Objective information about retirement, financial planning and investments


3 Financial Products to Consider Avoiding


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Before buying ANY financial product make sure that this product is right for you in terms of your unique, personal financial situation.  Financial products are tools and just like your projects around the house you should use the right tool for the job, not the tool that the financial rep wants to sell to you.

Here are three financial products that you should consider avoiding.

Equity-Indexed Annuities 

Equity-Indexed Annuities are an insurance-based product where the returns are tied to some portion of the performance of an underlying market index such as the S&P 500.  They are also called fixed-index insurance products and indexed annuities. Your gains are limited to a portion of what the index gains and there is generally some sort of minimum return to limit (or eliminate) your risk of loss.  As you can imagine these were pitched heavily to Baby Boomers and retirees after the last market downturn and are still being sold based upon fear today.

Two problems here are generally high internal expenses and surrender charges that keep you locked in the product for years. Worse yet, these internal expenses can be hard to isolate. If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including the level of index participation, expenses, surrender charges, and the health of the underlying insurance company. Check out FINRA’s Investor Alert regarding Equity-Indexed Annuities for more cautionary information.

Proprietary Mutual Funds

It is not uncommon for registered reps and brokers to suggest mutual funds from the family run by their employer. In many cases they are incentivized or even required to do so. While some of these funds are perfectly fine, all too often in my experience they are not.  Whether via high fees and/or low performance these are often investments to be avoided.

A lawsuit against Ameriprise Financial brought by a group of participants in the company’s retirement plan alleged the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and that these funds then paid fees back to Ameriprise and some of its subsidiaries as revenue sharing. The suit was ultimately settled.

JP Morgan also settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

Load Mutual Funds

It is important that you understand the ABCs of mutual fund share classes.  In the commissioned/fee-based world reps often sell mutual funds that offer compensation to them and to their broker-dealers.  A shares charge an up-front commission plus a trailing fee (often a 12b-1) of somewhere in the neighborhood of 0.25% or more.

B shares charge no up-front commissions, but carry an additional back-end load as part of the ongoing expense ratio.  This can amount to an addition 0.75% or more added to the fund’s annual expenses.  In addition these shares also contain a surrender charge that typically starts at 5% if your sell the fund before the end of the surrender period.  B shares have been largely phased out by most fund providers.

C shares typically have a permanent 1% level load added to the fund’s expense ratio and carry a one year surrender period.

These sales loads ultimately reduce the amount of your investment and are an expensive form of advice. Nobody expects financial advisors or any other professional to provide financial advice for free. Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go.

The DOL fiduciary rules

The fiduciary rules introduced by the DOL (Department of Labor) in April of 2016 impose a far greater level  of disclosure on financial advisors. The rules require financial advisors to act as fiduciaries when providing advice to clients on their retirement accounts such as IRAs.

The fiduciary rules require advisors to have their client sign a disclosure document for many financial products with sales charges and trailing commissions if used in a retirement account. Load mutual funds and proprietary mutual funds will most likely require a BICE (Best Interest Contract Exemption) disclosure. Additionally Equity-Indexed Annuities were not exempted from these disclosures in the final draft of the rules as they had been in earlier drafts.

It will remain to be seen how the fiduciary rules will impact these three products, both within retirement accounts and overall. As an example, broker Edward Jones recently announced that mutual funds and ETFs will no longer be offered to clients in retirement accounts where commissions are charged.

Before making any financial or investment decision review your specific situation. Consult a fee-only financial advisor if you feel that you need financial advice.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

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  1. Not sure if this qualifies as a financial product but I can’t stand free checking accounts with unrealistic guidelines. The last one offer I received was. . “If you use your debit card 10 times a month, you get free checking.” I told the person that I didn’t want to have to keep track or worry about making 10 purchases to qualify. I always joke with my husband that I am going to go to the bank with hula hoops and tell the people there that I will sign up for their acct. if they jump through my hula hoops 10 times. This was a checking acct that was suppose to be “grandfathered” because my bank changed over for the thousandth time.

  2. thanks for the great post.

    There is no free advice in the world. I agree that folks are better off by going for an fee-only advisor instead of getting one from the their banks and FIs. They almost always sell their own products. I can understand why you recommend avoiding Load MFs. I will say it depends on the fund’s performance and investment horizon.

    Other than the investment products you mentioned above, I would say that folks should avoid credit card loans. It gets you big time once you go beyond the introductory period. Woops..didnt i say that there is no free advise in this world? what am I doing telling people what (not) to do on your blog..:-)

  3. Good post as always Roger. I would agree with you that this time of year is prime time for those who’re in sales of financial products. Unfortunately there are too many out there that will sell things that are rife with fees and not always the best. Couple that with a less than well informed client base and it can be a bad combo.

    • Roger Wohlner says

      Thanks John. The investing public is not always aware of the fees (and often poor returns) associated with these and other financial products. They are also unaware of the way in which some financial types are compensated and how that may skew the products they are offered.

  4. Admit I am a BIT biased…however there are some very good Indexed Annuities on the market, that are transparent, who’s fees are in line w other products and, for the risk adverse and folks seeking guaranteed lifetime income-they’re hard to beat. I’d suggest a reading of a study done not too long ago from Wharton.
    PS: Some Credit Unions are offering very nice rates for Savings and Checking Acts.

  5. Great post! You always hit everything right on the head! I especially hate the annuities, while they can serve a purpose for a very small group, for most people they are a bad choice. Yet what really gets me mad is what you said – they are sold based on fear. Never buy based on fear, and shame on the professionals trying to panic their clients!

    • Roger Wohlner says

      Andrea thanks for the comment and the compliment, I fear you are giving me far too much credit though. Annuities are not a bad product in and of themselves, but you are correct they are too often sold via fear rather than with a real financial benefit to the buyer. The Equity-Index Annuities cited in this post are a prime example.

  6. Roger,

    Good article, with one exception. Variable annuities are among the leading products in consumer complaints and arbitration claims. The inverse pricing used by most variable annuities is particularly onerous. The VA issuer charges an annual fee based on the accumulated value of the VA, while legally, under the death benefit clause, they are generally only liable for the VA owner’s actual investment in the VA, This often produces a substantial windfall for the VA issuer at the VA owner’s expense. Toss in the fact that VA owners are limited to whatever investment options the VA issuer decides to offer and that such options usually consist of expensive mutual funds with poor performance records and it is no surprise that the VAs are one of the primary grounds for investor complaints.

    This is one of the reasons that most investment advisors, who are held to the higher standards of a fiduciary, won’t touch annuities, either VAs or EIAs.

    • Roger Wohlner says

      Jim thanks for your comment. As far as the products included or excluded from this post, I had meant to discuss several additional financial products but after writing what you saw here I felt the article was long enough. Annuities (VAs and others in addition to the equity-index variety) will certainly be covered in a “sequel” post as I feel I could easily write one or perhaps two covering additional products. The intent was also not to rank them, and even in that case I suspect different advisors and others would have their own very valid lists. I’m not a fan of most Variable Annuities and generally only use them when a client has one already and we can do a 1035 exchange into a better (aka lower cost, less restrictive) alternative to avoid massive surrender charges and/or a tax hit.

  7. Ornella@Moneylicious says

    I am amazed how professional advisors would sell any annuity without considering the expenses and surrender charges. They are are not short vehicles.

  8. I like the title and the content. I can’t believe anyone buys load mutual funds any more!

    • Roger Wohlner says

      Thanks Barb. The brokerage firms and registered reps affiliated with broker-dealers still have millions of clients. In addition to load funds of various types they also sell expensive wrap programs and high-fee annuities. A lot of investors are paying much more than needed for advice that may or may not be in their best interests.

      • To me, this is what overwhelms the average person. People do not have time to educate themselves and they don’t trust people for all of the reasons that people are stating above. It’s sad and scary. It makes people jaded and angry. Myself included.

        • Roger Wohlner says

          Karen thanks for your comment. I can understand the anger and fear that many folks feel. The two best strategies are for folks to educate themselves to the extent they can and to understand how a particular financial adivsor does business. Is there incentive to sell you financial products or are they true advisors who are compensated for the advice and service they offer?

  9. Ray Buckner says

    Indexed annuities have not been called “equity-indexed annuities” by those in the insurance industry since the late 1990’s. The insurance industry has been careful to enforce a standard of referring to these products as merely “indexed annuities” or “fixed indexed annuities,” as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments.

    Also, indexed annuities have no explicit charges or fees. Not all annuities have “fees” the way that deferred variable annuities do. Income annuities as well as fixed and indexed annuities specfically have no explicit fees. The “charge” that the client pays on a fixed or indexed annuity is merely time; via a surrender charge. The surrender charge is a promise by the consumer not to withdraw 100% of their monies prior to the end of the surrender charge period.

    Great advice that the consumer should understand all of the details when considering these products!

    • Roger Wohlner says

      Ray thanks for your comment and for clarifying the terminology. I had considered adding some of the “aliases” of this product. While I agree that the fees are not explicit, there are none the less fees buried here. In fact this is part of the issue I have with these products.

      My biggest issue is with some of the sales pitches I’ve heard for these products including the radio campaign here locally in Chicago by the group that had Mike Ditka pitching them. Selling this or any product based on the use of fear is reprehensible in my opinion. I’m for planning first, products second.

  10. Ray Buckner says

    Right on, Roger! I’m with you; planning first, products second.

  11. Roger you always bring the heat! Maybe we will progress to a fiduciary duty for all people holding themselves out as financial advisors (you know, like every other profession – CPA, Lawyer, etc). Salesman can try selling all the products they want just so long as the public understands that heading into the meeting.

    When I go to a car dealer, I expect the dealer to try to sell me something. When I go to someone holding himself out as a financial planner, financial advisor, wealth manager or whatever other designations are used, I expect him to have my best interest at heart. But anyone who knows anything about the industry knows that brokers are anything but objective in their advice. Here’s to hoping for a brighter future!


    • Roger Wohlner says

      Thanks for your comment Oliver. I agree with you in the hope that we do at some point have a fiduciary standard for all who call themselves financial advisors that is meaningful, clear and understandable, and really provides some protections for the investing public. Sadly I have no faith that we will see this anytime soon, let’s hope that I’m wrong. In any case consumers need to ask lots of questions and try to understand what they are buying and the motivation of the person trying to sell them a particular financial product.

      • Agreed on all fronts! Thanks for taking the time to check out my new blog and comment on it. It means a lot!

        How is your 401(k) review service going? Have you been able to break through some of the pricing push back that you had blogged about previously?

        It seems that the people who need the financial planning services the most either fall for the trap of the broker/salesman or can’t/won’t pay the fees of the fiduciary financial planner. America needs more objective financial advice, but someone has to compensate the professional for the service…


        • Roger Wohlner says

          Oliver thanks for asking. We decided that the service in the version that I had written about was not going to work for us as a business. I do plan to relaunch something in this space, quite likely something online perhaps in conjunction with this site. I’ll let you know as we progress.

  12. david Umlauf says

    Thanks Roger for reiterating those things of which we all need constant reminder. An equity-indexed annuity is nothing more than a variable annuity with a different title sheet. The fees are too high, the performance is too low and the guarantees too weak. Loaded funds, if they’re even still around, simply charge more for exactly the same service that is available for less. And, finally, someone is always trying to find a way to put lipstick on the pig.

    As the economic recovery seems to be getting a little bit of footing and folks might be feeling a bit better about investing, it’s really valuable to warn them, yet again about the pitfalls. THANK YOU!

    • Roger Wohlner says

      David thanks for your comment. Putting “lipstick on the pig” seems to be something too many in the financial services industry do all too well. Sadly these folks prey on investors who may lack the knowledge and sophistication to realize that these products are over-priced and are likely to put more money in the salesperson’s pockets than in theirs.

  13. I did not see any replies in defense of proprietary funds.

    My brokerage has moved all my holdings into their proprietary funds over the years.

    What is the best way to get out of the proprietary funds and minimize the cost of doing so? I would have to discontinue the account management service at the brokerage. There seems to be no reason to continue to use that service at this point.

    Two of the accounts are a Roth and Traditional IRA. The third account is non-retirement holdings.

    Per the SEC website I can move the IRA accounts around to new IRA holdings if I use the proper form to avoid a distribution tax liability. If I switch brokerages that can be done on the right form as well. How can I be sure the right form is used at either or both the existing brokerage or the new brokerage so there is no risk of error in moving the holdings or proceeds from one IRA account to another IRA account. What is the timeline for avoiding distribution taxes. I don’t want to appear to be taking a distribution just for moving holdings or switching brokerages on my IRA accounts and get penalized if the existing brokerage does not process requests timely.

    As for the non-retirement account, I suppose I would have to read the prospectus for each holding and manually calculate the cost of selling plus wait for tax season to find out what gains I would have to pay taxes on. I wait for that every year anyway.

    Can you point me to a good independent resource to get these questions answered?

    • Roger Wohlner says

      Thank you for your comment. A few general thoughts (not knowing the specifics of your situation):

      If you are working with a particular individual at the brokerage firm you might ask him/her why the move to these funds.

      You likely would have to discontinue their account management service. As far as getting out of these funds you will want to check as to whether there are any back-end surrender charges involved.

      I see no reason why you wouldn’t be able to move these accounts. It is likely that some or all of the holdings would need to be liquidated be fore the transfer. With the taxable holdings I would think that the periodic reports that you receive from the broker would contain the cost basis, if not you should certainly ask.

      Overall you are correct in that care needs to be taken to be sure that you are doing a true rollover on the IRAs in order to avoid triggering an unwanted taxable event.

    • Mr. Kroepel – I noticed that you referenced “account management services.” If they were actually managing any or all of your accounts, there could be a chance that they owed you a fiduciary duty, which basically means that they were legally required to act solely in your “best interests,” to always put your interests ahead of their own. Given the fact that proprietary mutual funds usually have high fees and poor relative performance, it could be argues that they breached their fiduciary duties to you. You might want to discuss this issue with them, especially if they insist on expenses for letting you out of said proprietary funds.

      • Roger Wohlner says

        Jim good points thanks for your comment.

        • Thank you both for the feedback. I agree with your comments. I need to make appropriate decisions for my own best interest regardless of their business practices that do not appear to me to be a best practice from a client return on investment standpoint. Even if there were fiduciary responsibility, it would take years and lots of an investor’s own money to sort that all out. Then you lose twice as a consumer if you live that long. Their own employees apparently sued and won over issues with forced proprietary fund options. Maybe their clients will sue them next via class action. As for me, I need to take some positive action on my own behalf as an informed consumer.

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