You can't have too much of a good thing.

Wild enthusiasm greeted "Variables Claim Victory " when it appeared in Financial Planning magazine. Penned by John P. Huggard, a Certified Financial Planner and faculty member at North Carolina State University , the 1999 article is one of the most reprinted items ever published by the magazine. According to a source at the magazine (circulation 100,000), insurance companies ordered at least 500,000 copies for promotional distribution .

By most standards, that's a 'best seller.'

W. Thomas Conner, vice president and general counsel of the National Association for Variable Annuities, proclaimed the article was "probably the most sophisticated analysis of the tax treatment of variable annuities I have seen."

So Mr. Huggard wrote more.

He wrote "Variable Annuities Victorious" for the October 2001 issue of "Financial Planning" magazine.

This spring he went a step further and published "Investing with Variable Annuities: Fifty Reasons Why Variable Annuities Are Better Long-Term Investments Than Mutual Funds." The paperback, priced at $40 a copy, is not distributed through retail stores. It was "designed almost exclusively for people in the financial business, " Mr. Huggard said in a recent telephone interview. The main reason he wrote the book, he says on page 1, is the "misleading and inaccurate " newspaper and magazine articles about variable annuities.

There's only one problem.

Huggard's work is filled with mathematical mistakes, conceptual errors, and deck-stacking assumptions.

That assessment comes from William Reichenstein, a Professor of Finance at Baylor University. On a recent visit to his office in Waco, I learned that his major professional interest is the study of investment decisions and personal finance. One indication of the depth of his interest is "Taxes and Investments", the college text he wrote on the subject. His work has been published in the Financial Analysts Journal, the Journal of Portfolio Management, and the Journal of Investing--- all peer reviewed journals.

"My major criticism of Huggard is that he always compares an average annuity with a high cost, tax inefficient mutual fund. If the alternative is a low cost, tax efficient stock fund, the average annuity gets clobbered. If the alternative is a low cost annuity, the average annuity still gets clobbered," Professor Reichenstein said.

"The key is talking about what's in the clients interest. And that's a low cost mutual fund or one of the low cost annuities. Yes, the salesman will lose--- because there are no commissions--- but the client will win."

Visit his website,, click on "research," and you'll find two articles about Huggard. One refutes Huggard's 1999 article. It points out (1) that Huggard fails to consider the deferred tax liabilities of annuity accumulations; (2) that he uses both average and marginal tax rates at his convenience; and (3) that he erroneously assumes a mutual funds' turnover rate indicates its capital gains realizations. Eliminate Huggard's errors and the imagined superiority of variable annuities over mutual funds disappears.

Looking forward, Professor Reichenstein suggests a basic comparison.

"Let's take stock funds. We'll ignore the $30 annual contract fee most variable annuities charge. Even so, the average cost variable annuity will have a 2.1 percent annual expense ratio. If you assume an 8 percent annual return, the variable annuity nets 5.9 percent, tax deferred.

"A low cost index fund would earn 7.5 percent (after expenses and taxes on dividends), with most of the return in unrealized capital gains. The long-term capital gains rate is now 18 percent but the 5.9 percent in the average annuity will probably be taxed at 25 percent or higher… So you get lower costs, tax deferral, and lower tax rates,"   he said.

In a more recent paper, "Critique of Huggard's "Fifty Reasons" , Professor Reichenstein takes three specific examples and walks you through the errors in each one.

What doe this mean for you and me?

If you meet a financial planner who assures you that variable annuities are superior to mutual funds by showing something written by John P. Huggard, you'll know the person is more salesman than planner.  

For the web:

Readers who would like to see an ongoing discussion between financial planners on this subject should visit a discussion I started on the website. You'll need to register as a user (describe your profession, etc. as "other") but it only takes a few seconds. Go to "the rooms" (for discussions), click on "investments", and start reading.

Next Tuesday: Who Should Buy a Variable Annuity?