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Agents have been screaming at me to
stop beating the ‘dead horse’ about equity-indexed annuities and the
dangers of working with commission-based advisors. Unfortunately,
the ‘horse’ ain’t dead…it’s very much alive and kicking. I receive
calls or emails from at several people every week with stories that
clearly illustrate this point. All of these situations have many
things in common and the better you understand them the less you
will be at risk.
Mr. ‘Smith’ contacted me just a week or so ago. He and his wife are
very conservative and near retirement. They have about $1 million in
investable assets and their $300,000 home is paid for. Of all this
money, less than $30,000 is invested in the stock market with almost
all of it being in a super-safe money market account.
His email asked me what was wrong with their ‘plan’ of investing
basically everything they had into long-term, highly inflexible
equity-indexed annuities. The agent who gave them this advice also
recommended getting a reverse mortgage on their home and using that
money to buy a high-cost life insurance policy under the guise that
it could cover their long term care needs. This smart, well-educated
couple was about to make the biggest financial mistake of their
lives.
‘Susan’ contacted me the same week. Her father recently passed away
and now her mother was making the decisions on over $1 million in
investable assets. Susan was alarmed when she discovered that an
‘estate planner’ was pushing Mom to invest her entire nest egg into
a 15-year equity-indexed annuity contract! 100% of it!
This ‘estate planner’ wasn’t an estate planner at all. She was an
insurance agent using that title to sound more qualified. She had
convinced Mom that the equity-indexed annuity was the answer to all
of her problems and Mom was ready to invest.
By the way, YOU can be an “estate planner”, “wealth manager”, etc.
too. All you have to do is get a business card saying you are and,
bingo, you are now more qualified! Watch out for fancy titles, as
they can be a ruse to gain your trust.
At Susan’s request, I looked over the contract and uncovered some
startling facts. If Mom cashed out after the 10-year surrender
penalty was up, she would forfeit the ‘bonus’ and any index gains,
and earn a measly total return of only 1.5%. That’s it, regardless
of the index. The only way she could EVER get the bonus and index
gains was to annuitize the contract for a minimum of 5 years. Even
if she died, the children wouldn’t receive the bonus unless they
annuitized! Or course, none of this was explained by the trustworthy
agent.
What can you learn from these examples?
First, these investors were being asked to invest a substantial
portion of their nest egg into a single type of product. This is the
first red-flag. Never, ever, put all or even half of your eggs into
one investment basket.
Second, these investors were being asked to buy long-term
pre-packaged investment products that strictly limited access to
their money unless they paid hefty surrender penalties. I’ve talked
with people who thought the surrender penalty was less than one
percent only to find out it was closer to 20%! Never buy an
investment with a surrender penalty over 5%.
Third, regardless of what they call themselves, these ‘advisors’
were only able to sell insurance-based investments. They can’t sell
government guaranteed, corporate or municipal bonds, mutual funds,
stocks, REITs, CD’s or any of the other products used by
full-fledged advisors. They are a one-trick pony.
Third, these advisors obviously don’t have the experience or
knowledge to offer appropriate financial advice. A trustworthy
advisor would never, ever make the recommendations these charlatans
made. They are completely unsuitable
Fourth, these agents have little concern for the investor. They were
more concerned about themselves then their client. Find someone who
will put your needs first.
Susan and the Smith’s are the lucky ones. They contacted me and
avoided a nightmare. Unfortunately, there are thousands of investors
that are taken advantage of every day. This should be criminal and
until it stops I will continue to ‘beat this dead horse’!
I’ll help you. Have a financial question? Send me an email and I’ll
personally respond, free of charge. Go to www.guardingyourwealth.com
and click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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