General

If All You Have Is A Hammer, Everything Looks Like A Nail

By July 27, 2016 December 19th, 2017 No Comments

escondido financial planner

Sunday Radio

When I drive around on Sunday, I put on the radio and almost every AM station has some financial “show” on it.

Some are real shows, but most are paid advertisements masquerading as advice.

It’s the so-called “safe money” pitch.  And before we go further, let’s start with what qualifications are needed to recommend (sell) these complex strategies that will do all these amazing things.   Ready?

A life insurance license.

What?

Yes.  A life insurance license that can be had with a small amount of study and paying a few state licensing fees in about a week.

Wait, but the guy on the radio said he was a financial advisor.

And I can call myself a car mechanic.  Even though the extent of my abilities is limited to changing oil.

You see, anyone can call themselves a financial advisor if they happen to sell a financial product like life insurance or an annuity.

They can be good salesman and have done it for many years, but the fact remains they sell and are trained to sell life insurance and annuities.

And if that’s the extent of what’s in your toolbox, that’s what you’re going to recommend. 

So it’s no wonder that people limited to selling life insurance products are going to attack real financial advisors and condemn the products and solutions they use.

It’s generally some variation of the “safe money” idea.  It’s a fear-based sales pitch which goes something like this.

  • The stock market is a casino. If you’re like “most people” you can’t afford to put your hard-earn money at risk by gambling.
  • Why would you ever invest your retirement funds in anything that puts your principal at risk?
  • You can’t afford to lose 50% in the stock market crash like the one that happened in 2008.
  • You need guarantees!
  • Are you paying fees to a broker? Why?  Why would you pay fees when there are no-fee products available to you that your advisor has not told you about?
  • With our products, you get upside participation in the market but never lose money.

You can have it all!

Let’s take these arguments one by one.

The stock market is a casino.

If the stock market is a casino, why do almost all pension funds – who have a fiduciary obligation to their clients as retirees- invest billions of dollars in stocks?  Is it because they aren’t enlightened to the local radio insurance salesman who has better solutions?

Or could it be that while stocks are highly unpredictable in the short run, that they’ve been very predictable as a long-term asset to accumulate wealth?  Hmmm.

Why put your principal at risk?

Is variable daily pricing the same as putting your principal at risk?  Using this logic, maybe I shouldn’t own a home.  After all, my house price changes in value every day and is, therefore a risky investment that I should not own.  It could go down in value and I could lose.

So let’s separate the idea of principal fluctuation with the idea of losing your entire principal.

Yes, if you own a diversified fund your price will change every day. And if you sell when your principal goes down, you have lost money.

Now why would anyone invest in something that goes up and down when they could have a principal guarantee?

It’s pretty simple.  Investments with a stable, fixed and guaranteed principal have really lousy returns.  Real close to zero in many cases.

You can’t afford to lose 50% like everyone did in 2008.

Think about the billions of dollars across the US that are invested in stocks.  This includes huge pension funds and other retirement savings accounts.

I would guess that most of them didn’t lose 50% in 2008.

How can that be?

It’s because while their account statements – the value on paper showed a loss as values declined – most likely never sold at the bottom and realized that paper loss.

So they didn’t lose 50% because they didn’t take it!  They were smart enough to know that the market typically recovers so they held on to their investments.  And guess what.  The market recovered.

Are you paying fees to a broker?  We have no fees.

  1. Then how are you compensated? You’re paying for this so-called radio show.  Are you selling these products out of the goodness of your heart?

Insurance products pay commissions to these guys.  There’s nothing wrong with that, but whether it’s a fee or commission, the customer is ultimately going to pay for it somehow.

That’s like that state of California telling me it’s not raising taxes, but has a “small increase” in fees.  Who cares?  It’s a cost to me.

These commissions are built in expenses.  They become real to you if you ever want out of your insurance product early via surrender charges, which can be significant, or your surrender or cash value in which you can get back far less than you put in.

You get “upside participation” in stock market growth. Sometimes they call it a “reasonable” rate of return?

Gee that sounds great.  But how much participation is that?  And how “reasonable” is it?

In the case of an annuity, how about this.

Year one.  You invest $100,000.  The market goes down 10%. This amazing product doesn’t go down, but you earn zero interest.  So far, that sounds OK.

Year two.  The market is up 15%.  Wow.  You get to participate, so that means you’ll earn 15% right?  Ah, no.  In fact, you will have a 100% “participation rate”, but the insurance company will “cap” that.  Right now, that cap in most products is about 3.5%.  That means you will earn 3.5% when the market went up 15%.

“Wait, that isn’t fair!”

Well, there’s no fee, but this product cost you 15-3.5 =11.5%.  That’s the amount you didn’t get while the market went up.  But don’t worry.  That’s not a fee.

“Wait, that’s not reasonable either.”

Well, reasonable is all relative.  It’s better than earning 0.25% in a bank account where your principal is guaranteed. So by comparison, 3.5% looks OK. 

“Forget it.  I want my money back.”

Sure no problem.  But you’ve only been in two years.  And this product has 10 year surrender charges that decline each year.  Right now, the surrender charge is 9%, so the insurance company will keep $9,000 and you get $91,000. But don’t worry, that’s not a “fee” either.

Conclusion

I want to make it clear that the right annuities, those with low surrender charges and the highest cap rates can have a place in a portfolio for a portion of client assets.

But unfortunately, they’re often not sold that way.  Many use fear-based selling to encourage clients to put all of their assets in these products.  So rather than using annuities as a fixed asset class in an allocation, they sell it as the only investment you’ll ever need.

In treating people this way, they’re planning for their retirement, not yours.

Securities and advisory services offered through Sagepoint, Member FINRA/SIPC, a Registered Investment Adviser.

The opinions voiced in this article are for general information only.  They are not intended to provide specific investment advice or recommendations for any individual and do not constitute and endorsement by Sagepoint.  To determine which investments may be appropriate for you, consult with your financial professional.  Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.[/fusion_text]

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