Am I Making Money At This?

Q. (A thank you & comment)...By the way; how do you make your money, giving away free advice?

A. I don't. I have about 30 clients that I manage money for--I'm sort of like their private mutual fund manager. I make all the investment decisions and take action when necessary to protect their principle. To that end I have developed a proprietary system on which 4 patents are pending. The system is designed to allow someone to participate in the market while knowing that their potential for loss is strictly limited. And it's done without a large commission up-front, time commitments, surrender charges, etc.

Occassionally someone that I have provided free advice to will become a client. As you can see, though, it's not something that I strongly pursue.

I am not opposed to large commissions--I've earned them myself on life insurance in the rare times I use it. My dislike of the commissions related to Equity Indexed Annuities has many reasons. First, it creates an incredible conflict of interest on the part of the advisor. When you were selling your machinery, the people you were talking to probably understood that you represented one company and were going to use their machines to solve the problem. Few people being pitched EIAs are told that the person selling it doesn't have access to other investment products and doesn't have a background or training in providing investment advice.

Secondly, it was normal for someone buying a big piece of machinery to earn a large commission. I imagine your sales cycle and volume are considerably longer and lower than for other products. That's not the case with EIAs. The commissions are huge when compared to the other investment options available and there are comparable, if not better, alternatives out there without all the costs.

Lastly, we are in a new world where terrorism is a real threat. For those who are retired or getting ready to retire it is much more important that they keep control and flexibility over their money. That's why I am opposed to any investment that locks an investor in because it has high surrender penalties that last for years and years. Why should I have to pay an automatic penalty if I decide I want back more than 10% of MY money?? It might make sense if you were being well compensated for that fact, but you aren't in EIAs.

You mentioned comparing costs. The best way to compare costs is in the surrender charges. There aren't any automatic surrender charges in ELCDs. There isn't much of a secondary market, but you can get ELCDs with terms of only 3 years.

One other thought. If you have so much of your overall portfolio allocated to the markets, wouldn't it make more sense to diversify into income-oriented, fixed type of investments that will have a negative correlation to the market? With an EIA you are essentially having the return based on the same as the rest of your portfolio.

Money management fees. Imagine if one of your customers could get one of those plastics machines...but instead of having to buy it they could rent it. Further, if they rented it, there wouldn't be any time commitments or costs to end the rental. That way, if there business model, technology, outsourcing, etc. changes, they can easily adjust. They could be using the latest greatest each year. Just as importantly, if they started using a machine and didn't like it they could make a change without losing all that commission money.

That's the difference between paying an advisor a fee versus a commission. Will it be more over 10 years? Yes, but only if you use those services for the 10 years. If you decide to go it your own after 5 then it is a lot cheaper. More importantly, the only way the fee-based advisor is able to keep your business for 10 years is to keep you satisfied. If the investments aren't working, if they don't like what the advisor is doing, they walk. It's not perfect, but it removes much of the conflict of interest.

On the other hand, with an EIA or other commission-based investment, the investor is in essence paying the advisor for 7-10 years worth of service up front--regardless of whether they ever hear from the advisor again, regardless of whether they are satisfied with the investment, etc. I won't pay a doctor, accountant or attorney for 7-10 years worth of services up front so why should advisors expect it?

Your posted comments on this and other questions are welcome.
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