Liar’s Poker

Liar’s poker is betting game with two or more players using the serial numbers off paper currency to make up a poker hand. Bluffing is in integral part of the game hence the name. But in real life when it comes down between you, your money and a salesperson the odds favor the one who knows the rules best.

A long time ago an insurance agent I knew bragged to me how he sold a multi-million dollar policy and made a five figure commission simply by changing the interest rate assumption on the policy dividend. When I pointed out that it was illegal he smiled and said that he covered his tracks by highlighting the disclaimer which said rates were not guaranteed. At the time the highest rate most insurance companies paid on the excess premium or dividend was five percent. The agent simply dialed up the projection and won the business on a lie. Not only was this illegal he could have lost his license.

Today that would be difficult but not impossible since insurance companies are responsible for their illustrations and make their computer programs more difficult to change. That doesn’t mean that things don’t happen. If numbers seem out of line (or extremely cheap) on an illustration have someone you trust look at them or get a second opinion.

The fixed annuity that sells under a variety of names but the most common is an Indexed Annuity.  Because of its name people think it has something to do with the stock market. The policy has about as much to do with investing in actual stocks as I have of running a marathon but agents routinely sell the policy as investing in the market. The cool part of the annuity, salespeople say, is that when the market’s hot  the annuity is invested in the market and when it’s not it’s in cash and the policyholder doesn’t lose a penny.

The fact is that the annuity simply invests using a complicated equation that provides the policyholder NOT with the actual market gains but a portion of those gains. And, when the market is flat the returns are not there and the policyholder is not exposed to any risk. The actual long-term fixed rates for the best performing companies are around five percent and certainly a long-way from actually representing actual market returns.

The old adage is still true that there is no free lunch.

The neighborhood mutual fund sales person isn’t above a little sleight of mouth. Assume they are selling a rather poor performing mutual fund. They say the fund has had an average annual rate of return of 10% a year for the last five years. The key words are average annual and not the annual rate of return. In reality the fund in fact had one banner year, lost its portfolio manager and had nine consecutive losing years culminating with an average annual rate of return of ten percent. It’s been on a downward spiral ever since. Ask to see a Morningstar report or order one on-line if the salesperson happens to be an in-law.

Your neighborhood bank isn’t a stranger to leading you down a path to locking in your money in a long-term certificate or an annuity. They know that the longer you keep your money with them the longer they have to make money using your money or make the huge commissions on the long-term annuity. It’s no coincident that most bankers recommend only certificates of deposit or an annuity. If you have questions make sure you have someone on your side to assist you. A good person is your CPA or tax professional.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.