Watch Out For This Loaded Question

A friend of mine is a financial advisor. He’s a really nice guy. However, he told me one day that when he meets with a retiree prospect, he sits down with them and their financial statements and then he asks them, “How much of this money can you afford to lose?” He then told me that he uses this question as a segue into an annuity presentation, which usually has some sort of guarantee feature (usually at a significant cost to the client).

I don’t like this question. I mean who in their right mind is going to say anything other than, “NONE OF IT!”??? I don’t like this question because it plays on the prospect’s fears. When people are scared, they make rash decisions. I can imagine a retiree having capital preservation as one of their top priorities. Asking a retiree, “How much of this nest egg (that you have spent your entire life building) can you afford to lose…” preys on that fear. It then places the advisor in the role as the white knight who is going to take care of them and lead them to the promised land. And, like I said before the “promised land” is usually reached via an annuity.

Sure, an annuity MIGHT be right for some people. I have never said that annuities don’t have a place in some retirement plans. In fact, I think fixed-immediate annuities can be a great thing if purchased right. However, annuities are far too often sold without the client fully understanding what they are purchasing and they are sold by salesmen who could care less about doing what’s best for the client.

My advice: BEFORE you sign on that dotted line, get a second opinion! Don’t go to another insurance agent. Instead, find a fee-only financial planner or fee-only insurance agent to look at the proposal. (DISCLAIMER: I am a fee-only planner) Sure, it might cost you $150 – $300, but it could save you thousands of dollars if it keeps you from getting ripped off.

Buyer beware.

17 thoughts on “Watch Out For This Loaded Question”

  1. To be entirely honest, I don’t know why I would even need a financial planner in the first place. I talked to one and if he wasn’t selling me a mutual fund, he was selling me an insurance policy… I’m capable of buying both on my own.

  2. I think there is a lot of value in a financial planner/advisor for some people, but it’s not to sell them investments.

    In my opinion, the true value of a financial advisor is in serving as a behavioral coach. For instance, keeping a client invested when the market is going down and they want to sell because the “sky is falling”. Or helping keep them on track to reach their financial goals instead of getting sidetracked by opportunities for instant gratification, etc.

    Just like some people do better working out and losing weight with the help of a coach or personal trainer, I think some people would be much better off with the help and guidance of a qualified fee-only advisor. (disclosure: like JLP, i’m a fee-only advisor)

    But I also believe some people are very capable and have the discipline to do it on their own. And jim is right, you no longer need an intermediary to purchase products if you know what you want/need.

    It boils down to behavior and emotional issues — not just buying and selling products. Just my .02

  3. There are a lot of people who see stocks go up 50% in a year and say they are highly risk tolerant, but when they go down 30% from where they bought them, all of a sudden they are filing lawsuits about their advisor’s lack of disclosure. That’s one reason why this question is incredibly important: make people think about both risks, upside and downside.

  4. If you don’t know your financial adviser definitely get a second opinion. But I do agree with your adviser ensuring that you understand the potential risks that can be involved with any investment.

  5. Kurt,

    Excellent point. Yes, people tend to take the immediate past (both good and bad) and expect it to carry forward into the future. That’s why the advisor should play the roll of the educator and help the clients understand the risks involved with any investment strategy.

  6. Almost all annuities are bad investments. Any financial advisor who keeps his clients fully invested during a bear market is not really helping them. A good exit strategy is as important as a buying strategy. Anything you buy in a bull market will probably go up and anything you buy in a bear market will probably go down. I suggest using a low-cost discount broker, investing in a few top-performing ETFs and watching exponential moving averages as a sell signal. You may get whipsawed a few times, but the cost is minimal and can protect you from severe declines such as the declines in QQQQ after the bubble burst in the dot com craze.

  7. I agree completely with TMT’s post about behavioral coaching. An adviser can be the objective, outside eyes looking in to give an honest opinion.

  8. Interesting post and very well written.

    What I cannot figure out, (and while I have the ears of several fee-only planners, I guess I’ll ask) is: When are annuities the right investment? I’ve read all of the negatives about them, but I keep hearing people allude to the fact that they have a place in some retirement plans. Which ones? When should someone seriously consider one?

    I personally don’t need one, but I really think my parents may be a candidate for one.


  9. Ok, I ‘ll take a stab on that one…

    Full Disclosure: I am a Fee Only financial planner.

    My beef with variable annuities is that most of them are just way too expensive. The concept is great but consumers pay dearly for every “guarantee”! I find having variable annuities inside tax deferred investment accounts highly suspect bordering to criminal. I still have not recommended any at all! I will only do so if ALL of the following are present:

    -Client has maximized all tax-deferred contributions (mainly 401ks and IRAs) available to him/her.
    -Client is in the highest marginal income tax bracket.
    -Client still has plenty of cash flow to put away for retirement.
    -Client absolutely hates paying income taxes (easy hurdle to overcome!)
    -Client is confident that he will be in lower ordinary income tax bracket in retirement.

    If all of the above hold true, then a low cost variable annuity from Vanguard may indeed work.

    Fixed annuities are a different animal and definitely have a place in more consumers’ retirement picture and they are ideal for VERY risk averse individuals. Replacing a quarter of total retirement cash flow with a fixed annuity could provide a peace of mind and a good hedge for raking it in if you live too long:-)

    Hope this helps further the discussion.

    All of the above is IMHO!

  10. A good loaded question to ask the financial planner is “How do you get paid?” With a fee-only planner, the answer is straightforward. Otherwise, they need to sell you something.

  11. The question (“how much are you prepared to lose?”) in itself isn’t a bad query, but I agree that in this circumstance it is used inappropriately to foster an emotional purchase. My experience with the Series 65 certification for investment advisor representatives is that such behavior is clearly unethical. They could face stiff penalties for putting their own interests ahead of the client’s. At least that is how the law is supposed to work, but the state securities administrator (the agency which enforces the Uniform Securities Act) tends to hear of such issues only if a written grievance is made to the offending advisor.

    A lot of discussion occurs in the personal finance blogs about the potential for conflict of interest in portfolio-based compensation. I believe there is a place for fee-based and portfolio-based (whether by performance or assets invested) advisory services, but the latter is often poorly represented in the DIY community of personal finance blogging. Two things might set this matter straight:

    1) More articles/posts about how to read and understand a portfolio advisor’s ADV-II form — this explains how they are compensated.

    2) An explanation of how to detect unethical behavior and the proper way to report it.

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