BEFORE You Attend That “Investment” Seminar

Here is the scenario:

You’re either retired or getting close to retirement. Not to be rude, but you are “prime meat” for advisors. They love your demographic because it usually means a nice lump sum for them to work with.

You either get invitations in the mail or someone calls you to invite you to a “free” dinner. All you have to do is listen to a financial consultant’s (investment advisor, insurance salesman, etc.) presentation.

Before you decide to go, let me share a few tips with you.

1. Understand that the advisor is trying to SELL you something. Whether it’s his or her services or some kind of product or idea, the intent is to get clients.

2. Once you understand number 1, you would be wise to be skeptical of EVERYTHING they say.

3. If they are talking about some kind of insurance product (IUL, equity-indexed annuity, variable annuity, etc.), they’ll usually start off by trying to scare the audience with talk about how risky or volatile the “stock market” is, which is true. It is “risky”, but most retirees don’t have 100% of their assets in the stock market. If the salesperson starts throwing around numbers, BEWARE!

The S&P 500 Index that is quoted in the media is a price index. That means it does not include dividends. So, although a price index is a decent barometer, it is not good for
comparing investments because a person who invested in a mutual fund or exchange-traded fund that tracked the S&P 500 Index would receive dividends as part of their return. So, it is misleading on the part of the salesperson to use the S&P 500 Index price return when drawing a comparison to what they have to offer.

How misleading?

Take a look at the following graphic I took from a book I received recently. This book was published in 2015, so I’m not sure why they stopped at 2012 (I will note that 2013 and 2014 were both up years as you’ll see in a later graphic). He also has the wrong return for 2012. It should be 13.41%, not 10.20%. You can click on the graphic to see a larger version:

Table from pg 15

That table is based on the S&P 500 Price Return Index. Yes, the author does mention that the table does not include dividends, but I question his motive for not including them. The next graphic will show you why:

S&P 500 TR vs S&P 500 Price
NOTE: Does not include fees or taxes.

Obviously, leaving dividends out of the equation highly favors whatever product it is getting compared to. That’s why you should be prepared to ask the following question:

“Are the returns you are talking about real returns that include dividends?”

If the answer is “No” or “I don’t know”, you need to get up and walk out. They are being dishonest and purposely misleading the audience.

4. Ask about surrender periods and charges. Some strategies using insurance have long surrender periods of 7 to 15 years. A surrender period is a time period in which you must pay a fee in order to terminate your policy. The amount declines over the years.

5. Be wary of bonuses. Remember, there is no such thing as a free lunch. If a company is going to give you a 10% – 25% bonus, it’s coming from somewhere.

6. If it’s complicated, forget about it. Retirement planning doesn’t have to be complicated. The vast array of products (most of them unnecessary) is what complicates things. Insurance products are among the most complicated because there are so many of them and each company has its own spin, which makes them difficult to compare.

7. Ask them point blank how much they will make off your transaction. Don’t feel embarrassed to ask. It’s your money. If they say, “The insurance company pays me,” leave. That’s not the question you asked. If they avoid answering the question, don’t do business with them.

8. No matter how good the deal sounds, NEVER sign or agree to anything during that presentation. Instead, get as much information as you can and leave. Then, once you are home, read all the information and ask any questions you may have. I would even suggest you get a second or third opinion. Find a fee-only advisor through and go see them. Expect to spend $250 – $500, but that’s a lot less than you could lose if you make bad decision.

Sadly, most of the people reading this blog post probably already know this stuff. Here’s to hoping this information reaches those who can use it.

For more information, check out this article from FINRA.

Annuities to Get Less Complicated?

From yesterday’s Wall Street Journal:

Imagine flipping through a jargon-free annuities-offering document.

The day is inching closer when that might be possible.

Industry groups are banding together to present prospective buyers of annuities with streamlined, plain-English descriptions of the basic features and costs of annuities, much like those now offered by some mutual-fund companies. Those shopping for an annuity also may be able to go online and compare the costs and features of one annuity to those of another.

As part of a pilot program, a simplified, 2½-page document is being tested in Iowa and West Virginia. The document was developed by the American Council of Life Insurers, or ACLI, in Washington, in conjunction with the National Association for Variable Annuities, or NAVA, in Reston, Va.; insurance-agent groups; and others in the industry.

Annuity Papers, Please. Hold the Jargon ($)

How much information will be available?

“We want to provide useful information, not an overwhelming amount of information,” says Carl Wilkerson, vice president and chief counsel, securities and litigation at the ACLI [American Council of Life Insurers]. The idea is to help consumers be “better equipped to make apples-to-apples comparisons,” he says.

My question is: if people can actually understand them, will they buy them? LOL! Once they know how expensive they can be, will they still want them? Will brokers be able to sell them once there is no longer a scary prospectus to hide behind? Will the broker’s compensation from the product be readily available?

Let’s face it, the insurance industry loves the complexity of annuities. They are hard to compare to each other and very hard to fully understand. Heck, lots of insurance salesmen don’t even fully understand them.

I’m interested to see how this plays out. Oh, and if anyone has access to the new 2½ page document mentioned in the article, I’d love to see it.