Category Archives: Annuities

Annuities sound like a great investment: lifetime income, never spend principal, tax benefits. But, there is also an ugly side when they are sold by less ethical sales representatives: high expenses, seven years of penalties, lack of liquidity, and poor performance.

Financial Tip of the Day [What Investors Should Know]

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Inflation - Financial Tip of the DayMany times I see investors being offered annuities with an income rider. My advice to investors is to do their homework. There are many varieties being offered, and I find only a few that are good for my clients.

Let’s consider an annuity with an income rider and how much you should put into one policy. I often see large amounts being considered for an investment. I advise clients to split up their investment into more than one policy. The reason for this is the compounding of an income rider.  Continue reading →

Investor Deception and Trickery

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When I first entered the investment advisory business I promised myself I would not reduce myself to being a commission sales rep and sell trash to investors even if I were dying of starvation.

The proliferation of new ways to package and repackaged garbage in the form of fixed annuities, variable annuities, equity-indexed annuities, and structured notes is astounding to say the least. How any investor can distinguish and compare the plethora of products is beyond me. I even question whether many of these sales people have the aptitude to compare and understand these products or whether they even care at all considering they have such a potent incentive (e.g. large commissions) to sell them. It all appears to be gimmickry; another way to fleece investors of their savings with sales products that carry steep commissions, excessive internal fees, and exorbitant surrender charges.

Following the recent financial meltdown, sales reps preying upon investor fears are marketing many of these products as safer alternatives and enticing investors with an initial "bonus credit" feature which will be accompanied by higher expenses that can outweigh the benefits of the bonus.

If you find yourself in a conversation with an adviser trying to sell you any of these products ask yourself what’s in it for the “financial planner.” Do yourself a favor by making a quick exit; tell him you have an appointment to make. Just remember these are great products for enriching the sales rep.

 

No Fee Investments – Real or Scam?

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It doesn’t take a genius to understand that investments with lower fees will produce higher returns for the investor, all else being equal.  So it is natural for us all to be attracted to low-fee investments.  A simple formula to keep in mind is:  Gross Return – Expenses – Taxes = Net Return.

 But what about financial vehicles with no fees?  Is there such a thing? In the past week, I have heard people claiming there are no fees on Fixed/Indexed Annuities, CDs, and even on several well-known, no-load mutual funds.  For this article, we will focus our attention on the first two products, as the third doesn’t even warrant an argument.
 
The key with each of these is the definition of “fees.”  Are banks and insurance companies non-profit entities?  Do they work for free?  Clearly, they must be generating revenue and profit from annuities and CDs, so what is the catch?
 
The trick with each of these is using a fixed or stated return.  Instead of disclosing the gross return generated from your money, they simply offer a Net Return (before taxes), which is derived using the formula:  Stated/Fixed Return to Investor = Gross Return – Spread (expenses & profit).  Depending on the product, the spread is typically 2-4%. 
 
So by offering a fixed or stated return, they avoid having to disclose the expenses embedded in the product.  Technically, there are no “fees,” but there are certainly expenses.  Is this wrong?
 
While I do not believe it is wrong to offer products with a fixed or stated return, it is very deceptive to sell them using the pitch of “no fees,” especially when comparing them to other products where the fees and expenses are disclosed.  This is magnified with many Equity-Indexed Annuities, in which the insurance companies can move the “caps” (stated return) to assure their own profitability. 
 
The bottom line – there are no investment products with zero expenses, costs, or fees.  Be wary of anyone selling a product using the “no fee” pitch. 

The Great Annuity Rip-Off

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Have you ever wondered why investment sales representatives recommend annuity products for assets that are held in IRA accounts? After all, the number one financial feature of an annuity is tax-deferred earnings. But, wait a minute; the earnings of IRA investments are already tax-deferred. So why did the rep recommend a tax-deferred product inside a tax deferred account?

Great question. A better one is who benefits when sales reps recommend annuities for IRA assets? It’s not investors who spent years accumulating the assets. They get to spend additional years paying excessive expenses for annuity features that don’t benefit them. And, if they want to sell the product, their only choices are to continue to pay high expenses for years or pay substantial penalties.

There are three winners: the sales representative, the rep’s company that permits this sales practice, and the annuity company. That’s because annuities pay some of the highest commissions in the financial services industry. Now you know why less ethical sales reps recommend annuities for IRA assets. They make more money and so do the companies that stand behind them.

How do you trust sales reps who recommend annuity investments for IRAs? You don’t, not when they blatantly put their financial interests ahead of yours.

Ripped Off: Who is Paying Your Financial Advisor?

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If your advisor is accepting commissions, guess who is paying him? Not you.  He is being paid by the company that is providing the product he is selling. This is a serious conflict of interest in the very least; it creates a situation where your best interest is not the same as your adviser’s best interest. How could anyone possibly look out for your best interest when he is not being paid by you?

You need to see through all the gimmickry and balderdash. There are so many creative sales pitches to make you feel good while you are being cheated. Any so-called professionals including financial planners, insurance agents, lawyers, bankers, and accountants that get paid with commissions need to be looked at with skepticism.
 
Using “trusted advisers” as representatives, mutual fund and insurance companies spend untold sums to market their latest products to you. Most of these products are nothing more than a new way to pick your pocket.  A skilled pickpocket can make off with just as much money as an armed robber, and by the time the victim realizes what’s happened, the pickpocket has made off with his loot. Often times these products are so confusing you can’t even figure out how badly you’re getting ripped off.
 
When you invest your money in these products your advisor more often than not gets paid upfront along with the insurance or fund company and anyone else involved in the transaction; everyone else makes money first before you make a single dime. In other words, you are at the bottom of the food-chain. This should seem absolutely preposterous to you because you are being ripped off!
 
Do you know how your adviser is getting paid?