The Horse Ain’t Dead Yet

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.