Objective information about financial planning, investments, and retirement plans

Annuity Sellers Love Stock Market Turmoil

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We experienced our first major stock market correction in several years earlier this week. As I write this the market is recovering but who knows where things will go.

Just like clockwork if we see a prolonged period of volatility you can count on a new wave of ads touting various types of annuity products as the answer for investors worried about the stock market. Annuity sellers love stock market turmoil. Those of you who follow my blog know that I have a special level of contempt for those who sell financial products by invoking fear.

Stan Haithcock wrote Annuity sharks smell blood with market volatility recently at Market Watch. This was one of those articles that after reading it led me to wish I’d written it.  Stan’s opening paragraph provides a great overview.

“Any time the stock market has a bad week or experiences extreme volatility, the annuity sharks start smelling blood in the investment waters and will be on the attack to lock your money into their “perfect product.” Current indexed- and variable-annuity sales pitches can sound enticing and almost too good to be true, so it’s important to keep your head and understand the contractual realities and proper uses for annuities in a portfolio.” 

Mike Ditka and Indexed Annuities

My dislike of fear-mongering annuity ads started a few years ago when the local news radio station was full of ads touting indexed annuities as the cure for the risky stock market. The group enlisted former Bears coach Mike Ditka as their pitchman. Ditka can probably sell anything to the win-starved fans of the Chicago Bears.

I personally think using any celebrity spokesperson to sell financial products is reprehensible and takes something as serious as someone’s financial well-being and equates it to the decision of which snack food to buy.

Indexed Annuities 

Though I’ve tried to keep an open mind about these products, I’ve reviewed many contracts over the years and have never found one that seemed to have much redeeming value for the contract holder. By this I mean I’m not sure what the product does for them that a properly diversified investment strategy with a well-conceived retirement income plan couldn’t do just as well or better for a whole lot less money.

Indexed annuities, sometimes called equity-indexed annuities, offer limited upside participation in a stock market index such as the S&P 500. The reason they are sold as an alternative to the risky stock market is they offer either a guaranteed minimum return each year or a limit on how much of a loss the contract holder can incur each year. The sales pitches will vary and they are often also touted as an alternative to CDs.

A few things to be leery of if you are being sold one of these products:

  • Long surrender periods. I’ve seen policies where the surrender charges last for 10 years or more.
  • High fees and commissions. The fees internal to the contract serve to provide nice compensation to those selling them. Why do you think agents and registered reps are so eager to sell you an indexed annuity?
  • Hard to understand formulas to determine your return. The premise is typically that you will participate in a portion of any gains on an underlying market benchmark such as the S&P 500 and that there is some minimum amount of return that you will make no matter how the index performs.  Make sure you understand the underlying formulas that determine your return and any factors that might cause a change in the formula.  Check out FINRA’s Investor Alert on Indexed Annuities as well.
  • Limited upside participation in the underlying index.

Additionally the sales pitches can be confusing. Make sure you understand what you would be buying, all of the underlying expenses and most important why this is the BEST solution for you.

Variable annuities and riders 

Variable annuities generally have underlying investment choices called sub-accounts that function like mutual funds. They also have internal fees called mortality and expense charges that cover the insurance aspect of the contract. These fees can vary all over the board. Many contracts also carry surrender charges for a number of years from the issue date as well.

While the value of the VA will vary based upon the investment results, several riders or add-ons can create certain product guarantees. These riders come at a cost and that cost will impact how long it takes for the contract holder to come out ahead.

Two popular living benefit riders are guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum income benefits (GMIB).

A GMWB rider guarantees the return of the premium paid into the contract, regardless of the performance of the underlying investments via a series of periodic withdrawals.

A GMIB rider guarantees the right to annuitize the contract with a specified minimum level of income regardless of the underlying investment performance.

Both types of riders entail added costs and require varying time frames to be eligible for exercise and/or to recover the cost of the rider.

A variable annuity with or without one of these riders may be the right choice for you. You are far better off shopping around for the best product versus allowing yourself to be sold via a slick sales pitch.

The Bottom Line 

Renewed market turmoil means a new wave of annuity sales pitches reminding prospects how risky stocks can be. Financial planning should always trump the sale of any financial product so investors who are worried about the volatility in the stock market will generally be better served by having an overall financial plan in place from which the appropriate products for implementation will flow.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

Should You Buy Financial Services From Tommy Lee Jones?

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Français : Tommy Lee Jones au festival de Cannes.

I recently noticed the return of Tommy Lee Jones as the TV pitchman for Ameriprise Financial.  Tommy Lee Jones is one of my favorite actors, loved him in the Men in Black movies as well as other such as the Fugitive and No Country for Old Men.

Jones comes across as credible and trustworthy.  His closing line “Together for your future” is masterful and powerful.  As I’ve written here and elsewhere in the past, I’m not a fan of celebrity pitchmen for financial services and financial products.  Case in point was a post about Mike Ditka hawking equity index annuity products.

At the end of the day advertising is about building awareness.  I’m assuming and hoping that nobody reading this would actually contact Ameriprise or any other company and say “… sign me up…” based upon a celebrity endorsement.  Rather this might prompt you to check out the company or product being advertised. Here are some basic questions to ask both yourself and a perspective advisor for starters:

Ask yourself this before Engaging a Financial Advisor

  • What issues are really bothering me?
    • I’m worried about retirement.
    • I want help managing my investments.
    • I need answers to a specific financial question(s).
    • I need a comprehensive review of my financial situation including a financial plan with actionable suggestions.
    • Having an understanding of the areas in which you are seeking help is a key first step in selecting the right financial advisor.

Questions to Ask a Perspective Financial Advisor/Firm

  • What makes you qualified to provide me with advice?
  • Do you normally work with clients whose situation is similar to mine?
  • How will you determine the right course of action for me?
  • What areas of financial planning/financial advice are your specialties?
  • Will I be dealing with you or some lower level employee?

Questions Regarding an Advisor’s Compensation and Potential Conflicts of Interest

  • How will you be compensated if we work together?  Are you willing to disclose all forms of compensation that you will receive?
  • Are there any conflicts of interest such as restrictions from your firm or the manner in which you are compensated that would impact the financial products that you might recommend to me?
  • Are you compensated via commissions; fees (Fee-Only); or a combination of the two (Fee-Based)?

Choosing the right financial advisor for you and your family is critical.  You want to do your best to find someone who is competent, whose compensation method is made clear and is transparent, and who you feel that you can trust.  Don’t be afraid to ask direct pointed questions and don’t settle for half-answers.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Photo credit:  Wikipedia

Indexed Annuities – Da Coach Likes Them Should You?

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Mike Ditka recently began doing radio commercials for an insurance group touting their Indexed Annuity product. He ends one of the commercials with his characteristic “… tell them Mike Ditka sent you…” Given that Da Coach was a member of the last two Chicago Bears championship teams since the days of leather beater helmets (1963 as a player and 1985 as coach) he is perhaps the preeminent pitchman here in Chicago.

Alumnus Mike Ditka is a Hall of Fame tight end...

Should you pick up the phone and say that Coach sent you?  Let’s examine a few issues.

What is an Indexed Annuity?

Per the FINRA website, EIAs (Equity Indexed Annuities) are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

Reuters recently ran a piece on these products. A few points raised in the article:

— Hidden fees and commissions. Commissions typically run between 5 percent and 10 percent of the contract amount, but can sometimes be more. These and other expenses are taken out of returns, so it’s hard for buyers to determine exactly how much they’re paying.  

— Complex formulas and changing terms. The formulas used to determine how much annuity owners earn are so complex that even sales people have a hard time understanding them, and they can change during the life of the contract.

— Limited access to funds. Buyers who try to cash out early will incur a surrender charge that typically starts at 10 percent and decreases gradually each year until it stops after a decade or more.

–Limited upside. An annuity’s “participation rate” specifies how much of the increase in the index is counted for index-linked interest. For example, if the change in the index is 8 percent, an annuity with a 70 percent participation rate could earn 5.6 percent. However, many annuities place upside caps on the index-linked interest, which limits returns in strong bull markets. If the market rose 15 percent, for example, an annuity with a cap rate of 6 percent would only be credited with that amount.

Mike Ditka is not an inexpensive spokesperson.

Nor do I believe that ads on our local CBS radio affiliate are cheap. This goes to reinforce the point about high expenses and fees from the Reuters article. In fact I have been told that annuities are among the highest revenue generators for financial sales people, to me this creates a potential conflict of interest.

Additionally, any annuity product is only as good as the insurance company behind it. Before buying into any annuity be sure to understand who the insurer is and get information about their financial health.

An Equity Indexed Annuity might or might not be a good solution for your situation. In fact many of the proponents of these products point out that their performance has by and large been as expected over the past several years.

Rather than focus on any particular financial product or investment vehicle, start with a financial plan. Determine your financial goals, your risk tolerance, and your time horizon to achieve your goals. Look at your current resources and compare these to what you might need to accumulate to achieve your goals. Only then are your ready to look at what financial or investment products might be appropriate for you.

Lastly I would encourage you to ignore celebrity endorsements for financial products or services. While Mike Ditka might be an exception, there are many stories of athletes and celebrities making really poor financial decisions and being ripped off by financial sales people and advisors. If you buy the wrong brand of snack food based on their endorsement, not much downside. The same can’t be said if you pick the wrong financial advisor.

Please feel free to contact me with questions on Index Annuities or any aspect of financial planning.

Check out an online service like Personal Capital  to manage all of your accounts all in one place.  Please check out our Resources page for more tools and services that you might find useful.

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