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Math for Acquiring a Financial Advisor

Posted by on 7:21 am in Financial Planning, Sales | 0 comments

Math for Acquiring a Financial Advisor

Many of the financial publications today tell the tale of advisors selling their business for two and a half times what their revenue is worth. But what is not being discussed in many of these reports is what the buyer should expect. Early on in my career as an investment banker, I was trying to sell a retail organization that specialized in kitchen and bathroom tiles. The organization had 23 locations throughout Colorado, New Mexico and Arizona. It was a well-run business for sure. The owners had their mind set on selling the business for $10 million. The annual income received was $1 million on revenues of $8.8 million a year. However, we kept running into the same conversation with potential buyers: “I am only going to pay six times the earnings or $6 million for the business.” After seven buyers passed on the deal, the owners finally took it off the market. Several years later, I heard one of the seven prospects came back and bought the business. Unfortunately, the sellers never got their asking price. Outweighing the Risk So what does a buyer of a financial advisor practice want? Recently, I was writing about investment options in a series I call FLOW. I determined I was looking for a 10% return and was willing to take on some risk. It is likely that the price of the investments could swing by more than 20% in a six-month period, but I believed the investment’s cash flow stream would remain consistent. To begin, a financial advisor should seek at least a return of 10% on the purchase price of a business. Ensuring this; however, can be difficult as there tends to be risk involved. First, there is risk with stock market uncertainty. Second, there is a level of client anxiety associated with the fear of a trusted advisor leaving. Third, you may encounter an employee risk which occurs when an advisor leaves the firm or has not received proper training. Lastly, you must be prepared for systemic risk, which is the risk of an entire financial system collapsing. To outweigh such risks, I would look to achieve at least a 15% return on the initial investment. This means that the annual cash flow should be 15% of the price paid to the financial advisor. Let’s say that a financial advisor has $300,000 in revenue. Using the often-heard “two and a half times’ revenue” equation, the selling advisor may expect a return of $750,000. However, the amount received ultimately depends on how much cash the firm brings in as profit. If the expenses are $200,000, leaving $100,000 in cash flow each year, this represents a return of 13.3% annually, before taxes. Is Your Return Worth It? FA Insight indicates that profit margins are about 18% with a range of 15% to 30%. Therefore, if a firm with $300,000 in revenue were generating 15% cash flow or $45,000 a year, this would only represent a return of 6% to the buyer…NO THANKS! A return that low is not worth the market risk, client risk, employee risk and system risk – plain and simple. Now imagine your profits are more extreme and are closer to the 30% mark. With $300,000 in revenue, you’re looking at $90,000 in cash flow each year. This...

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Score! Using the Golden State Warriors’ Approach to Win More Referrals

Posted by on 7:30 am in Referrals, Sales, Sales Perspectives | 0 comments

Score! Using the Golden State Warriors’ Approach to Win More Referrals

Golden State has had a great year; winning 73 games, receiving a new record, and now entering the NBA Finals for the second year in a row. They did not achieve this by following the typical style of play. Instead, they moved the boundaries of where to take shots from and created space with great passing. In all, they looked at how the game of basketball was played and changed it. This is what we are going to do with referrals. SHAPING THE STRATEGY ONE ADVISOR AT A TIME Let’s first begin with a typical story on how referrals work and how one financial advisor changed the way he was operating. During one of our recent breakfast meetings, my good friend and fellow financial advisor, Paul asked me for advice on how he could ramp up his company’s number of scheduled prospect meetings. He was reaching out to people, but nothing was happening. Either they did not respond to him, they felt uncomfortable, or they were unsure of whom to refer. Therefore, we had to change the strategy in order for him to compete and retain referrals, just like the Golden State Warriors changed their strategy of play to win more games. I instructed him to follow this process. Over the course of two weeks, he spent a total of four hours sending 11 emails to prospect referral partners. Of the 11 emails sent, nine responded with a yes! He sent four additional emails to set up eight possible meetings, five of which occurred. Paul went from not having any meetings in one week to having five scheduled the next. All of this happened by putting in four extra hours of work. THE TYPICAL REFERRAL PROCESS The typical referral process has four steps. Each step of the process faces the risk of completely and utterly breaking down. Perhaps the exchange does not happen; the referral partner is not suited to make an introduction; the potential partner responds by saying he or she is not looking for a firm, or there is simply no interest. Consequently the typical referral process is outmoded. THE NEED FOR A SIMPLE APPROACH To make an impact, the process needs to be easy. Unfortunately, the typical referral is NOT an easy task. Your first goal should be to make it as effortless as possible for you and the referral partner to succeed. Next, craft and deliver a personal introduction (Note: Your introduction should not be a sales pitch for the product or service your company provides. If you don’t like being sold to, neither will the next person). THE FIVE-STEP PROCESS In the ever-competitive marketplace of financial advisors, if you want to succeed and stand out, you need to work differently. The following process is meant to change what you do and give you a clear path that will lead you to success. Identify the individuals you want to receive referrals from. Begin by creating a list of people you are well acquainted with. Try not to worry about them getting angry or thinking poorly of you, as this tends to be the most common reason for inaction. Instead, get outside of your own insecurities and go for it. If the person is uninterested, they will tell you; however, the reality is they seldom —...

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Park Your Ego! Selling a Firm from the Owner’s Perspective

Posted by on 7:30 am in Interviews, Sales, Storytelling | 0 comments

Park Your Ego! Selling a Firm from the Owner’s Perspective

Selling a business is an emotional decision that takes a great deal of preparation. For Greg Seal of Seal Financial Services, closing the door on being a business owner was only the beginning. Greg recently celebrated his one-year anniversary since selling his firm in February of 2015. In the last 12 months, he has learned a thing or two. His decision to sell the 31-year old firm was an emotional one that involved giving up his authoritative position as president of the company. For Greg, transitioning from owning and operating a successful firm for more than 30 years to becoming an employee required a great deal of time to comprehend. His first reality check came when he was asked to write a personal performance review. “This was the first review I ever had to compose,” stated Greg. “All of a sudden, your employees no longer look at you as the decision maker, which can be challenging when you are used to having the final say.” In addition, Greg realized the importance of smart negotiating during the sales process. Sellers should have an idea of what they expect to achieve and what is most important to them prior to selling their business. Part of the negotiating process involves having flexibility and the ability to collaborate and park your ego at the door. Identifying Your Market After making the decision to sell his firm, Greg was faced with another challenge. He had to determine whether he was going to internally sell the firm or seek a buyer from outside the practice. In order to maximize the value of his company, he had to line up his business for sale, which meant assessing and organizing financials. This included completing a U4 (a government document that informs clients of advisor backgrounds, work history and any legal actions or lawsuit against them (fortunately there were none), ensuring discretion on assets (advisors have sole rights to make changes on their clients’ behalf), and consolidating investments into manageable groups. Greg started out with 400 mutual funds and 50 ETFs, all of which needed to be condensed into models and manageable assets. When Greg decided to put Seal Financial Services up for sale in 2013, revenue for the business was over $1 million. To prepare the company for the purchase, Greg and his business partner, Janet McCoy connected with FP Transitions, a firm that specializes in helping financial advisors sell their business. Although the company was helpful in evaluating the firm over several years, Greg and Janet instead chose David Grow JR at Succession Resource Group (SRG), as the firm had a more concrete understanding of the compensation model of advisors and the process of selling. Within days of closing the sale, Janet sensed that the potential buyer was an incorrect fit, and she and Greg walked away from the deal. After deciding against selling to the original firm, Greg and Janet took a month to realign their focus by creating a questionnaire and distributing to firms that inquired through Seal Financial Service’s centers of influence, including Schwab, T. D. Ameritrade, various mutual fund vendors and other SRG buyer contacts. If at First You Don’t Succeed… It wasn’t until the second time around that Greg and Janet began to feel wiser about the transaction process. Walking away from...

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UPDATED: The Big Mac Economy — How the Hamburglar Stole the GDP

Posted by on 4:19 pm in Economy, Inflation | 0 comments

UPDATED: The Big Mac Economy — How the Hamburglar Stole the GDP

This post was originally published on July 31, 2013. It was updated on November 11, 2013, August 3, 2014, and again on August 2, 2016 to reflect the new GDP numbers. Extending our research on the use of the Big Mac Index, as created by The Economist, we applied the rise in the price of a Big Mac in relation to the economy. While Big Mac prices rose over the last three months, the price overall declined in the past 12 months. The burger, as a representation of GDP, may be stealing more than calories from consumers. The Bureau of Economic Analysis (BEA) reported that in 2015, the economy grew 1.2%. This was far below economists’ expectations reported by Briefing.com. As the BEA indicated in the press release “The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE) and exports that were partly offset by negative contributions from private inventory investments, nonresidential fixed investments, residential fixed investments, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.” The deflator used for inflation was up 2.2%, which was far higher than the Consumer Price Index (CPI) of 0.8%. Under estimating inflation results in correspondingly optimistic growth rates. This resulted in the GDP number being significantly higher than it would otherwise be if the CPI was used. Odds and Ends The BEA defines gross domestic product, the measure of economic growth as: GDP = private consumption + gross private investment + government spending + (exports – imports) Taking it one step further, we can break this down to by private consumption into service and actual goods and investment into fixed investment (machinery) and inventories. When looking at GDP with all its components, we can see that real final sales was the strongest, but all other components have weakened over the course of the last 12 months. Doug Short graphically represents the components of GDP. Burger Blues Inflation boosts the growth rate of each of the components of GDP. When the price of food or gasoline increases, GDP increases. This is more accurately called “real” GDP. Thanks to The Economist, we have come to look at the price of the Big Mac as a good indication of inflation. The Big Mac includes beef, dairy (cheese), wheat (bun), cost of labor, and the cost of real estate. As a result, I believe it is a good representation of inflation. However, our analysis indicates that the price of the Big Mac has continued to escalate much faster in recent quarters than the official government rate of inflation (CPI-U). Consequently, here is a view of GDP in light of our analysis of prices using the Big Mac Index.   Previously, when including the price of the Big Mac, GDP growth has been exaggerated. We can see that without the benefit of lower inflation, GDP has actually declined by more and for longer lengths of time than the official numbers suggest. Using inflation (as measured by the Big Mac), we see that growth in GDP is lower than reported by the BEA. The reported 1.2% growth rate fell to a negative 2.0% in the second quarter. Further, the BEA revised the GDP growth for the first quarter of 2016 from 1.1% down...

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Plan Now, Save Later – How Simple Strategies Can Secure a Sale

Posted by on 7:30 am in Process, Sales, Simple Financial Advice | 0 comments

Plan Now, Save Later – How Simple Strategies Can Secure a Sale

Picture this: you’ve just met with a powerful potential client—a female business owner with a stellar reputation in the community. You addressed each element in her financial situation and asked all the right questions. You devised a valuable plan, and she appeared to be on board. You provided her with a detailed breakdown of fees, references, and the accounts custodian. Before your conversation ended, the two of you had already scheduled your next meeting, and then… You receive an email saying that she has not yet reviewed the information you provided and is therefore postponing the meeting. Does this situation sound familiar to you? Interactions like this are frustrating and time consuming, and may leave you curious as to how you can prevent clients from dragging their feet in the future. Driving the Sales Process with an Effortless Evaluation Plan In his book, “The New Solution Selling: The Revolutionary Sales Process that is Changing the Way People Sell,” author Keith Eades emphasizes that as a salesperson, it is vital to guide clients along in a way that promotes accountability from both parties involved. One way Eades encourages accountability is to use an evaluation plan as a road map while navigating your business as well as your clients’ needs. An evaluation plan is a step-by-step checklist that outlines each milestone, date and party or individual responsible for taking action. Implementing a plan helps to keep the process on track and helps prospects understand what is expected at every step along the way. Here is a sample evaluation plan: If a prospect has suggestions or makes adjustments to the plan, that’s an even better sign. This means the individual is fully engaged in the process and feels hopeful about the next steps. This organizational tool can encourage prospects to own the plan and take charge of the process. The more involved your clients feel, the greater the likelihood that they will engage with YOU.Utilizing a plan also pushes you to understand where you — as the advisor — stand with prospective clients. If they accept the evaluation plan, you can be confident that the sale is moving in the right direction. If a prospect isn’t ready to move forward in the sales process, it is unlikely that they would agree to set an evaluation plan into...

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Win Over Your Clients with a Strong Sales Process Manual

Posted by on 7:45 am in Sales, Sales Perspectives | 0 comments

Win Over Your Clients with a Strong Sales Process Manual

For many advisors and business owners in general, the thought of creating and eventually selling a successful, longstanding business is a dream come true. Unfortunately, when it comes to financial planning, most advisors merely create a job and not an actual business. Consequently, the anticipation of selling a job to another advisor is difficult and maintaining a successful business on a daily basis can be nothing short of grueling. This is why having a sales process “manual” in place not only helps you run a better financial planning firm, but can transition your job into a thriving business. Step One: Putting Your Processes into Place for Greater Sales Opportunities The first question you must answer before you begin developing a strategy to increase sales is why you want to build your firm and what you anticipate the impact to be. You cannot effectively navigate a plan if you’re unsure of what lies ahead. When it comes to establishing a process, there are three elements to consider. The first is making sure you have a definite purpose. Perhaps you are looking to increase efficiency or you want to create a consistent client experience. Whatever your reason, be sure to understand your purpose moving forward. Second, you should carefully envision all potential outcomes. Questions you may want ask yourself before proceeding are: How can we complete this in as little of time as possible? How does this plan help us to fulfill our purpose? How usable is our finished product? Understanding potential outcomes can help your business steer clear of issues along the way, and maximizes efficiency so you can dedicate more of your time to clients. Lastly, it is important to take time to review your process for any areas in need of revision. Helpful ways to organize information may include using templates to create policies, procedures & checklists. Categorizing each topic into a table of contents may also allow for easier navigation in the future. Step Two: Increasing Your Clientele through Lead Nurturing In order to generate the anticipated amount of sales for your business, your process should focus on broadening the number of contacts you have on a list. By following this process, you will see your warm leads grow progressively hotter. To convert potential clients to loyal followers, lead nurturing must be incorporated into your sales process. This concept allows you to create something of value for your prospective clients. By educating your prospects over a period of time, you are building the value proposition that clients will easily be able to latch onto. One of the many benefits of establishing a solid sales process is that you are initially creating a business for yourself. Developing a firm process enables you to design a transaction and generate an annuity or an income that you receive for doing something you are genuinely passionate about. Unsure of where to begin? Click here to get started! Download our process map example below and start creating your own. Simply submit your name and email and the download will be sent to your...

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Increase Employee Profitability with the GWC Model

Posted by on 7:45 am in Staffing, Time Management | 0 comments

Increase Employee Profitability with the GWC Model

In the past, we have discussed the importance of hiring the right people. This may sound like a simple process, but how can you be sure your company currently has the right people in place? And if you don’t, how do you go about finding them? More importantly, how do you retain them? These questions are overwhelming, but are important ones to answer, as the benefits of hiring the right people are increased effectiveness, efficiency and improved profit. As a sales trainer for financial advisors, I often use the Moss Adams profitability and compensation survey results from financial advisors. The public accounting firm concluded that the top tier firms paid employees 10% to 20% more than other financial advising companies. The firms that increased employee compensation also saw a rise in profitability by more than 30%. This means financial advisors are receiving more productivity from each employee. The question now is how do we go about hiring the right people? Gino Wickman, founder of the Entrepreneurial Operating System (EOS) and author of Traction: Get a Grip on Your Business, suggests evaluating employees on the GWC scale: ‘Get It, Want it, and Capacity to Do It.’ Let’s look into how this approach plays out. Get It Getting it means understanding the big picture as well as recognizing the smaller pieces that are needed in order to get the job done. Does the employee understand his or her mission? Can he/she achieve the desired outcomes? Want It The employee needs to enjoy what he/she is doing and be motivated to excel. In essence, your employee needs to have a drive. This might not exist for every project, but in total, all members of your company should have a desire to succeed. Capacity to Do It The last function in the GWC scale is having the education, experience and ability to handle the job. Education and experience are easy enough to measure; however, ability is far more difficult. Ability is how an individual applies his or her knowledge in order to make decisions. Before I began incorporating the GWC scale into my hiring process, I contracted an individual who had run two offices for a prominent wealth advisor. Prior to that, she was in charge of operations for two separate financial advisors, so she was familiar with what we were trying to accomplish. She enjoyed managing others and had a history of assuming leadership positions. Her previous roles had granted her the education and knowledge needed; however, when it came to capacity, she was unable to apply her ability to communicate, make decisions or accomplish projects. If one of your employees lacks one or several of these traits, it is time to part ways. While it can be difficult to do, you need to let the person go and hire the RIGHT employee that will generate results for you and your company. Working with people is the hardest part about owning a business. As a financial advisor, I highly recommend using GWC to evaluate your employees in order to increase efficiency, speed and...

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Are You On Track? Using a Personal Balance Sheet to Map Your Financial Route

Posted by on 8:00 am in Personal Alignment | 0 comments

Are You On Track? Using a Personal Balance Sheet to Map Your Financial Route

Technology is advancing faster than many of us can keep up with. While I am undoubtedly a big advocate of using technology, I do believe there is such a thing as being overloaded. We are beginning to see the use of financial software such as eMoney and MoneyGuidePro becoming more pronounced. Instead of relying on the latest application to crunch numbers for you, I suggest creating a personal balance sheet for yourself and your clients. There are multiple ways in which you can create your balance sheet, either with a pen and paper or simply by using a spreadsheet. One of the significant benefits of having a personal balance sheet is that it is quick to implement and allows you to regularly update your clients. It also enables you to become more aware of your client’s net worth and more importantly, what impacts it. I personally use a balance sheet to monitor where I am going and how I can increase my wealth by adding more assets. There are two ways in which you can do this. The first is to save more money from your income. The second method is to invest in items that increase in value over time. Lessen Your Debt to Increase Your Assets There is; however, a third way to increase your wealth. This can be done by paying off debt. Reducing your debt has two positives. Not only does it minimize the led weight that is dragging down your net worth, but it lowers your monthly interest payment, allowing you to save more in order to help increase your assets. As a sales trainer for financial advisors, I am a big advocate of helping clients determine their net worth, which is calculated by subtracting liabilities from assets. Simply put, your net worth is how much you own minus how much you owe. Liabilities include unpaid credit card balances, automobile loans, student loans and home mortgages. Your assets are broken down into current assets, long-term securities (retirement accounts), real estate, personal business (if you are a business owner or entrepreneur) and personal property (jewelry, art, and cars). Your personal balance sheet should be updated once a year. When updating my sheet, I track two things: net worth and assets growth. Net worth is the remainder after subtracting liabilities from assets. If this number continues to rise, I know my wealth is growing. The second item I monitor is the value of assets or assets growth. This helps to show if what I am investing in is maturing. Tracking these two things over time has provided me with a picture of where I’m currently at financially and what direction I am heading. Updating Your Personal Balance Sheet to Assess Your Current and Future Financial Placement For those of you who enjoy spreadsheets, it may be tempting to continually analyze your personal balance sheet. However, I recommend only updating your sheet annually, or when contemplating a big investment opportunity or paying off debt. Otherwise, it is too easy to get caught up on whether your wealth is rising or falling. In order to update your personal balance sheet, you will need to collect year-end statements for all the items you own. It may be difficult to estimate the worth of your personal property and you will...

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From Storytelling to Selling: How to Evoke Effective Client Communication

Posted by on 9:15 am in Selling, Storytelling | 0 comments

From Storytelling to Selling: How to Evoke Effective Client Communication

To influence change is the edict of any financial advisor … or at least it should be. As advisors, our objective is to guide clients and create value for them. In other words, we want to sell to them. However, when it comes to selling, we often fall into the habit of trying to instruct our client on what to do. Now is the time to think about that approach — how often have you changed what you were doing simply because someone else TOLD you what to do instead? In the World Presidents Organization (WPO), Young Presidents Organization (YPO), and Entrepreneurs Organization (EO), there is a language protocol called Gestalt. This protocol provides a framework wherein members discuss their experiences rather than give advice to one another. Essentially, members share stories based on their own account of something. These stories help make the topics more relatable to others and opens up communication for all members which aids in allowing change to occur. In a previous article, From High to Goodbye: Are You and Your Clients’ Finances in Line?, I reviewed the power of storytelling through the eyes of Chanel Reynolds. She was happily married until her husband, who was out for a bike ride in July of 2009, was killed after being struck by a vehicle. The event sent her into a state of panic and prompted her to organize her financial situation. Chanel’s story — including the actions she took and the tools that helped her – is featured on her site, http://getyourshittogether.org/. The most valuable aspect of her site; however, is not the insight into financial planning she shares, but rather the STORY she provides about how she got to her end result (finding financial stability and managing a successful website). We all can think of similar stories, either our own or from someone we know, that link us to Chanel’s story—a once-removed subject that evokes emotion and personal interest. Success in Storytelling Storytelling is a terrific art form, but what does it have to do with your financial advising business? The takeaway is simple: stories sell. In the book Influencer: The Power to Change Anything, authors Kerry Patterson, Joseph Grenny, David Maxfield, Ron McMillan, and Al Switzler describe how changing behavior is really about creating a vicarious experience. As advisors, we do not necessarily have the time to take clients or prospects through an experience. However, telling a story like Chanel Reynolds has done enables us to provide our customers with a tangible concept they can make their own. Storytelling does not come naturally for everyone though. If you’re unsure how to lead your clients on an experience through the use of words and feelings, don’t fret. Below are some tips to help you gather your thoughts and words. Four Tips for Financial Advisors to Improve Storytelling Allow people to empathize. There is great importance in enabling a person to truly understand the emotional journey of another individual. By tapping into the feelings of someone else, we are able to adopt similar feelings and make them our own. Allow others to empathize with your story by providing vivid detail and a keen sense of emotions. Define vital characteristics. When developing your story, think about the vital behavior your character exhibits. In Chanel Reynolds’ story, her vital characteristic is perseverance; she overcame hardship and recognized that as difficult as getting...

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Investing in Variable Annuities in light of the Department of Labor Ruling (DOL)

Posted by on 8:58 am in Investing | 0 comments

Investing in Variable Annuities in light of the Department of Labor Ruling (DOL)

Disclosure: For investment professional use only. This is not intended as investment advice, but rather to provide an opinion by a financial professional to other financial professionals about a type of investment product. Earlier this year, the Department of Labor (DOL) issued a final rule requiring new fiduciary responsibilities for advisors who manage 401(k) plans and individual retirement accounts (IRAs). When it comes to the best interest of clients, undoubtedly one of the leading financial items being sold by advisors today are variable annuities. While there are many benefits this retirement vehicle offers, variable annuities can be difficult to decipher. It is therefore critical to understand the multitude of options that accompany variable annuities in order to know what is best for your client. Creating Profit from Projections Getting the most out of a variable annuity requires extensive research in order to understand exactly what is in store. The guarantees from variable annuities are favorable compared to what the S&P 500 has provided over the last 14 years. In recent years, the stock market has fluctuated in both directions, yet the S&P 500 has only returned a total of 34.8% since September of 1999 to March of 2016. Put simply, this is a 2% return each year. With numbers like these, it is no wonder variable annuities with guarantees of 5% and 6% returns are selling well. You may be wondering why not everyone is jumping in? When I was 22 and beginning my position as a research analyst at the Gartner Group, a broker for Northwest Mutual came to my office and delivered a pitch on buying life insurance. At the time, I had no concerns and certainly no beneficiaries that I needed to take care of. I couldn’t imagine what I would need life insurance for. I told her I would look at the numbers. As any analyst would, I dove into the numbers and calculated what the expected returns would be versus investing. I compared the outlook I had for investing against the idea of putting my money in the Northwest Mutual policy. I concluded that the policy would not begin generating money for three years and at the time, I had a host of solid investments that were significantly undervalued. Even after taking into account the tax benefits I would receive with the life insurance policy, it was evident that the cost outweighed the returns and therefore, I took a pass. Looking back, I am pleased with my decision, as my investments in Gartner Group, Coca-Cola, Dairy Queen and Gen Re far surpassed the S&P 500 and certainly the life insurance policy. Comparing Variable Annuities In order to provide your clients with a better understanding about what’s currently on the market, we have reviewed three of the most popular and successful variable annuities: AXA Equitable Retirement Cornerstone℠, Allianz Vision℠ with Income Protector, and Vanguard®. The advantages for each differ, but they all guarantee a certain level of return for investment. We’ve examined each one thoroughly and have accessed the benefits of riders that guarantee income or growth. With our report on each variable annuity comes a series of recommendations that are based on each market scenario including when the market is overvalued as well as undervalued. To learn more about each annuity, contact us today. Looking Ahead In order to...

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