Secondary Market Annuities
Secondary market annuities put Annuity Straight Talk on the map. It was the first time we had a real competitive advantage. Many people on my email list have been here for close to ten years or even more. When rates started dropping in 2009 it became harder and harder to find good deals for retirees in the annuity market. I was hesitant to start selling indexed annuities and the secondary market was exactly what I needed.
For anyone who knows, we always called it a secondary market annuity (SMA) but it is actually a structured settlement. When someone is injured in an accident, the liable party buys an annuity to compensate the injured person. It is a court-ordered settlement that is intended to make the injured person whole. If circumstances change for the injured person, federal and state laws allow that person to sell the income stream for immediate cash. You may recognize this process from the JG Wentworth commercials on TV.
JG Wentworth is a factoring company. Sellers of the payment stream work with a factoring company to get cash up front and the factoring company turns around to sell that payment stream to an individual or financial institution. A series of discounts happens along the way so the final buyer pays much more for the cash flow then the original seller receives. The bottom line is that we were able to deliver rates to consumers well above rates available on what I call primary annuities, or the type you buy directly from an insurance company.
Life was good for a while and people were getting some really solid rates when the primary market was in the toilet. Purchasing an income stream often came at a discount of more than 25%. Income streams that might cost $200K in the primary market could be found in the secondary market for $150K or less. Dial it up or down however you like, there were larger and smaller deals available, some north of $1M and others that cost around $25K or so.
This market worked a lot differently than traditional markets in that rates were not set by normal economic factors. The available deals are finite, so when more people discovered the opportunities, rates started to drop as more and more people were willing to pay less because it was still a good deal. We considered our spread between buy and sell rates to be our margin. Most of the time we sold through other brokers and received a piece of the margin that was similar to a regular annuity commission. As the market became more competitive, margins shrunk and the incentive to sell the deals went away for several brokers.
As this was happening, the deals were also not as compelling for consumers. I’ll explain why this makes a major difference. In the secondary market, you buy what is available, although it may not be an exact match for what you need. You might want $1200 per month but a really good deal is on the list that pays $1300 per month. It’s such a good deal so you take the larger payment because it costs less than what it would going through the front door of an insurance company. When the margin shrinks with lower rates, it’s harder to find the right match because you’re spending more money for something that’s not a perfect fit, even if the rate is still higher.
Along the way, I knew our business needed to branch out and make tracks with other retirement products that were more mainstream. Acquiring a structured settlement is a legal process that can take months and lots of people didn’t feel comfortable with the process. My business partner at the time was pushing in the opposite direction with a desire to control as much of the secondary market as possible. I was on my way out and didn’t even know it. In 2018 we split ways, I kept Annuity Straight Talk and he took the part of the business that sold SMAs. Most people don’t know this but I essentially started from scratch almost five years ago.
There are several reasons why I no longer sell structured settlements. The easiest one for you to see is that rates aren’t any better than the primary market. An SMA with a similar time period might pay interest equal to just a plain old fixed annuity. One takes months to close and the other weeks. You can choose the amount you want to invest in a fixed or indexed annuity but with the SMA you pay the stated price for each deal, which has your spending more or less than you had planned. Fixed annuities and free withdrawals whereas SMAs offer no liquidity for a similar type of deal.
This is the only thing I’ve dealt with in my career where I’ve seen so many people get swept up with greed. I lost several relationships because of it and it gave me a really uneasy feeling. Every single person wanted to get the most out of every deal. When you see how much profit is potentially in each deal, many would attempt to cut other people out of it just to get more. Clients knew they could negotiate for better pricing so I was getting pinched on both sides of it. It became a miserable place to exist.
On to my final reason for no longer selling it… I can no longer say that this market is 100% safe. Mostly I can attribute this to greed, or some people desperate to sell a deal who get in a hurry and don’t complete the due diligence but we did lose one. In many cases, various buyers would split pieces of a larger deal. Two of four or so buyers in one such case were our clients and the court order granting the transfer was reversed. The insurance company stopped making payments to our clients and sent them back to the original seller. It’s a nightmare for any retiree. To make a long story short, all parties to the deal were essentially out of business and our clients had no hope of recovering any money. I and my initial business partner agreed to work together and we came out of pocket to cover losses for our clients. I can’t afford to do that for everyone.
Now, the case above was an extenuating circumstance and definitely not the norm. But you can’t convince me that something similar won’t happen again. Therefore I will not represent to anyone that it can’t. Over the years we sold a lot of good deals to a lot of people that really needed them. Currently there are several hundred active payment streams or lumps sum payments that will pay out with no problem at all. But I’m done because it’s just not worth it. Maybe some of you will understand why I don’t like chasing rates from B Plus companies. When I’ve seen a failure then I stay away from anything that looks similar. And I have proof that I’ll put my money where my mouth is.
If any previous buyers of structured settlement have concerns regarding this please reach out and I’ll explain why you’re most likely just fine. Any other who have considered it can also get a hold of me and I might give you more details about the things stated above. The bottom line is I’m on your side.
Have a great weekend!