Industry Double-Talk Creates Investor Confusion

Recently, a reader sent me the following question: “Are there any CFP's out there you can recommend? The more I read about the available choices, the less confident I feel about being able to manage my own money.” I understand his dilemma. It’s one faced by investors every day and it reveals a common misunderstanding. There’s a great deal of ‘double-talk’ in the financial services industry. When an investor and an advisor use the same term, they don’t mean the same thing. In this case, when an investor says they want someone to help them manage their money, they mean they want someone to help allocate their money, choose the right investments, and carefully watch over those investments, making any changes necessary. When an advisor talks about managing money, what they really mean is finding someone else to manage that money. The advisor isn’t making any day-to-day decisions about your money, closely monitoring it nor taking action to protect it from loss. The advisor transfers those responsibilities to a mutual fund or variable annuity sub-account manager. Of course that manager doesn’t know you from Adam. In an effort to gain your business, advisors turn to designations to make themselves seem more credible than their counterparts. This only adds to the confusion. For instance, doesn't a Certified Senior Advisor sound more qualified to help you than someone who isn’t? And a Certified Senior Advisor probably isn’t much different from a Certified Financial Planner(CFP), right? But there is a tremendous difference between the two. It takes most people 2 years to meet the educational requirements necessary to get their CFP. Less than 50% pass the exam. Then they have to have 3 years of work experience in that field. Those are some pretty stiff requirements. On the other hand, all you have to do to become a Certified Senior Advisor is read one book and take a simple exam. In fact, there is very little investing information even involved in it. But how are you to know that? And that's the whole point. I believe that designations such as the Certified Senior Advisor (and a host of others) are DESIGNED to give an investor the impression of special training and qualifications. Then many use that 'credibility' to rip you off! I'm a Certified Financial Planner, a Certified Estate Planning Professional and a nationally-syndicated columnist. I've had the Certified Senior Advisor designation but was so embarrassed by it that I stopped paying the annual fee. Just because I have all those designations doesn't mean you can trust me. I can still rip you off. Likewise, it doesn't mean that someone without all these designations won't do what is in your best interests. The bottom line is that when it comes to managing your money, these designations mean nothing. Don’t fall for that trap. You have to look at how the advisor is compensated, what types of products are being recommended and the firm they work for. You want to look at whether the advisor simply recommends products (is just a salesperson) or if they are the ones who actually makes the day-to-day money management decisions. It's rare that you will find one who serves as a money manager because that's not where their training is. That's not what the brokerage firm or insurance company wants them to do. It wants them selling product. You need to ask yourself this: Am I looking for someone to sell me a product or am I looking for someone who is a money manager? If all you are looking for is someone to help you allocate your money between mutual funds and to help you select those mutual funds then YOU DON'T NEED AN ADVISOR. You can get it done for free by calling Fidelity, Schwab, T. Rowe Price or a host of others. Of course, the strategy and philosophy they use isn't going to prevent you from losing 30%, 40%, 50% in a down market. For that kind of protection, you don’t need a product-pusher; you need a personal money manager. For most investors, there is a big difference between what they are looking for and what the typical advisor delivers. Don’t be fooled by designations or distracted from your main goal—finding someone to manage your money. I’ll personally respond to your questions, free of charge. Go to http://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.

Annuities? Give Me a Break!

Millions of seniors are sold equity-indexed and variable annuities with promises of guaranteed returns with little or no risk. And hardly a day goes by that I don’t hear from some frustrated investor who finds him/herself trapped by one of these investments. Let me paint a very clear picture of the dangers of these products and share some pointers for those who have already bought one. Annuities (especially equity-indexed annuities) are the product of choice for insurance agents and other commission-based advisors. Why? Because it’s an easy sale for the advisor, it pays a huge up-front commission and it locks the client in for several years so little attention has to be given the client or his/her money. Annuities are an easy sale for an agent because, in theory, it gives the investor everything they could ever dream of. Agents tell you that equity-indexed annuities can give you the returns of the stock market in the good times without any of the risk. In fact, they will guarantee you will earn a minimum amount even if the market crashes. Those selling the latest variable annuities will explain that you are guaranteed a 7% return! They’ll tell you there’s no way to lose money. Wow! What an investment! That’s not all. If you invest today the insurance company will even pay you a bonus! Some pay a bonus as high as 12%! Think about that, Mr. Prospect. If you transfer all of your $1,000,000 retirement account into this whiz-bang annuity, you’ll get $120,000 right off the bat. Is that great or what? Why, you’d be an idiot to not instantly throw every dollar you have into one of these. Some agents out there are even recommending you borrow money to put into these annuities! Oh, if only it were so easy. But it’s not. Give me a break! First, what the agent or advisor isn’t telling you is that he/she can make as much as 10% off of every dollar you put in. If you transfer that $1,000,000 retirement fund into one of these, the agent may make $100,000! Did the agent happen to mention that? Talk about conflict of interest! Second, do you really think that an insurance company is going to give you a 12% bonus AND pay the agent a 10% commission AND that the money isn’t somehow going to come out of your pocket? Come on. How can the insurance company pay out 22% right up-front and still stay in business? I remember seeing a humorous sign at a local business: “We rip-off the other guy and pass the savings on to you!” Is that what you think the insurance company does? Nor is there an insurance company on the planet that can guarantee you will earn 7% a year on a variable annuity. None. There’s always a catch. The problem is that it is very hard to find. Unless you are a Philadelphia lawyer and can parse every word of the contract you aren’t going to see it. Most advisors don’t even see it! For the millions of seniors suckered into these products, there’s little they can do. They’ve contacted their State Department of Insurance to little or no avail. They’ve pleaded with the insurance company. Often, they are advised to go to an attorney. What should you/they do in this situation? The options are very limited. First, I recommend withdrawing the penalty-free amount that is available each year and transferring that money somewhere else. If the annuity is an IRA, you can still transfer that penalty-free amount to another non-annuity IRA each year without tax consequences. Second, you have to determine if it is better to pay the surrender penalty or wait it out. Brad, who recently contacted me, is choosing to pay the 15% penalty. An agent sold his 89-year old father an annuity with a 15-year surrender period! What topped it off was that the heirs will have to pay a surrender penalty to get the money if his father dies before age 104! It’s a very expensive education for those in this situation. That’s why I speak out so strongly against these products. There isn’t an easy way out. And remember, there’s always a catch. Don’t take that chance. Stay away. I’ll personally respond to your questions, free of charge. Go to http://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.

Beware Of Universal Life II

In my last article, I explained the basic differences between term and permanent insurance. Permanent insurance such as Whole Life, Universal Life, Equity-Indexed Universal Life and Variable Universal Life is regularly promoted as the perfect retirement vehicle or the new way to build wealth. This week I will expose the fallacies of those arguments. First of all, I believe that the need for life insurance should be met in the most economical way possible. With universal insurance, where life insurance is combined with investing, you end up paying too much for the insurance while earning too little on the investment. It’s the worst of both worlds. Term insurance allows you to purchase the life insurance you need at a lower cost, while giving you the flexibility and control over your investments. Universal policies unnecessarily lock you in. You’re committed to paying a high annual premium. For instance, the annual premium on one million dollars of universal life for a healthy, 45-year old non-smoking male is around $8,000. That’s $8,000 each year---for the rest of his life. On the other hand, the annual premium for one million dollars of 20-year term insurance is about $1400. That’s a difference of $6,600 each year. With universal insurance, most of that additional premium builds the cash value of the policy. But because of administrative and other fees, the amount added to your cash value each year is reduced. By the way, has your agent mentioned there is a way to buy no-load universal life insurance? Insurance agents tout universal policies as a wonderful investment vehicle. They’re not. Better returns can certainly be found elsewhere. Many of these policies are pitched to people in their prime earning years, most of whom are raising their families. These investors will earn a far better return by first paying down their debt. That’s a guaranteed return, of up to 20% on credit card debt. For those without debt, any extra money they have is better used for 401Ks, IRAs, etc. The tax benefits heavily promoted as a major benefit of universal insurance are suspect as well. It’s true that money drawn out of these policies for retirement spending isn’t taxed, but that’s because this money is actually a loan. In essence, you’re borrowing your own money. And since it’s a loan, it has to be paid back. If you hold the policy until you die, a portion of the death benefit is used to pay back the loan. If you surrender that policy, the cash value is used for that purpose. Suddenly that money isn’t tax-free. Just like you may have to pay capital gains taxes when you sell your home, you will have to pay taxes on the amount of the cash value that is greater than the amount you paid in premiums. Last of all, you need to be aware of the tremendous financial incentive agents have in selling universal life insurance policies. Commissions on universal insurance are 70% or more of the first year’s premium, then 5% of the premium each year after. One of the most egregious sales tactic used to promote universal policies as an investment is that you should take the equity out of your home and ‘invest’ it in a universal life insurance policy. The argument is that your home equity is an asset that should be used, not left dormant. The tax benefits are also touted—the transfer is tax-free, the growth is tax-free and the distribution is tax-free! That’s triple compounding, they say. Do not fall for this trap. Frankly, those recommending it should lose their licenses. The arguments used to support this scheme are all smoke and mirrors. The tax benefits are bogus, you lose control of your money and the agent earns a big fat pay day. Nor will the earnings be what you expect. Most of the time you will end up paying more in interest on your home equity loan than you will make in the policy. The distribution is tax-free, but all death benefits paid on life insurance policies are tax-free. So you can leave the equity in your home, buy a term life policy and have the same tax-free distribution benefit. 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.

Beware Of Universal Life Insurance

Has a life insurance agent suggested that you buy ‘permanent’ insurance such as Whole Life, Universal Life or Variable Universal Life? The reasons they give seem so compelling, but are they in your best interest? Here’s an explanation of the basics, plus what the insurance agent isn’t telling you! There are two broad categories of life insurance—term and permanent. The basic idea behind life insurance is that if you die prematurely, there will be a pot of money there to take care of your loved ones. That pot of money is referred to as the ‘death benefit’. The cost of life insurance is based on your age, your gender and your health. The insurance company bases the premium on the risk that you will die. The older you are or the poorer your health, the more expensive the insurance will be. The ‘raw’ cost of insurance goes up every year because the risk of death increases every year. Term and permanent insurance approach the payment plan differently. With level term, these increases in cost are spread out over 10, 20 or 30 years and the premium is kept the same. If you renew your policy at the end of the term, your insurance costs will increase. With permanent insurance, your premium stays the same as long as you own the insurance, up to age 100. That way, you shouldn’t be in a situation where it becomes too expensive as you age. Initially you pay more than the raw cost of insurance and that money is kept in reserve. Once the raw cost of insurance is greater than your premium, the difference is taken from the reserve. The difference between Whole Life, Universal Life and Variable Universal Life has to do with the return you earn on that money while it’s kept in reserve. Whole and universal essentially pay interest while variable universal allows you to ‘invest’ that reserve in mutual-fund-like accounts. On the surface, it may seem that there shouldn’t be a lot of difference between the premium on 20-year term and a universal policy with the same death benefit. But let’s look at some real numbers. The annual premium for a 45-year old man in excellent health for $1,000,000 in coverage is $1400 per year for 20-year term. That man would pay roughly $8,000 a year for permanent insurance. That’s right—about $6600 more every year. That reserve in the permanent insurance can become a substantial over time, so they give you the ability to borrow the money held in reserve. This has spawned the use of permanent insurance for needs other than the death benefit, such as a way to build a retirement nest egg. The ‘ploy of the day’ is that you should take all the equity out of your home and put it into a universal life insurance policy because it will allow you to build your wealth more quickly. (I expose the fallacy of that argument in a future article.) What your insurance agent isn’t going to tell you is that the commission on permanent insurance can be around 70% of the first year premium and then maybe 5% a year on additional premiums. Commissions on first year term premiums can be as high as 100%. In our example above, the agent will make about $5600 on permanent versus only $1400 on the term. This higher commission is a tremendous incentive for agents to sell permanent insurance instead of term. The result is a huge conflict of interest between the needs of the client and the desires of the agent. I would like to think that every agent will always do what’s in the client’s best interest, but we know that’s not the case. And most agents are convinced that term is a waste of money and that permanent life insurance is the better choice. I don’t. I believe that permanent life insurance should only be used in special situations, such as to cover estate taxes due at death. I do not think it should be used when you want to provide for your family in the event of a premature death. I don’t think it should be used as a way to ‘build wealth’ or as a type of retirement plan. In my next article, I’ll explain why. Have a financial question? Go to http://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.

When A Will Isn’t The Way

Many people have the mistaken impression that their Last Will and Testament determines what happens to their possessions when they die. As John, a reader in Marysville, TN learned, that’s not necessarily true. Time and time again we are told about the importance of having a Last Will and Testament (Will). “What’s a Will?” we ask. “It tells who gets what when you die,” is the classic response. So we come away thinking that by taking the time to draft our Will that we have put our affairs in order. Unfortunately, it is not that simple. When transfer of ownership of an asset is based on your Will, that item is said to ‘pass through’ your Will. There is even an elaborate, mandatory legal process involving the courts that ensures your Will is handled just right. This process is called Probate. Most heirs end up using an attorney to navigate the Probate process for them. As a result, Probate normally takes approximately 12 months and can easily cost thousands of dollars. Many things you own will not ‘pass through’ your Will. Therefore, what you’ve stated in your Will has no affect on who receives them. The first group of assets that avoid your Will are those that name a beneficiary. Common examples of these assets are life insurance, annuities, and retirement accounts. For instance, I own two large life insurance policies on my life. If I were ever to pass away prematurely, it is important for me that my wife and children be taken care of financially. When purchased, I had to decide who would get that money when I died. I named the beneficiaries. Now, if I pass away while those policies are still in force, the beneficiaries I named on that contract are the ones who will get the proceeds, regardless of what my Will says. The proceeds of a life insurance policy pass by contract, not by Will. All beneficiaries have to do is present a certified copy of your death certificate to the insurance company and the money is paid out. No Will. No Probate. No attorneys or courts. Better yet, the beneficiaries get the money in weeks instead of months or years. It works the same way with any asset on which you have named a beneficiary. Company retirement programs, IRAs, annuities and even bank and brokerage accounts allow you to name a beneficiary. Properly planned, this can be an effective way to distribute assets at your death. The second group of assets not controlled by your Will are those that pass by Title. Real Estate and vehicles are a perfect example but this can also apply to bank and brokerage accounts. It’s common for most couples to own their assets jointly. When one spouse passes away, that asset passes by title and becomes the property of the other spouse, regardless of what is in your will. Since your Will is not involved, Probate is avoided. Thirdly, assets owned by a trust do not pass according to your Will and thus avoid Probate as well. The most common type of trust is a Revocable Living Trust. You decide who receives what when you set up a trust. Assets such as bank and brokerage accounts, vehicles and real estate are then titled in the name of the trust. A trust can be the beneficiary of your life insurance policies. It is also easy for personal property to be owned by a trust. Properly funded, a Living Trust can allow someone to avoid Probate altogether. It is only assets that don’t have a named beneficiary, that don’t pass by title and that are not owned by a trust that pass through your Last Will and Testament. So instead of being the main document that determines the distribution of your estate, it ends up being the last. Everyone should have a Last Will and Testament. You need to make sure that you coordinate your desires between your Will, your beneficiary designations and the ownership of your assets. Otherwise, your wishes may not be carried out. If you have a specific question or would like more information give me a call toll-free at 1-877-827-1463 or go to www.guardingyourwealth.com. You can also reach me by email at jeff@guardingyourwealth.com. I will be happy to help you in any way I can. Mr. Voudrie is a Certified Financial Planner and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN.