Response: The DOL ruling basically means three things to advisers and consumers in the financial services industry:
1. No misleading statements to clients
2. No more than reasonable compensation
3. Making sure the product selected is in the client's best interest
In other words... Do the right thing.
Having said all that and let's face it, rules have always meant to be bent, broken or in some cases completely disregarded and I'm sure that this is no different. However, from a consumer standpoint there are some safeguards, things you should expect when dealing with a financial professional, that should become the new standard based on what this regulatory package expects. Here is an example of my business process that I feel eliminates the risk of things going bad for both the client and myself.
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Response: I recently wrote a response to a question that someone posed to me with regards to getting a second opinion on their annuity, to which I responded that it's always a good idea to get a second opinion about anything if you feel you are having a lopsided conversation. Meaning, if you are getting all the good, but feel as though the negative aspects are being left out... you might want to take some more time before making a decision. One blog reader posted a comment that essentially said that all annuities are bad, only snakes sell them and gave his interpretation on how an indexed annuity works and the advice that he offered his family members.
"Steer clear of annuities. The insurance company caps your return, invests your money in the markets and keeps all above the guaranteed cap. Example, they guarantee 4% a year to the annuity holder on $100,000. Then, they invest the entire $100,000 in stocks of their choosing. Imagine a year like 2013 when the stock market averaged returns of about 34%. In that year, the insurance company keeps 30% and gives the annuity holder their 4%... What a great deal. It is a terrible product and only snakes sell them. If you ever want out, it takes fierce phone calls and about two to three months to get YOUR money back from them. I know because I had to help relatives get out".
At first I thought it was comical how an "armchair" expert could have things so absolutely wrong and then I became concerned. I have conversations weekly with people who are clearly stressed over either their purchase of an annuity or own one or a handful of them and learn something about them that they didn't know when I provide them with a detailed Annuity Report Card. My point in this response is that seeking advice from someone that you know who may be very smart... may not be the best choice for your source of information. These are confusing, complex investment vehicles that and there are a lot of bad ones out there as well as bad people selling them. However, making an emotional decision about what to do from someone who doesn't understand what they are speaking about might just very well take a bad situation and make it even worse.
My advice is not to seek advice or even a second opinion, just get it from a qualified source and someone who is willing to tell you not only the good, but the bad as well. Getting those good and bad details in writing.. even better.
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Response: The question to day is all about that ugly word "commission" when it comes to purchasing annuity. People who sell books and sit at pretty desks on television and even those that don't sell annuities most often throw out the blanket statement that commission on annuities is "too high". I read a lot of stuff and I've never read or hear anyone ever say what they would consider an appropriate commission level is... all we know is that they are too high.
I'm going to kill the elephant in the room and share a secret with everyone... EVERY financial transaction you make on ANY product has some type of commission or fee. I know there some smarty pants out there talking about "No Load" mutual funds etc... but no matter whether you are purchasing a mutual fund, stock, bond, REIT, annuity, car or home... you are paying a commission.
Now that we have that out of the way... let's talk about what's appropriate and what should be a red flag. With my 25 years of experience I will tell you that just like everything else, there are "consumer oriented" annuity contracts out there that actually make the client money, offer them some liquidity etc. and there are also what I would consider "broker oriented" annuity contracts that mathematically don't work and pay the broker more than they should. Here is lies the issue... THEY ALL LOOK THE SAME! Hence the blanket statements and on and on. Let me give you a bit of advice... ask the advisor how much they are making on the deal. If it's more than 6-7%... it's time to start asking questions and a lot of them. One other thing to be aware of is that everything you're told is now quickly and easily verifiable on the web. My proprietary Annuity Report Card® spells everything out for our clients in writing so they can see ALL fees, charges, back end charges, liquidity parameters etc. These are the primary items that will affect how much the insurance company is able to pay the advisor.
I'm going to be doing several features on the DOL Fiduciary Ruling and will get into this topic a bit more, until then please keep the questions coming at www.annuityhack.com or call or text your question to 561-657-3360
Response: When it comes to getting a second opinion I would suggest that it's always a good idea. What can it hurt? I would suggest a few rules of engagement when dealing with multiple advisors during this process and here are a few tips to help you wade through those waters.
1. Be up front with the advisor you are working with. You are expecting the person you are speaking with to be upfront, truthful and transparent with you... you should offer the same courtesy.
2. If you ask the advisor your speaking with if it's ok to get a second opinion and they discourage you from doing so... there might be an issue with that person.
3. If you are going to get a second opinion get it from a qualified source not your golf partner or someone who watches CNBC a lot and you think is pretty smart.
4. Get everything in writing from both sources... remember, there has to be a clear economic benefit to you to make changes with your portfolio.
5. Be deathly afraid of the advisor who's reasoning for suggesting you make a change is because of a bonus or some other enticement in the contract... this will end up costing you money.
6. Don't do the disappearing act with the first person you spent time with. Being up front with both advisors is not only common courtesy, but it will also ward off the "follow up" phone calls.
Thanks so much for the annuity question Kelli
Response: Knowing when or if you should exchange one annuity for another is an extremely important topic to understand if you own annuity contracts. Let's face it, products change over time and bigger and better things come along, however the old adage "if it ain't broke don't fix it" also applies here as well. The underlying theme here when you are faced with this decision is economic benefit, and I'm not talking about the commission being generated to the advisor to helping you with this transaction. There MUST be a clear economic advantage to the investor to even consider making an exchange of one annuity for another.
In the next couple of videos I'm going to dissect what those major economic factors look like and how you should be evaluating them, but it's safe to start by suggesting you ask the advisor who is proposing this change to you two basic questions:
1. How many companies do you represent? You certainly don't want to exchange your annuity to one that isn't the best available and if your advisor has a limited product catalogue then you are going to end up purchasing an annuity.... quite possibly not the best annuity.
2. Ask the question... What is the economic benefit to me to make this exchange? and would you be so kind as to put those items in writing for me? The Annuity Report Card that I prepare at my firm truly takes the trust factor out of the equation and allows the client to make decisions based on written facts vs. verbal promises or slick sales pitches. There must be an economic benefit to you to consider moving your money and why wouldn't you want that in black and white?
Thanks so much for the question Rolando, stay tuned for some more details on this important topic.
Response: Today's question came in from Daniel from Westin Florida. The quick response to your question Daniel is to say absolutely not. This is a classic example of an advisor selling the features of an annuity trying to entice a sale and setting an expectation of safety when one doesn't exist. I'm quite certain based on the question that the discussion of fees for these "guarantees" was not part of the conversation either. I want to be perfectly clear to state that NO variable annuity offers its owner principal protection or any sort of guaranteed return. To take that a step further, many sales presentations include a discussion about either an income rider or death benefit rider which many consumers misunderstand. Both of these riders are costly additions to your expense schedule and in short an income death benefit rider guarantees your beneficiary's that they will not inherit less than your original deposit plus a nominal rate of return. Please note that this IS NOT spendable cash by you while you are alive. An income rider is a feature that provides for a "roll up" in value and a guaranteed payout for life from that "income account" NOT your cash value. There is a huge difference here. You should also be aware that if you add these riders, there are fees involved. You should know what the total cost of your annuity is before considering the purchase. I would also be asking to see the track history of the performance on contracts that include the riders to show you the net affect of those expenses.
Thanks so much for the question Daniel.
Response: My first response to this question is that I don't have enough information to answer the question from a financial standpoint. In order to assess whether you are suitable to purchase an annuity I would have to conduct a full financial assessment. Since liquidity is one of the concerns in making this kind of investment, we want to make sure that you have enough money to afford that type of illiquidity in his portfolio.
Assuming you are financially suitable to make this kind of move, I would suggest that you have a very small window of opportunity to do so. Every annuity has a maximum issue age and once you exceed that age the product you are considering is no longer available to you. Looking at the entire spectrum of available products, once you hit age 75 the number of consumer oriented products that perform well diminishes significantly and again at age 80. Once you hit the age of 85, I'm not aware of any annuity product that I would recommend even if it were available. So here are a few things to consider before writing that check:
1. Make sure that you understand the liquidity of the annuity product you are purchasing completely.
2. Even though I don't use variable annuities in my practice, owning or purchasing one at age 83 isn't a great idea. You just don't have enough time to recover from any sort of market correction and the fees will eat you up.
3. Make sure that the annuity you are considering has some type of health care waiver. This allows for additional liquidity if you happen to need your cash while being under some sort of medical care.
4. Make sure there is no surrender charges at death. You certainly don't want your beneficiaries to pay any fees upon your death to collect their money.
Thanks so much for the questions Leon and if there is anything else I can do for you, please don't hesitate to let me know. Stay well.
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Response: Great question from Sue T. in Noblesville, IN. The very first question I'm asking any advisor that I'm meeting with to discuss annuities is "how many companies do you represent or are you contracted with?" Ask for a list to see what you will have access to. Let's face it, you can't possibly buy the most competitive product, from the best rated companies if the person you are speaking with doesn't have access to it.
Next I want to know about fees, caps and things that cost me money. Have the advisor prepare an outline of all of the contract limitations, things that will cost you money like expensive riders and go through them with you. If you are being presented with a annuity that has a rider, like an income rider or death benefit rider, ask if it's optional and why this vs. a lower cost product which will probably offer you better performance.
If the annuity has a bonus, don't jump to the conclusion that this is automatically a good thing. Ask if it's a cash bonus, if there is some sort of recapture or vesting schedule or is it paid to an "income account" accessed through exercising an income rider or annuitizing. These are critical to understand.
Last I want to learn about liquidity, how you access your money if you need it. How much can you take without incurring a fee and last but not least, what happens should you pass away while owning this contract.
I think these are some of the most critical questions you should be requesting responses to Sue and of course there are many more follow ups to them but at least this points you in the right direction.
Keep the questions coming.
Response: Thanks so much for the questions Sonja...there is plenty of dirt on the topic of annuity bonuses. It's interesting how even some of the most well read investors when you ask them why they purchased a particular annuity the first thing out of their mouth more often than not is "well I was paid a bonus". Wearing this like a badge of distinction as if they were so crafty they outwitted the insurance company and beat them like the gambler who is going to take down a Las Vegas casino. First off, there is no "getting over" on the insurance company. If you haven't notices, these are for profit companies and aren't in the business of giving money away. Having said that, I normally discourage my clients from entertaining a bonus annuity product as I do with most other annuity riders. Why?... because after the thrill of "being paid" wears off typically in the long run they end up costing YOU money. Let's take a look.
When you are paid a bonus it's either paid to you in cash, added to your deposit or if you have an income rider, it's added to your income account. The difference between the two is extreme. Funds in an "income account" or "income rider account" not only are costing you in fees which have a negative affect on the earnings of your actual cash value, but you typically either need to exercise that income rider or annuitize the contract to realize that value. I've seen cases where bonuses were used to offset surrender fees coming out of another annuity contract and the bonus was paid to the income rider account, not the cash value... this should never happen. Rule number one, don't own a rider that you aren't prepared to use at some point otherwise you are just tossing money away.
The alternative to being paid into an income rider account is when that bonus is added directly to your cash value.. a much better situation since that is real spendable money, but there are downsides here as well. Normally when you are paid a bonus is cash there is something called a "bonus recapture" schedule. It's a vesting schedule much like the surrender charge schedule on your annuity but it applies to your bonus. If you leave early, you give it back, it's that simple.
The questions that must be asked when you are being enticed with a bonus are:
Response: Let's face it... Annuity investing has always had a negative connotation. Ralph from Coral Springs wants to know why. Well Ralph in my opinion that negative cloud exists for a few reasons. Obviously the media portrays this asset class as a whole as a bad choice. Whether or not there are thousands of success stories out there, let's face it, negative news sells. It's much more interesting to read an article about the 82 year old widow who got burned than the 82 year old happy annuity investor. The other issue is that when the media portrays these products, it's done in mass. For example, high fees are normally discussed. Well, I would agree that high fees exist in the variable annuity market place... but that's one of 4 types of annuities that are available to the public. The problem is the public can't differentiate and suddenly ALL annuities have high fees and are bad investment options.
Secondly, I would agree that there are plenty of people who have purchased annuities and have had bad experiences. I would say that's true of any product a consumer could purchase. One investors experience does not make for the demise of an entire asset classification. As I said above, there are plenty of great products out there and plenty of fantastic planners and advisors using them in their practices, you just aren't going to read about them or see them on the news. Thanks so much for your question Ralph .
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.