Paul Winkler: Welcome. This is “The Investor Coaching Show.” I’m Paul Winkler, talking about money and investing because I believe the educated investor is a more confident investor and isn’t likely to get taken advantage of.
I understand that not everybody wants to understand all of these things, but recognize that if you don’t, you can be prey to people that either aren’t necessarily trying to do the right thing or may not even know themselves.
Don’t Trust a “Guarantee”
I start off with that notice because that recently happened. I use some of the things I see during the course of the week to educate because I think it’s really important that people understand what is going out there in the investing world, as well as what people are being sold and how they’re being sold things that aren’t so great for them. I think it’s important to know how to avoid becoming a statistic in this regard.
Let me walk through this situation. Someone put some money into a variable annuity. I don’t talk about those a lot, but variable annuities are annuities that have mutual funds behind them. You may not even recognize that you have one.
A lot of times the investment advisor doesn’t even like to tell you that what they’re selling you is an annuity because people have a bad taste in their mouth many times regarding these products. It’s easier to sell something to someone if they don’t even know what they’re buying.
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tual funds have sub-accounts that aren’t mutual funds but operate just like them. These sub-accounts are cloned after other funds, so you may have a popular mutual fund and it will end up inside of a variable annuity, but it’s not really the same fund.
Don’t let the allure of the word “guarantee” fool you into making a serious investment mistake.
This person heard the word “guaranteed” when they bought into this. That is the allure of these products, the word “guaranteed,” guaranteed income, guaranteed growth in the product, no worries whatsoever. You don’t even have to think about what the stock market’s going to do.
In this particular case, an income rider did exactly that. Now to understand this, I want you to just picture two buckets. One is the investment. So whatever mutual funds were chosen, subaccounts were chosen, investments were chosen, that’s going to go up and down based on whatever the market is. But you have this other bucket over here and that’s just going to keep going up regardless of market conditions. It’ll be at some guaranteed amount usually.
Troubleshooting the Fine Print
It happened to be a pretty good guarantee because the amount of money that was in that income rider was about $240,000. And it’s said to go up, up, up. Then they basically say, “Well, this is the bucket that you could take income off of in the future at some point.” You’ll be able to take an income off of $240,000 regardless of what the market does.
Now on the other side of the equation, the investment account was worth about $120,000. And you look at that and go, “Wow, that’s not nearly as much as $240,000. So if something like that happens with the investments they’re not doing as well as that income rider side. Then you start to think that it sounds like a good deal.
Just because something sounds like a good deal doesn’t mean it is—usually it means it’s not and you should run the other way.
So we were trying to figure out exactly how the product worked, and the person couldn’t take an income except for within 30 days of the anniversary date, which would be at the end of June of next year.
And I’m thinking, “Well okay, can you tell me what the income would be because the person is taking out more than will sustain the account right now.” And I can imagine if you’re going to be taking more out of it, because you’re taking money out of the $120,000 part. If you’re just taking withdrawals, that’s where you’re taking it from.
Now if you go too high, you obviously deplete the account and you’re sunk, but is there a certain amount that can be taken out where you won’t deplete the account, you won’t harm the income rider?
The answer finally came back. It took a long time to talk literally to the main home office of the insurance company. And if I’m asking questions with all my knowledge and experience, what would it be like for the general public to be trying to figure this stuff out?
What happened is the person on the other end of the line didn’t really even know the answer to some of the questions. It took a lot of additional questions to which finally the person was like, “Okay, this person on the other line knows what they’re talking about, I better go get help.” She did go and get someone else.
The Reality of Phantom Accounts
They came back and said, “Well, the annuity, the number is 6%.” And I said, “Okay, so the factor is 6%. So basically what you’re telling me is that you can get somewhere in the neighborhood about $14,000 off of that $244,000. You can get that for life.”
And that’s basically what an annuity does.You hand over the contract and say, “Here, any of this money is yours. Now if the person dies, usually the way it works is that the money’s gone. But you’re going to get an income until then. If the person lives another 200 years, they’ll be paid an income for the next 200 years, and if it’s only two years, the company is only on the hook for two years.
The number came back at about $14,000. Then I went online and got a quote from an insurance company on an immediate annuity—meaning, you hand over actual cash, not the income rider thing because that’s fake money.
You hand over actual cash and they will pay you an income for the rest of your life. They come up with an income amount, which is if you’re older, it might be 10% of the value of the portfolio, maybe even higher. That income will come every year so long as you’re fogging a mirror. But when you’re gone, the income’s gone.
I played around with the numbers and found that they could get $16,000 of income off of $120,000. Well, on the $244,000 income rider, it was only $14,000 if you’ll recall. They could get more income off of a smaller amount of money, only $120,000.
If something about an investment strategy doesn’t quite seem right, it’s probably not.
At this point, you may be confused. You should be. The reason you’re confused is because that income rider, that $244,000 was a phantom account. It was just a number. You could just make it up and just say, “Hey, I’ll pay you $6,000.” And say, “Well, okay, what’s my income rider amount?” “Oh, it’s $10.5 million.” You can say whatever number you want. That income that you’re going to get isn’t going above $6,000.
Don’t Buy Something That Gives You Nothing
Basically what happened is they used that number to help you make up your mind to buy that product from them. It gets people to sign on the dotted line because they hear the word “guaranteed.” They don’t understand what it is that’s guaranteed. They don’t understand that it’s just smoke and mirrors.
In this particular case, I said, “Let’s step back.” It became a planning discussion, but now at least we knew that the guarantee in the product was not worth the paper it was written on. It was a fictitious number being thrown out there.
The problem is if people buy these products thinking that they got something when they really don’t have anything. What happens unfortunately is not only that, but you have these tremendous expenses inside the product and the expenses on just the insurance itself, part of it was almost 2% of the value of the investments. Then you got the mutual fund costs on top of that, and then you have lousy investments on top of that. So the investment vehicles weren’t so great.
Stay away from product sales.
From the salesperson’s standpoint, it is easy to sell because, “The product’s going to go up, it’s going to go up, doesn’t matter what the market does, it’s guaranteed, it’s easy.” What they don’t tell you is that percentage is pretty stinking low for your age because the insurance company set it.
They are in charge of how much income they’re going to pay you and they will just put whatever number that will get people to buy on the other side. That’s what happens. People look at that and go, “Wow, that sounds really, really good.” Then another one bites the dust.
So this is one of the reasons I tell people we have always stayed away from product sales. Don’t do it, don’t touch it. I recommend you do the same as an investor. Stay away from product sales because it creates an incentive to come up with products that sound really good but aren’t necessarily good for you.
Unfortunately, there are people that aren’t very studious when it comes to the products that they sell. I mean, I know for years and years and years worked for a big insurance company and I saw the “lack of attention to detail,” let’s call it, to how these products worked.
The Truth About Disclosures
What drives me crazy is when they say, “Well, this is over this particular period of time. If you had chosen a different period of time, you would get different results.” They literally go to a period in history where their product would have looked good against the market, or they only look at an unverified segment of the market like the S&P 500. It sounds like a lot of companies, 500 companies, but that is just a tiny, tiny fraction of markets around the world of what you can invest in.
You’ll see the disclosures and so they have abided by the law as far as what they have to do from an investment sales standpoint. They just have to disclose information. It doesn’t have to be information that makes any sense whatsoever, but so long as it’s disclosed, they are in the clear.
Another thing you may see is, “Well, this is what this product would have done versus this area of the market over this period of time.” Then the fine print says, “Well, our product wasn’t actually around, it didn’t exist during the period of time that we’re showing you, but this is what it would’ve done had it existed.”
Really? Are you kidding me? What kind of audacity does it take for somebody to go and do that? Well, it’s the audacity that exists out there. You better understand how this stuff works or you end up being a victim to it, or your parents or grandparents will end up being victims to this kind of stuff.
That’s the reason for this show, to educate on how easy it is to be deceived and to help you understand what’s going on. To me, dealing with a person that does not sell this stuff is really key.
You can’t know all this stuff. You can’t know everything that we know. There’s no way.
Understanding some of the investment games gives you a head start on knowing what to avoid.
I think that’s really the point and helping you understand that sometimes even the biggest companies can put things out there that simply are extremely misleading.
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*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
