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Do You Attend Retirement, Investment, or Annuity Seminars?
By JLP | September 12, 2007
Do You Attend Retirement, Investment, or Annuity Seminars? If so, I want to hear from you. I want to find out how honest these presenters really are.
Here’s my dad’s experience with one of them:
My dad has attended a few seminars in recent years. The last seminar he attended was a seminar for “seniors” presented by a guy hawking an equity-indexed annuity. My dad said that two inaccuracies (lies) stood out to him:
1. The presenter told the audience more than one time that if they got a 12.5% return, their money would double in 5 years. WRONG! How wrong? Let’s see:
As you can see, it’s clearly longer than 5 years. Either this guy didn’t do the math or he is being VERY LIBERAL with his rounding. Either way, it is definitely misleading.
2. The product this guy was presenting in this seminar was an equity indexed annuity. I don’t know the particulars of this annuity but my dad told me that this annuity capped gains at 10% and any down years in the market resulted in no change to the account balance. So, on down years, the “worst” you could do is get a 0% rate of return. Based on that, what does this tell you? Well, over the long run, your rate of return is going be LESS than 10% since 10% is the MAXIMUM that you can get and we all know that there will be years when you don’t get any return, which will drag down the average.
Well, this guy went and took the S&P 500 Index, went back to 1950, and pulled out all the bad years and told the audience that it returned 15.75% per year. Sounds pretty good doesn’t it? However, remember that the gains in his annuity are capped at 10% so how the heck could these audience members expect to get 15.75% per year? They wouldn’t. In fact, I went back and reran the numbers, capping the gains at 10% and came up with an average annual rate of return of 7.63% (and that doesn’t include fees!).
This guy’s main goal was to get these people to invest in his annuity. It didn’t matter to him that what he was presenting to these people was misleading and confusing. The sad part is that most of the audience members had no idea whether or not this guy was telling them the truth.
Anyway, back to my original question: Do You Attend Retirement, Investment, or Annuity Seminars? If so, I want to hear from you - just be sure you take good notes.
Topics: Miscellaneous |
September 12th, 2007 at 1:59 pm
Earlier this week the SEC issued a release titled, “‘Free Lunch’ Investment Seminar Examinations Uncover Widespread Problems, Perils for Older Investors.” It is loaded with a lot of stats that would make your dad’s story seem typical.
Here is the SEC link:
http://sec.gov/news/press/2007/2007-179.htm
September 12th, 2007 at 3:15 pm
Although the return for the annuity is lower than a long-term market return, the investments the seniors have anyway wouldn’t be close to the S&P 500.
This may be a fair investment for seniors looking for less volatility in their nest egg after retirement while still receiving a decent return. Even if you take a traditional approach of, say, 50% stocks and 50% bonds for seniors, there is a good chance that they will lose some principal in several years during retirement. This is simply a way of preventing that.
September 12th, 2007 at 3:53 pm
I have not attended one for a long time - here is why:
I was about 18 at the time (so a good number of years ago) and my friend and I went to this seminar on the advice of my friend’s dad. I had no money, but we thought it would be a good learning experience. After the session was done I went up to ask a question on a particular company he spoke about that politely challenged him on the revenue trends in light of digital products which were just starting to appear (it was Kodak). His honest to goodness response to me was, “…investing takes maturity and that question does not show any” and he went on to explain why he was holding firm. My take was he didn’t care about me because I didn’t have any real investable assets and therefore had no time for me. That was the last time I went to a seminar like that.
September 12th, 2007 at 5:10 pm
I wrote a very long article about this topic that goes into great detail about just how bad of an idea equity-indexed annuities really are. Capping gains is just the beginning of the insidious tricks played by insurance companies. Here is the website address if anyone cares to read it.
Equity Indexed Annuities – the Dumbest Investment Ever?
September 12th, 2007 at 5:43 pm
If you take the simple rule of 72 (72 divided by interest rate will give you # of years to double), you end up with 5.76 years, not just 5 years (it would take 15.2% longer to double). This presenter was clearly trying to round down and fudge the numbers to fool seniors (which makes me angry).
The fact is these seminars intend to fool the unknowing and fudge the numbers just to get people to give up their money. The only possible reason to go would be to learn more information about such financial terms, rather than buy anything they have to offer.
Annuities are some of the hardest investment vehicles to understand, and very often seniors are swindled because annuities are both complex and sometimes devious in their contracts - I would generally stay away unless you completely understand annuities and find the right one from the right company.
September 12th, 2007 at 5:56 pm
Brian, one reason they are not a fair deal for seniors is the lack of liquidity, and many seniors need access to their money. Also, people can principal protect their investments and have market participation with a combination of zero coupon treasuries and index funds, no insurance magic required. If markets do REALLY well they get the benefit, rather than just paying an infinitely increasing fee to an insurance company. Yes they can lose principal if they sell before the zero matures, but you also can lose principal if you surrender the annuity early. If they want an annuitized stream of income, than they can always purchase an immediate annuity when that time comes, probably with a more favorable annuitized payment.
Also, principal protection still loses to inflation, and the stock market has historically been a wonderful hedge against inflation.
Equity Indexed Annuities are sold with smoke and mirrors to people that don’t know any better. It would be hard for me to believe that anyone has ever purchased one that truly understood how it worked and understood their alternatives.
September 12th, 2007 at 9:55 pm
As I understand it, most of these equity indexed annuities keep the dividends for themselves instead of giving them to the owners of these annuities.
September 12th, 2007 at 11:41 pm
Dylan - could you expand on the zero coupon treasury/index fund combo? I am not familiar with that strategy as it relates to principal protection. Thanks!
September 13th, 2007 at 7:25 am
Brian, basically you purchase zero coupon Treasuries with a face value equal total of principal you want to protect. Then invest the difference between the discount price and the face value in something else, index funds for example. If the other investment goes to $0, you are back at your original principal amount when the Treasuries mature. There are fancier, more creative, and higher risk variations, but that is the basic idea. I’m not recommending it, just comparing it to the equity indexed annuity concept.
September 13th, 2007 at 7:58 am
Mike, equity indexed annuities don’t really keep the dividends because they don’t actually hold any securities in a variable account. The index is just used to calculate the insurance company’s obligation to the contract owner, and the index does not account for dividends.
September 13th, 2007 at 12:28 pm
Thanks for the insight on the alternatives to these products, Dylan. After your comments as well as JLP’s new post on this subject, I can’t really see any use for this type of product.
September 13th, 2007 at 6:01 pm
I am very confused about where YOU got your numbers. Your numbers seemed significantly low to me so I got out my financial calculator and plugged in the numbers you provided. The ending balance would be $28,864.96 if you invested $16,018 and received an annual 12.5% return. Which isn’t quite double, but is much closer than double than the numbers you came up with. I am VERY curious how you got your result? Please share.
September 13th, 2007 at 6:05 pm
Sorry, I re-read what your post because I was so confused how you could even think that your numbers were correct. I realized you were using 10,000 as the original investment, and the 16,018 number was the balance after four years. So yes, with an original investment of 10,000 you are correct. My apologies.
September 13th, 2007 at 6:07 pm
ah ok i was confused too
September 24th, 2007 at 6:05 am
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June 15th, 2008 at 12:09 am
Only go to seminars where the speaker is licensed to sell securities. Registered representatives have allot more knowledge about investments and have to get their seminar materials approved by their broker dealer.