In order to take a complicated subject and make it understood some brokers define one product being just like another even though there is little or no correlation between the two. Those serving up rattlesnake often say it tastes just like chicken.
You have to ask a lot of the right questions if you want to get a straight answer. Unfortunately, even if you ask the right questions there are people that lie to get at your money.
Which brings me to the story of the new year and what happened to one of my clients just last week. It was about him and his wife doing business with someone they thought they could trust.
It started off by them deciding to take the money they had invested with me and moving it somewhere else. These were people who had been with me for years and yes they got caught in the 08-09 meltdown. They bailed into cash at the mid-point of the crisis because they were losing sleep and every day they awoke to more and more bad news. Yes, from their point of view the sky was falling and nothing I could say could convince them to stick it through. Thew threw in the towel and decided to never invest in equities again, even though they had made significant amounts of money they made a decision that only fixed and guaranteed were words they wanted associated with their savings.
These are retired people who live about two hours north of me in a suburb of Flint but in a town where traditional investment firms are as rare as Starbucks franchises. That alone should tell you that they live in unspoiled country. Us city folk call it the sticks. There are trees, deer and loads of open land. The financial advisers in their neck of the woods are mainly tax preparers and insurance agents; and there is a growing group of newly minted adviser's who only a few years ago were installing seats in Buick's at those factories in Flint before the auto industry collapse.
I got a call from my back office that informed me that these folks were leaving and transferring their assets somewhere else.
Normally when a client decides to leave I say to myself, 'Vaya con dios.' I figured these clients were moving to a local bank or credit union but later that day I wondered exactly where they were moving their money to. I was told by my back office the money was going to an insurance company, and when I checked the company out I found they had a history of being sued by clients and state regulators because of their product line. I knew at the very least I had to call and tell the client.
Let's call the company ArmPit Life of ArmPit, Texas and their primary product an equity-indexed bonus annuity that they specifically market to seniors.
EIA are fixed annuities and the only thing they have to do with equities is that the word 'equities' is in their name. They have been sold as they best thing since low-fat cottage cheese with no risk and huge equity returns. To understand an EIA you need a doctorate in mathematics as the creators use hedges and a variety of esoteric formulas for matching investment returns to a specific index. The insurance annuity does not really invest in the index but buys certain products to mimic an index.
To further hedge their bets the insurance company does not credit what an index actually returns to the client but uses another formula to provide a percentage of that index to the client. If, for example, the index was up 20% a client may only be credited with 30% of that 20% or 6% return in their annuity. In addition, if it wasn't mind-boggling enough, there is a cap on earnings and this number changes every year on the anniversary of the account. The company may also offer sweeteners which include a guaranteed one year fixed return and/or a onetime bonus. In order to get that bonus a client may have to hold the contract forever or annuitize the entire amount. The only fixed long term rate is a minimal guarantee of 1-2% per year that the client receives no matter what happens to the marketplace or interest rates.
If you're confused don't feel bad. Almost all agents selling this product don't understand how it works except for the fact that it pays a huge commission. Usually agents will receive 10-15% of the deposit made by the client. If someone hands over $100,000 to invest in an EIA the agent earns $15,000 for doing little more than filing out paperwork. In addition there are overrides and other commissions paid to people above the humble agent. Putting it simply the $100,000 gets carved up in fees and expenses rather quickly. Pity the poor but uniformed client who truly believes that they are getting a wonderful opportunity but in reality something more akin to a high colonic. They could be sitting, excuse me, facing a redemption period of 15-20 years.
I could have turned my back on these folks and let them do it to themselves and get a satisfaction that they got what they deserved for leaving me, but I didn't feel that way and they very least I wanted to know if my soon to be ex-clients knew what they were getting into. This, I know, is a little like calling your soon to be ex-wife who is running off with the pool boy, and asking her if she knows if Juan has a green card. Usually the answer is, What business is it of yours?, followed by an expletive and the sound of a phone being slammed.
When I called Mr. Jones wasn't home so I spoke with his wife, also a client, and explained why I was calling and asked if they knew how the product they were buying worked. There was silence at the other end of the line that told me the agent had been less than forthwith. I shared a few of the highlights with Mrs. Jones, who finally asked when Mr. Jones could get back to me and I told her. Sure enough the next morning before the sun crawled over the transom, Mr. Jones was saying to me, 'Guess I screwed up, huh?'
I will summarize our conversation because it was rather long. Basically my client was told by the insurance agent that when he invested all his savings he would get market returns, no downside risk, a 10% bonus on his money (no strings attached), a 5% fixed guaranteed rate if the markets were down and no cost to him. When I asked how the agent got paid the insurance agent said he was paid by the insurance company and not by the client. There was no mention of redemption fees, expenses, how returns were credited, what happened if the client needed money the next day, and how much he would have in his account the day after he gave his money to the agent. In fact, the information was so sketchy my client did not even know the name of the company he was moving all his money into. Anyone with any common sense would have screamed at this agent, 'Liar, liar, pants on fire.'
When we finally sorted out what to do next my client said to me, I know this guy's family, why would he do something like this?' I answered, with tongue firmly in cheek, that I didn't really know but it was a huge commission and maybe that had something to do with it.
As we were hanging up I asked Mr. Jones where he met the insurance agent. He answered, with a note of sadness, 'He gave a talk a few weeks ago at the local Lions Club. His daddy's a Lion, for crying out loud. If you can't trust a brother Lion who can you trust?'
If something sounds too good to be true, dear reader, let that be your first warning and investigate only at your peril. Remember the old adage, if you sit down at a poker game with strangers and can't figure out who's the sucker, it's probably you.
If you want additional information on anything mentioned in this blog call Paul Stanley @ 877 783 7080 or e mail at pstanley@westminsterfinancial.com
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