness.
Do you want to know what is really going on with your own portfolio? Request your free Morningstar analysis today.
The Morningstar analysis will identify the true expense ratio (hidden fees) of your portfolio as well as identify the level of diversification of the portfolio.
Investment advisory services are offered through Foundations Investment Advisors, LLC, a SEC registered investment advisor.
Written by Marc Montini, IAR. Call (480) 428-8005 to learn more and schedule a no cost consultation.