My rebuttal:

GMWB’s are distribution (person living in retirement) product and were not designed for accumulation. This is a young couple who are clearly in the accumulation phase of life.

Manulife themselves state that the sequence of returns does not matter during accumulation but DO very much matter in the distribution phase. If the sequence of returns does not matter why would anyone in the accumulation phase ever use a GMWB? They are paying excessive fees for a guarantees they don’t need.

Instead of using a GMWB, they could have borrowed to invest in a plain vanilla equity mutual fund and would probably have been better off.

I agree the advisor did not do a good job of explaining the product, but the ultimate question is why would anyone in their 30′s ever need to own a GMWB? I just don’t see it.

Point of clarity – Interest on investment loans is a deduction from all income and the loan itself has no other tax consequences.

Both of your arguments are flawed, because there are 2 facts that you do not take into consideration:
1- The investment loan will be taxed as capital gains, whereas your investment into the RSP will be taxed as income. Yes you do receive a tax refund from the government on the amount you put in, but you get taxed on the entire growth of your investment, you will also receive a tax refund on the investment loan (if invested for the purpose to generate income etc…) but at the end of the day your growth will be taxed as capital gains. Many assume that when you retire (for most people the question now is if they retire) your MTR drops which may not be the case.

2- you are also assuming a 5% return on their RSP, but i am sorry to advise you that had your clients invested in 2007 they would have been worse off. The 5% guarantee on a GMWB is guaranteed plus you also receive any upside in the market. For any client who is risk averse this is a better option. The market was down 50% in 2008, $1500 is a small fee to pay in return of a 5% guarantee… you do the math $125,000 – 50% = $62,500… i would much rather pay the $1,500.

Finally as financial advisors, we always promote to our clients to invest early, and invest as much as possible to help meet their financial goals, how many of your clients would like to make 5% on $8000 vs 5% on $125,000, take into consideration the power of compounding and time and you do have a winning formula.

I would only say that this advisor did a poor job explaining the GMWB to his clients, he only focussed on the 5% guarantee without talking about the disadvantages of the product, this is unfortunate because the GMWB is a great product.

I posed this scenario to Preet (wheredoesallmymoneygo.com) and he mention these tactics were under the scrutiny of branch managers.

My issue is really one of oversight at the investment dealer level. Most firms compensate their advisors by commission and their branch managers (who are responsible for ensuing compliance and suitability guidelines are held to) by branch profit. Most firms then provide an atmosphere where this kind of activity flourish.

I find very few investment dealers who seek to provide their services in a way that is customer focussed.

Note: Another colleague I spoke with also mentioned that the GMWB vendors (manulife and Sunlife) do not recommend these types of plans either but don’t do anything to stop them.

Thanks for the mention!