Do You Need An Income Intervention?
06/14/2012 9:45 am EST
A lot of promises are thrown around like pennies in the income world, but when real opportunities look like manhole covers these days, don't fall for everything you hear, writes Stan Haithcock of Stantheannuityman.com.
Most people equate the word "intervention" with trying to help a person from the continuation of a fatal habit such as drug or alcohol abuse. Sometimes it works and sometimes it doesn't. But if you truly care about the person, this process is a last hope to save them from themselves.
In the world of income planning and annuities, I feel that there needs to be an "income intervention" on a nationwide basis! The truth of the matter is that people need to understand the realities of their decisions and what is being "pitched" to them.before it's too late.
Let's face it: we all want to be told that we are attractive, or not overweight, or the most clever person out there. People want to hear what their mind is hoping to be true. So what do a lot of financial advisors do? They tell you exactly what you want to hear.even though down deep, they know it's not true.
You want it to be true, and they know you want it to be true, so they tell you what you dream the product or strategy will do. Sound familiar?
With interest rates at all-time lows, more than 10,000 baby boomers retiring every day, market volatility, political uncertainty, and so on, the income planning hucksters and dream-slingers are preying on people and feeding them the "line of dreams" just to get the sale.
In my opinion, most of these salespeople operate like they have a terminal illness and won't be on the planet for much longer. They are going to tell you whatever it takes to get the sale, with little if any thought to the impending consequences!
After recently hearing some of the most absurd conversations and outside recommendations that I have ever experienced in my financial services career, I felt compelled to share some of the scams, dreams, and advise malpractice that is happening right now. Hopefully, it will stop someone out there from making a horrible decision with their financial future.
I could write a full book on the subject, but below are a few real-life examples that I have encountered in just the last few weeks, along with my "STANalysis Intervention" thoughts on the matter.
Example No. 1: The Promise of a High Rate in a Low-Rate World
With the ten-year Treasury hovering at all-time lows, people are panicking for ways to avoid invading their principal and receive the needed lifetime income stream. A very nice couple recently told me that they were going to put all of their money into a four-year bond portfolio that supposedly will yield 5%. Huh?!
These were the same people that specifically told me that they didn't want to put their principal at risk, and it was very important to leave the majority of the money to their two kids. They also told me that they were done with market volatility. So what happened is the advisor told them what they wanted to hear.in addition to the 5% yield, there was absolutely no risk to their principal. Again, huh?!
They were sold the dream. Reality is going to be brutal when rates move, or if one or more of those companies go under.
The truth of the bond portfolio they purchased is that none of the bonds are "secured," and the majority of them are callable at a lower amount than the purchase price. The truth behind this recommendation is going to be fatal for their money and their retirement income stream.
By the way, my intervention with them failed. They bought the dream, and the truth is coming soon.
STANalysis Intervention: If the ten-year Treasury is at 1.5%, there is no magic plan out there that is going to get you the high rates you dream of. The truth is the truth.
Example No. 2: The Promise of "You Can Have It All"
Eighty percent of all annuities sold in the US are variable annuities. The pitch is that "you can have all of the market growth, with guarantees attached."
In essence, the promise is that you can have it all. That is what you want to hear, right? However, the truth does not support the dream that is being sold. When you attach a guarantee (rider) to a variable annuity contract, your investment choices are limited in order to lessen the risk for the carrier. So there goes your dream of all that market growth!
Another untold truth is that income guarantees on variable annuities are the most expensive, yet pay out the least from an actuarial standpoint when you turn on the income stream. I know this is not what people want to hear (as evidenced by the amount of variable annuities sold), but it is the truth. I get so many weekly calls on this that it's scary!
Oh, by the way, the average annual fees on variable annuities are 3%-plus. How many of you would hire a money manager and pay them 3% to manage your money? Hello!
STANalysis Intervention: Variable Annuities are the last product on which brokers and advisors can make a large commission. If your full-service advisor is suddenly recommending a variable annuity after managing your assets with traditional stock and bond investments, please add the 2+2! The truth is the truth.
Example No. 3: "Well, That's What He Told Me"
Here's a typical call I get on a daily basis: "I have an annuity that pays 7%." Or "I get all of the upside of the market or 6% guaranteed." Sounds fantastic! However, the truth will once again get in the way of the dream that was sold.
The reality is that there are no annuities that yield 7%. What that person owns is an Income Rider (attached benefit), a separate calculation that can only be used for income. (And that's OK, if the plan was "target date" income.) You can't access that 6 or 7% amount lump sum, and if you die, it is Monopoly money.
As for the pitch of "all of the market upside," the reality is that with a variable annuity, your investment choices are limited once you attach a guarantee. Thus, the market upside is limited. And the 6% "guarantee" is a separate calculation that can only be used for income.
Most people end up arguing with me, telling me I'm wrong, and then try to sell me on what they were told. I always hear, "Well, that's what he told me." My comment is always that what they were told is not true, but people often don't want to hear the truth.
STANalysis Intervention: If your "common sense radar" goes off when you are told something about a product, then go with that gut feeling. There is no perfect product out there. Everyone knows but conveniently forgets the saying: "If it sounds too good to be true.(you fill in the blank!)
Always remember that if you are using annuities for income planning, own them for what they will do (contractual guarantees), not what they might do (hypotheticals).
Advisors have a tendency to "juice the numbers" to make their recommendation look better than reality. Always have the agent run the proposal numbers at 0% return, or worst-case scenario. That is how you should plan for lifetime income.
My recommendations lose to the dream-slinger advisors every day because I only focus on the truth of the contractual guarantees, and worst-case scenario projections. The truth! Yes, it might not be what you want to hear, but the truth should be the reality of your income plan.
A reporter recently called me the National "Annuity Consumer Advocate" in the same vein as Ralph Nader and Clark Howard are for other products and services. My goal as Stan The Annuity Man is to be that person, and I hope to continually educate the public on the complex and sometimes ugly world of annuities and become the go-to resource for "all things annuity."
I recently published The Annuity Stanifesto, fully explaining in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. You can get a free copy of The Annuity Stanifesto by going to my Web site and downloading your copy.