Investor Deception and Trickery

By: Matthew Arndt, CFA, CPA, CFP | July 22, 2009 | Annuities, Wall Street Ethics

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.

2 Responses to “Investor Deception and Trickery”

Sam Lindsey

March 28th, 2011 at 1:00 pm

You mention that ‘these are great products for enriching the sales rep,’ and yet we have found that annuities, for us, have paid us a monthly income for years now. How about if what is good for a financial professional MIGHT be good for us, retirees, too? This site appears to be very negative and slanted. CDs impose a surrender charge, too, and we see nothing here about CDs. What is your motivation for this site?

Matthew Arndt, CFA, CPA, CFP

March 29th, 2011 at 8:08 am

Let’s start out by answering your last question, “What is your motivation for this site?” First of all, I am not the only one who writes posts for this site so I can only speak for myself and not the others (I don’t know what motivates them; you would have to ask them). If my posts sound slanted, it’s because they are. It’s my view derived from sixteen plus years of experience with the industry. My principle aim is for investors to think much more critically about how they invest their hard earned savings instead of blindly handing them over to Wall Street investment houses that demonstrated in the financial crisis of 2008 they couldn’t even manage their own money. Investors should question every aspect and every single detail of an investment (I can’t imagine you have any problem with this). My posts might sound negative because they are meant to be cynical. Skepticism and distrust are two mental traits you need to truly evaluate any venture. If you’re not looking at finance, as well as politics through a cynical lens, then you are not even in the game!

Your next question, “How about if what is good for a financial professional MIGHT be good for us, retirees, too?” Let me start out by saying you have a directly opposing and competing interest with the broker who sold you the annuity, period. That broker has no fiduciary responsibility to you. Your broker’s sole responsibility is to represent and act in the best interest of the annuity company. If your broker stated before offering you advice or selling you products, “I have NO fiduciary responsibility to you. I am paid commissions from mutual fund and variable annuity companies from your transactions, not by whether or not your investments succeed or fail,” How comfortable would you feel?

For the broker to truly look after your interests while at the same time earning the best living possible is like trying to ride a horse in opposite directions at the same time. The bottom line in all of this is that your broker is not your friend, and your broker is not looking out for your best interest. The first conflict is that brokers are compensated through sales commissions. The more they sell, the more they earn. The more they recommend that you invest in products that pay a high commission, the more they earn. Their earnings are your costs, and costs are one of your portfolio’s worst enemies.

True fiduciary duty legally obligates the provider of investment advice to place the investor’s interests before any other party: the provider of investment advice, the provider’s employer, and the shareholders of the provider’s employer. If you have the perception that you were treated fairly, then I am happy for you. Another aim of mine is to get investors to examine and gain a much better understanding of the conflicts of interest in the financial services.

For you to water down the complexity of the details inherent in these financial products by comparing them to something like a certificate of deposit at bank, that is very easy for 99.99999 percent of the adult population on this planet to understand, is quite laughable. My 96-year-old great auntie understands what a CD is and how it works. She is well aware of the fact that if she withdraws the money from a CD before it expires; there will be a penalty charge. This is not news to her or any other person I’ve met in my lifetime. Yet, I have met numerous folks who have no idea what an annuity is costing them, what the hell a surrender charge is, what benefits they are paying for, etc. Many of these folks have brought written complaints against the broker who sold them the product for failing to disclose these very facts. These are not mentally challenged people. I even came across the book, Annuities for Dummies by Kerry Pechter (I have yet to find the equivalent for CD’s). The glossary of terms alone to define the many variables and nuances of annuities is quite extensive and several pages long.

I understand annuities and the like quite extensively and I don’t see how the benefits outweigh the costs. It seems like a lot of hocus pocus and a smoke screen to help separate investors from their hard earned dollars. It’s my strong belief that Investors by educating and informing themselves and placing their budget on a diet can replicate and achieve similar results without paying high upfront commissions, exorbitant internal fees, surrender charges, etc. Your unquestioned devotion to investing in annuities by trying to compare them to certificates of deposits makes me suspect you are nothing more than a shill for the brokerage industry.