Animal Spirits Podcast - Talk Your Book: An Alternative to Low Bond Yields

Episode Date: September 13, 2021

On today's Talk Your Book, we spoke with David Lau of DPL Financial Partners about all things annuities and how they can help advisors in a low interest rate world. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by DPL Financial Partners. Go to DPLFP.com to learn more about how they can help financial advisors help their clients get into annuities and insurance products. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. Ben, you mentioned that advisors could use DPL to get their clients into annuities and insurance as if those products haven't been around for literally hundreds of years. But what's different about... about the advisor experience with DPL is these are what are referred to as commission free products. And there is a stigma from a lot of financial advisors in RAs against commissionable products because they come with all the wrong incentives. It's never with the client in mind first. It's always with the view through the lens of what does this generate in commission. This whole industry has spent the last 15 to 20 years getting people off the commission model

because we don't want to turn portfolios and sell products and onto the fee-only model. So going back to these types of products seems like a step back for people until they realize that there's a different way to do it. The annuity market, like I said, it's literally been around for hundreds of years, a way to pull risk, and it is gigantic. It's a $3.5 trillion dollar market. So clearly, there is investor appetite, and with interest rates where they are, they provide potentially a nice alternative as an income stream. So we spoke to David Lau about how DPL is

working with financial advisors, bringing technology into the fold. So, for example, I was poking around. They've got an annuity comparison tool where you can plug in what your objectives are, just some simple information, and you get back a menu of different options. Alternatively, if you're an advisor and you have a client who is in what you would consider to be an inferior your annuity product, but you're not an expert and you want somebody to look over your shoulder to give you some different options. You can plug in the carrier. You could plug in the how old they are, all those sort of things. And this could spit out some alternative options for what you could do with enforce annuities that are already in force. So I think there's two reasons

that you can change your mind about this stuff. Once you have your whole high level philosophy, it's hard to change your mind about that stuff. But I think there's two things that have caused me to change my mind in recent years on a whole host of financial issues. And one, of them is interest rates. I do think interest rates being as low as they are, you have to change your view of the world because things just have never been like this before. And number two is technology. So I think technology has made it easier for products like this to exist at a lower rate and be able to compare in a way that you couldn't in the past. When the past you would have had to got on the phone and ask someone, this is a product that used to be sold in the past,

not bought, right? Now it can be bought. And it requires a ton of industry knowledge. There are dozens of carriers, thousands of different products, riders up the wazoo. So DPL is a company that has leaned into the technology where they will partner with you and help you find the right solution. So with that in mind, let's not step on any further show material. Here is our conversation with David Lau of DPL. We are rejoined today by David Lau. He is the founder and CEO of DPL financial partners.

David, thank you so much for coming back on the show today. Thanks, Michael. Thanks, Ben. Looking forward to being here. He got such great reviews of the first time I was on. Oh, excellent. All right. So I think a perfect place to start. I got this email in my inbox. Nine times out of 10, I don't answer them. I opened it this morning because it was timely, given what we're about to talk about. The subject that got me to click on it was the search for high monthly income, know your options. And it doesn't matter who this is from, but the headline under that was targeting high monthly income and lower risk, not so bad. So maybe a good place to start is here.

What are the challenges that advisors like Ben and I face on a daily basis trying to deliver a reasonable, any sort of income to our clients? Well, the super obvious thing is the low interest rates. So super obvious. You've got terrible low interest rates that. your traditional fixed incomes, just not generating income anymore. So what does that do? What it forces to happen is a few pretty bad things.

One, you have to wind up adding more risk into the portfolio and you do that, in particular as we start thinking about people nearing or getting into retirement in a few different ways. Maybe they've got higher equity exposure than they used to in a traditional retirement portfolio. And maybe that's because the advisor can't move the money. into fixed income and still kind of get to the place that the client wants to be. And maybe the client's just like, hey, we're on this seamlessly endless upward trend in equities. Why do I want to go into a bond that's going to pay me 1%. So you've got those problems.

And so you wind up with higher equity exposure. And then when you look to fixed income, you wind up with lower quality assets. The traditional bread and butter of the retirement portfolio just 15 years ago, the fixed income portion would be heavily in bonds. Corporates, maybe even treasuries, because you're getting a nice yield. If you're trying to deliver a 4% rule, no big deal, those things are paying 5, 6%. No problem. But today, you have to start looking beyond bonds. So you start looking into other, quote unquote, fixed income alternatives. So there you're getting away from kind of the trusty old bond, the trusty old treasury into things like REITs, this is one I was just reading. Similar, an email I got from a mutual fund company talking about, you know, a fixed income

alternative. They described the fund like this. Managed for a replacement for intermediate fixed income in terms of risk and return, we employ a convertible arbitrage, hedged equity, and now SPAC strategies. So this is what is now going into the fixed income portion of the portfolio. Obviously, that strategy, which is a popular one today, is a lot more risky than the traditional AAA corporate bond that you're buying. And then this is my third one where you see more risk coming in.

And this is kind of an interesting one, is higher levels of cash. So you see those clients who are sitting in high levels of cash. And cash is not something that people traditionally associate risk with because you traditionally think about risk in terms of the volatility of the asset. But when you're looking at the risk to the plan or to the outcome in terms of delivering retirement income, delivering a retirement plan, David Blanchett, we did a joint webinar a couple months ago where he had this chart that cash is actually the most risky asset to delivering the plan. That's because it's generating nothing, really negative real returns. So that's

guaranteed. Guaranteed. Only hurting the plan. You mentioned some of these alternatives. And I think one of the hardest parts for that is not only the client understanding them, but getting the advisor to understand them as well. A lot of advisors just don't have the investment shops to understand this stuff. Michael and I, not to brag, we have our CFAs. Some of the stuff we don't understand. No doubt. You wrote this really good piece in investment news last month about how you see ETFs and annuities kind of on this parallel path from ETFs in the past where I think advisors had to get over a hurdle of understanding them and figuring out how they could utilize them correctly. And you make the analogy that maybe that's where we are with annuities. And I do see. see that being a problem is getting over that hurdle of the education because conceptually, annuities are fairly easy to understand. It's this set amount of cash flow based on the rate you get when you put the money in. But I think a lot of advisors really don't know how to think about them in terms of a plan or think about them in terms of their business. What are some of the things that hold advisors back from using annuities for those advisors who aren't using them in their plans? Oh, wow. That's a lot of stuff there. Let's start with the fundamental. The fundamental for

most advisors who operate on fees is that annuities didn't match their business model. Annuities were commission driven. They paid commissions. That was basically the only form you could get them in. And so they didn't fit a business model for fee-only advisors. Now that's not the case anymore. I mean, you've got dozens and dozens of commission-free options. But that's a relatively new thing. I mean, if we just dial the clock back five years ago, you probably have one or two product types available, investment-only type products available to fee-only advisors. So it's a relatively new phenomenon, which leads to the next issue is need to get educated. And too many advisors are kind of caught up in their own schick about annuities where they were selling against them for so long

and they do it in a kind of a way that describes some kind of Frankenstein-like product of they're illiquid and they're complex and they have high fees and all that. Well, that's not any annuity that I know. There are many different types of annuities, and some of those things apply to some of them, and it doesn't apply to all of them. So you really need to become educated on the products, how they work and how you use them. And then we wind up hearing a lot of resistance because of the complexity issue that I hear. And I think that's just a really poor excuse because financial products are complex. That's why there are financial advisors. If it wasn't complex, everybody could manage their own money. But financial products,

I always make the mutual fund analogy. Explain to me how your mutual fund comes out with a return for your client. You need a spreadsheet. I mean, and it's super complex underneath. The use of the product is pretty straightforward. It's the same thing with annuity. As a financial advisor, take the time to understand how the product works, but presenting it to your client where you said, like that mutual fund I described,

how are you going to explain that to your client, let alone do you understand it? But how do you explain that to it, retiree, who's looking to invest, and fixed income. Explaining an annuity is pretty straightforward. I'm looking at fixed income. And if you look at spreads for investment-grade bonds, not only are bond yields super low, but spreads are basically as tight as they've ever been. I'm looking at just under 1% for investment-grade bonds.

So you could lend Microsoft money for 10 years at 2.1%. That doesn't sound like too attractive to me. Or high-yield bonds are now yielding about 4%. It's incredible. The 10-year was above 4%. not that long ago. So what are some of the, I mean, there are other all terms that advisors are using preferred stocks, I guess is one example where you can get a little bit more. Obviously, that's tied to the equity market in March of 2020. Those things are going to fall just like stocks.

There are different types of floating rate notes and all sorts of things that advisors can use to plug the gap or higher risk stuff like dividend yielding stocks, where the coupons are going to be, you know, Kimberly Clark's not cutting their dividend, but the stock flops around like a fish out of water. So I guess there are different parts of the portfolio. It doesn't have to be that this is bad, that's good. There are different slices. So where does an annuity fit in? How are advisors slotting this into the portfolio?

Is it the bond piece? Is it something more? How do they use it? It is the bond piece. That's where it fits within the portfolio. Because if you're looking at an annuity, you should be looking at it's an income product. So it should be fitting in the fixed income portion. So where they're funding it from depends on the particular

client portfolio. So if you've got one of those people who I was describing earlier who are overweight equities and you need to start derisking them and you've been kind of handcuffed by the fact that there wasn't a good option to move them into, you can fund it out of the equity in that glide path towards retirement or you've got underperforming fixed income assets, which there are boatloads of them fund it from fixed income. If we're looking at annuities and we've got a client who desires 4% annual income. Let's just say that we're starting there. We're new to the space. We don't know anything about annuities, how they work, what's appropriate. How does the advisor DPL relationship work where I say, hey, listen, this is what we want. I don't know the

appropriate product. Please help us. What does that look like? Number one, we've got a whole team of consultants. We've got, I don't know, 35, 40 consultants who you can work with. And then the other thing that we do is apart from bringing products to market that are low cost commission free is we bring to market. So on our website, accessible to advisors we work with, you don't have to be an annuity expert. Just plug in what you're looking for in terms of an outcome and give us a couple data points about your client. How old are they? When do they want the income? And we'll look at the range of annuity products and tell you which ones will do it most efficiently. It's a fabulous tool. And you can look at it and compare annuity to annuity. Just look for a guaranteed

income, whether you've got a flat dollar amount you want to invest and see how much income it can generate and the best product to do it, or you're working on a financial plan. You've got a dollar amount you want to solve for. We can tell you which annuity will take the least amount of premium to do it. And we can compare it to your fixed income. And that's where it's super interesting these days, because annuities, one of the common misconceptions with advisors is, why would you want to buy an annuity in a low interest rate environment? And that's frankly, where they absolutely shine. How?

In the low interest rate environment. As some advisor I was debating with said, what is it magic? I said, no, it's risk pooling. It's called risk fooling. It's not magic. It's risk pooling. Ben and I were talking about this before, right before we hopped on. I'm not trying to be funny, but it's sort of like death arbitrage that you can offer a

higher payout rate because not everybody in the pool collects the payments. Correct. So, I mean, you're getting a product that you're basically getting a risk premium. And this in the form, instead of like equity risk premium, you're getting, mortality risk premium. It's getting a premium for your investment. But the easy math on this, and Wade Fow and David Blanchett, both retirement researchers have a great chart that shows it, is at a 1% real return of fixed income and annuity is a little over 40% more efficient because of that risk pooling in funding income than your fixed income portfolio. And now we're below 1% of

real returns in a bond portfolio today. You can almost say annuities would fund it infinitely, more efficiently. But what that means is if you're going to fund, for example, a $50,000 a year income for a retiree for 30 years, it would take you about a million dollars in a fixed income portfolio today. With the annuity, it would take you about $600,000. So you're going to get the same amount of income, and you're going to frankly get it guaranteed for life to meet that income need for $400,000 less than allocating to underperforming fixed income. So that also then leaves that $400,000 in additional liquidity. What do you want to do with it?

You want to invest it in equities in 30 years? That turns into over $2 million. It's going to improve your discretionary spending, your legacy, all your variable components, your financial plan. I think one of the things you talked about that has so many advisors caught up on this is that there's been this huge sea change in the recent decades to a fee-based model. And you talk about one of the reasons that people push back against annuities is because they're commission-based. And now you've set up your platform, you've taken the commissions out of

it. So what is left over in terms of fees? What makes sense and how do you explain that to clients and advisors in terms of what kind of fees are left over that they are paying for this income protection? That's something that you have to look product by product. Really, when you look at annuities, variable annuities are the only real annuity type that has a distinct fee. There's an a mortality and expense fee that is kind of the product cost. When you're looking at a commission based variable annuity, on average, they cost 140 basis points a year in M&E fees. And that's Morning Star average. Our products, our variable annuity products, you know, are 20 to 30 basis points. So super cheap ways of basically getting a tax deferred investment wrapper that you can turn

into income. When you look at other kinds of annuities, like fixed annuities, single premium median annuities, income annuities, fixed index annuities, they're all spread products like bonds. They don't have distinct costs or distinct fees, let me say. They obviously have costs, but they don't have distinct fees. So you're comparing them based on rate and credit quality and things like that, just the way you would when you'd look at a bond. So like a structured note, the fee is effectively baked into it already. Correct. Maybe that's a good place to pull on that right. So we've been kicking the tires on structure notes as a way to generate income, limit the downside, define what the risks are. Can you talk about some of the contrast between those products

and annuities? And I know that's like a big wrapper, but just generally high level. The most analogous annuity products are relatively new. And they go by several different names. Some people call them a buffered annuity. Some call them registered index linked annuities or a structured variable annuity. They're all referring to the same product type, which is basic. a structured note strategy where you've got a defined downside and an upside cap. So it works in that fashion. The nice thing about the annuities, and again, those types of annuities don't have distinct costs. Maybe a couple do, like small, like 25 basis point costs in order to give you higher upside on your cap because it's going directly into an options budget. But the nice thing

relative to the structured note is one that comes with an insurance guarantee. It's also tax deferred, which is important in the strategy. It's an easy packaged product to buy and understand and explain to your client. You're going to invest in the S&P. If it goes up 15%, you're going to get all of it. Above 15%, you're capped. On the downside, first 10% of loss is absorbed. Below 10%, you get whatever minus 10%. 12% down, you only lose 2%. Those are products that clients love, because they're easy to understand. Nobody's complaining about a 15% upside on the S&P in a single year. And to have that 10% downside protection, they're the hottest product in the annuity market today. How does this work operationally? Does this sit inside of our custodians, whether it's

Fidelity or Shrub or whoever, or do they go straight to your platform and it sits somewhere else? How does that work? So if you think about it, the insurance carriers effectively the custodian, because unlike some other product where the assets need to be custodied, where the carrier is custodying your client's assets. So they're effectively another custodian. And so typically the way it's getting integrated is through your portfolio management and reporting system. There's data feeds.

Every annuity company is going to support data feeds to get into your portfolio management system. You're going to get account balances, positions, things like that. So you can see it integrated into your portfolio and you can bill on it from there, do whatever you need to. So we've used commission-free annuities from Jefferson. which I guess nationwide bought them. Yes.

How does DPL work? Do advisors go to you and then you have commissioned free products with all different providers? How does that work exactly? Yeah, that's exactly right. So Jefferson National was DPL 1.0. I was chief operating officer there for a decade. I built that company from the ground up.

That was DPL 1.0. What we were trying to do was create the same kind of change, create some structural change within the insurance market by bringing out commission-free product, and famously, it's flat fee, and it was a great marketing piece for us. But really, what I understood over the course of a decade, the way to affect the structural change was not to do it through a single carrier. It was to do it through a platform. I really needed to create a platform for a number of reasons. One, the target audience, the advisor, wants choice. You don't necessarily want to work with just one provider. You're

not going to say, I'm working only with American funds. You want a choice from a variety of carriers so you can get the best products, you know, at any given time from a variety of people. The other thing was that carriers didn't know how to work with you. That was one of the things that we were really good at at Jefferson National was understanding because we focused on the RIA, the fee-based and fee-only advisors. So we knew all your operational issues. We knew how to make it work within your practice. We knew your particular issues and problems and, frankly, product preferences. So basically what we've done at DPL is said, hey, we know this market. We go to all the carriers and frankly, most carriers come to us and say, hey, we'd love to be in the RAA market.

Can you help? So we can help them. Here are the operational things you're going to need to support. Let us help you with those. Here's the way you need to think about products and pricing and features and stuff like that. So we consult with them on products. So we bring a whole suite of products. We've got 50, 60 different products on platform now. And then we augment the technology. So as I was describing to you about the data feeds and getting data feeds into your portfolio management system, we've also built those tools I was talking about to help you with product selection. And we're taking those tools and integrating them into portfolio management systems.

We've got a partnership with SS&C Advent where we provide the insurance functionality within Black Diamond. So you get access to our tools. It gets all integrated into your portfolio. You can see the benefits to your portfolio and you can find great products for your client. Most financial advisors these days have some sort of financial planning modeling that uses like a Monte Carlo and they input all the client's goals and they take all their financial circumstances and assets and liabilities and stick them in there. And then it spits out some sort of here's how close you are to reaching your goal depending on what you want. Going through all that with advisors is the best use case with the understanding. that there's obviously a lot of different use cases. The client who's kind of on the edge and very close to their goal, but maybe close to not reaching it as well and saying, all right, we need to anuitize this because your biggest risk is running out of money and longevity risk. Is that the best use case? Or do you find that there's just a ton of different ways you can go about this? I mean, there's a ton of use cases because there's lots of different

products. So for example, you're just looking for a short to intermediate term bond. Why not look at a miga, a multi-year guaranteed annuity? We have a four-year product that pays 2.75 That's not necessarily about retirement or anything. It's a portfolio allocation, which makes a great deal of sense. Then if you think about the case you're talking about, Ben, when you're looking at the client whose marginal has got real longevity risk, that's the classic annuity case. Yeah, that makes a great deal of sense for that client who's truly in danger of running out of money.

But given what I explained about the efficiency of income that the annuity generates, and again, it's not through annuitization. I'll explain that in a second. If you can fund an income need for $600,000 rather than a million, why wouldn't it be for anybody who's taking income out of the portfolio? If you need the portfolio to generate income, you don't have other sources of income, why wouldn't you do it 40% more efficiently? Could you explain how do you do that?

What's more efficient about the annuity wrapper than, say, a fixed income product? We could go right into one of our tools on DPL. But if you take basically fixed income, and if you, and this is, I'll do this from memory, because I've run it for people a number of times. What is a good fixed income yield assumption? 2%. Is that a little high? We take it.

Okay, so we run it at 2%. You can put in anything you want in the tool, but if you run it at 2%, and you say you're me, David Lau. I'm 55 years old. I want to retire at 65. Compare that fixed income portfolio and generating income relative to the annuity.

We're going to run, find the most efficient annuity, show you what it's going to take to fund my income need, say it's $5,000 a month relative to that portfolio at 2%. So the way the annuity is more efficient is, number one, we would find you a fixed indexed annuity. So it's going to have a similar, if not better risk profile, 100% downside floor. Our fixed indexed annuities right now are paying about 2.75ish in the fixed account. So that's not an index. That's the fixed account. That's the interest rate on it. That's better than your 2% that you're accumulating. So you've got 10 years of better accumulation. And then that product also has what's called deferral credits, which

similar to Social Security, the longer you own it before you start taking income, the higher the payout rate gets. In the scenario I just described, the payout rate on that product would be 7.25% for life, guaranteed. So now you've got a fixed income portfolio at 2% against an annuity that accumulated at 2.75 and then it's going to pay out for life at 725. It'll take, again, to meet my $5,000 a month income need, about a million two in that fixed income two percent portfolio, or about $650,000 to $700,000 in the annuity. So, David, I'm thinking through this from Michael and I seat on an investment community of wealth manager. And so obviously we could come to you and we could give you each individual

client's circumstances and their income needs and say, all right, build us a specific one for this client, find us their solution. What if we also said, okay, we have over a thousand clients. We have 25% of them that are going to need some sort of income solution. We can bucket those into three or four different paths. We can say, this one bucket needs this. This bucket needs this. Maybe they don't all need to have their own specific circumstances. They can kind of be in the ballpark. Operationally, is that something that could be done as well where you could say, okay, you have a group of 100 clients that needs a certain income level or yield, basically. They need 3% whatever it is. We can build that and that can be tailored to all of these clients.

Sure. We can definitely look at that in terms of if you want to look at age bans or something like that. Yeah, exactly. In order to create, okay, for people in this age band, this product is most efficient, or in this age band, this one will be most efficient. Or, you can add a risk tolerance to it. Maybe you want a variable product as opposed to a fixed product. But yeah, you can certainly do that. So I'm looking at your guaranteed income analysis, and this is a neat tool. So for the advisors, how much income does your client require? You enter the income amount, the period, the annual income, tell us about your client, basic information, when do they want to retire, how long do they anticipate needing the income, a few market assumptions, your advisory fee, boom, submit, and then it kicks back out what?

What does it kick back out to you? It kicks out basically a ranked list of annuity products that will best meet that. So we're basically saying, we don't care about the product. We're not saying it's a variable annuity, a fixed annuity, a spia. We're just saying, that's your client need. let us find the product that'll do it for the least amount of money. So then we're going to give you a ranked list and say, okay, this one for whatever, $500,000 can meet that income need.

Then here's another one that for $520 could do it. We're going to give you that ranked list. This sounds like a home run to me. I guess the proof is in the put again and maybe it's early, but how many advisors are on the platform and what sort of volume are you doing? Do you share that information? We've built DPL on a membership model. So advisory firms join DPL as a member, pay us an annual fee of $1,000 to $5,000.

It gets access to our products, our tech, our team. We're basically your turnkey insurance office for any firm. In the little over three years we've been in market, we've got 1,300 firms who've joined DPL. And then through our partnership with SS&C and the Black Diamond users, we've got another almost 2,000 firms. we support that are Black Diamond users within the model. If you look at the number of advisors, it's, I don't know, close to 20,000. Wow. Any data on the volume were the number of policies or do not have that? Here's a few interesting things relative to that. So coming out of, again, having built Jefferson National, the market with RIAs for annuities was basically one product.

It was investment-only variable annuity and it was primarily through Jefferson National and there There's a couple other. TIA had a really good product, still has a really good product. And it was term life in terms of the insurance products the typical advisor would use. When we launched DPL, we brought out so many more products. We started where term life and investment only variable annuity were our lead products and most used products. As we've created education, we've created tools and we've explained how to think about and use these products, now fixed index annuities are the most used product. Myga is second and variable annuity is third. It sometimes fluctuates, but it's fixed index annuities are about 40% of what we do. Myga's low 30s, variable annuities around 30%. And we'll do about a billion

a year in volume through our network this year. So it's working quite well, the product as a solution. How quickly do market rates get updated in annuity? So obviously we've had interest rates falling for 40 plus years now. Let's say that that finally stops, and interest rates rise a little bit. Do annuities reflect those rising rates fairly quickly? Is it on some sort of lag? How does that or how quickly does the market get updated in annuity prices and yields? For one funny notion, Blanchet put a slide out one time in one of the sessions we were doing that shows that actually interest rates have been falling for about, I don't know, 8,000 years, right? Like literally. So the U.S. is the like only industrialized country where we haven't been mired and

this really low interest rate environment forever. But to answer the question, they can get updated, depending on the product. So let's think about fixed annuities, migas, things like that that are just pure rate products. The company can update the yield on them at any time. But that just means the new products, the rate changes. If you've bought the product. Existing ones are locked, right? Right.

So they're locked for the duration. You buy that four-year product I talked about. You've got that 275 for the four years. So they're locked. And then the other thing. to clarify about annuities are differences between interest rates and payout rates. So interest rates are what's being paid on accumulation. Those can change by the interest rate fluctuations. The payout rate on the product is contractually guaranteed. Now, those can't be

changed. You buy the product and you're going to get that payout rate that I talked about. That is contractually guaranteed. That can't be changed once you've purchased the product. interest risk has taken off the table regardless. If rates rise, if rates fall, if they stay the same, you've locked it in. So either way, you've taken it off the table. Correct. But interest rate risk, if it rises, that's not a good thing, right? Because if you've locked in your low rate and interest rates rise, then what? Well, you could have locked them in by buying a bond and now your bond is worth less. The value of your annuity is still the same. I mean, think of it as a bond you're holding the duration. I mean, you wouldn't sell it if interest rates rose. But I mean, so you've got a situation now,

one, the annuities, as I was talking about, are paying better rates than bonds. So you're getting a better yield. So you've got a pretty good way to go in terms of interest rates before your AAA corporates are getting to where annuities are. So what I was getting at is, all right, you're buying a bond at 2% today. If you're buying a bond and interest rates do rise, it matures, and then you could roll it into bonds at 3%. But you're saying the spread between what bonds are offering today and what annuities are such that rates would have to rise dramatically for people in annuities to be disadvantaged by locking in a rate today? Correct.

And that's the way you have to think about it, is what are your options? What are your options if you're investing your assets today and make the choices based on those considerations? So I guess one major risk, and I'm sure that there are riders to fix a solution is people use annuities. One of the primary reasons is to ensure that they don't outlive their money, that they will have an income if they live to 130. Conversely, what if there is, God forbid, a premature death and they have just put $400,000 into an annuity

and the errors get nothing? How frequently are riders used and what does that do in terms of lowering the payout? How do people balance that tradeoff? If you think about how income is generated and the products used for generating that guaranteed income, it's somewhere in the neighborhood of 96% of the time it's through a rider. The other 4% is with SPIA's single premium immediate annuities, but mostly it's done through riders. And it's for that very reason, because people don't like that risk of, I buy the annuity today, and a year from now, I unfortunately pass away. I lost, quote unquote, to the insurance company. So people use riders. And the benefit of the rider is that your assets are available until they've been depleted

by the payouts, just like a regular portfolio. Of course, you've got your money until it's been depleted, but the value of the annuity is it will continue to make those payments even after the assets have been depleted. So when you look at, again, that example I talked about earlier with the annuity that's paying out at 2.75 percent, and then you've got a fixed income portfolio at 2%. There's more assets in that annuity than the fixed income portfolio. And once you start matching the income from the annuity, the value of the fixed income portfolio is completely depleted in about 13, 14 years, where the annuity is going to have value for a little bit longer because it accumulated more, and then the payments are going to continue for life.

David, I feel like we could speak to you for another 17 hours about this stuff. There's so much to go over. But I appreciate you giving us an overview. I was taking a look at the calculator while we were speaking. So forgive me for being on my keyboard. But this is fascinating stuff. Advisors have to take a look and see what else is on the market so they can visit DPLFP.com to learn more. Yes. One of the things we try to focus on and broaden most advisors with is the fact that there's always been the knock that the annuity salesman, they're the hammer, everything looks like a nail. And we find the opposite to be true also. Interesting. Investing people, you're going to use investments for everything. So we're looking at investors who are getting into, again, more and more exotic fixed income solutions because of the low interest rate environment. When you've got also a way to blend in an annuity, a product. purposefully built for retirement income that works now beautifully within your practice.

Well, David, thank you again for coming on today. We appreciate it. Thanks, Michael. Thanks, Ben. Enjoyed it. Thanks to David for coming on again in a second appearance. Thanks to DPL financial partners. Again, that's DPLFP.com. And send us an email, Animal Beardspot at gmail.com. Thank you.