It’s happened again. A client of ours was duped a while ago into buying an investment that has been costing him thousands of dollars in both outrageous fees and investment returns.
Unfortunately he’s not the only client. We have many that are in a similar position. Most don’t even know what’s happening until we educate them. The product that we’re warning people about is annuities.
The slick annuity salesmen scare the death out of individuals as part of their sales pitch. During volatile times they talk about the stock market crashing and the client losing everything they have. Then they will say “A guaranteed 6% return for life” or something like that to help solve for the fear. Some salesman say that these products protect investors from lawsuits or seizures of their assets. They’ll say anything just to close the sale.
It’s such a sketchy investment that FINRA (Financial Industry Regulatory Authority) wrote an article called “Variable Annuities: Beyond the Hard to Sell” which warns investors of these products.
Now don’t get us wrong, not all annuities are horrible. There are some types that are okay, not great, but okay. Other types are built and sold to benefit only the insurance company that sells them, not the client.
An example that recently occurred with one of our clients will help put it into perspective.
On March 10, 2010 a client was sold on an annuity product that they put $218,876 into. The goal of that annuity was growth. Five plus years later on December 31,, 2015 the annuity was worth $306,212. Our client was pretty happy when we first talked to him about it. He thought it had “done really well.”
Our response to him was, “let’s look at the numbers.”
In the past 5.83 years he had made 39% in “growth” annuity for profits of $87,336. The minimum fee was 2% for this product. It was probably higher than 2%, as most annuities are, but we’ll put it on the low end so 2%. (Which is far more than most Investment Advisors including us).
During that same time frame the stock market (measured by the S&P 500) was up 101%. The gain, had the client invested directly into the S&P 500, would have been $221,279.
To pour even more salt in the annuity wound, had the individual invested directly into Treasury Bonds (which is not a growth investment) they would have made 61% or $133,615.
As you break down these numbers the question that should be asked is, “Why in the world would you pay double the fees for a significantly less return? It’s like rewarding someone for bad behavior.”
The decision was easy for him. He told us he wanted out of the annuity and wanted to invest his money with us. We agreed that this was the right decision for him and his personal goals (note that sometimes it is not the best decision) so we continued our research into what it would take to get out of the contract and found one more thing.
You must understand that annuity companies have a hard time putting the client first. The fees, restrictions, lack of return, say as much. What we found last is a classic example of this.
In order for this client to get out of his annuity contract and to invest it there are more fees attached. In this particular situation it was a . . .
Contingent Deferred Sales Charge (CDSC): This is a fee that is charged when a client cancel’s the contract within a certain time frame. In this particular situation if our client had cancelled the contract after one year the fee is 8%. After two years 7%, three years 6%, four years, 5% and so on until the fee is gone after eight years.
So in order for our client to get out of his contract he would have to pay an $8,400 fee.
So this client has to pay an enormous fee to get out of product that has underperformed (remember this was growth) and has charged double the fees as most advisors.
How is this type of product good for the individual investor? How does this help an investor growth their wealth?
In the world of annuities remember, if it sounds too good to be true, it likely is- buyer beware.
If you have an annuity that you need help understanding, please contact us. We are more than happy to assess the situation and discuss what is best for you and your situation. Simply complete the form below and we will contact you.
Information presented is gathered from sources to be reliable. However, Iron Gate Global Advisors does not attest to its accuracy and is not responsible for errors and /or omissions. Past performance does not guarantee future results
The ETFs used in this example we’re not directly invested into, they are used as examples.
This article was written for educational purposes and does not constitute a recommendation to take certain action. An investor should always consult with a financial professional before making any changes to their financial investments.