Financial Planners & the Death of the “Fiduciary Rule”

This topic really fires me up! Here is a little humorous video to lighten the mood. Warning its going to be 20 minutes so better put the sign on your desk saying you are “away at the toilet” or “away at lunch.”

I’m not a fan of Suze Orman/Dave Ramsey because of their scarcity/fugal money saving ideas but for some people who can’t seem to save two pennies to save their life, I guess it is better than nothing. 

Suze’s WTF face @4:41 when the caller says their financial planner recommended buying an annuity. (that would net a 5% commission!)

@4:00 – Financial advisors make commissions and often put you in investments that are best for them.

Obama tried to do a good thing and pass a law where all financial professionals (like brokers and insurance agents) had to adhere to the “fiduciary” standards—meaning they’d have to work in your best interest if they were advising you on your retirement investments. But this died recently and there is no more fiduciary rule – https://www.wsj.com/articles/fiduciary-rule-dealt-blow-by-circuit-court-ruling-1521164915

Federal Department of Licencing discussion on conflicts of interest or kickbacks to the tune of $17 billion – https://www.dol.gov/newsroom/releases/ebsa/ebsa20160406-0

I don’t recommend any financial planner because I don’t take financial advice who is still working for a paycheck and not out of the rat race (lives in their parent’s basement) but if you must go with one of my friends or a flat-fee one – http://www.fpany.org/

I have heard of these guys/gals do their sales pitch and use fear-based words like “diversity”, “security” and “risk” where the 25-year-old kid is trying to sell random investments to me. And don’t get me started when I tried to tell them about the being your own bank concept. #FacePalm They just tried to sell a higher return (6% whoop-ti-doo) with no liquidity. Totally not what I was going for. Not saying these guys are bad people, they just don’t know and products of the Wall Street institutions.

“It’s like a lawyer who only sets you up with only a will (and not a living trust) because they know you will come to them for probate which will cost on average 10-30k for most people. Talk about BS!”

Note: When I call out financial planners I am also calling out brokers and insurance salespeople. Repeat never listen to a broker!

Share this with your co-workers & friends/family that still believe in the Easter Bunny (happy pre-Easter!) and have a false sense of security in what this financial planner says.

Who took all my money?!? We are living in the best time to be alive with all this information at our fingertips.

Why do people still choose to follow the advice from financial planners working for a commission or so-called low-cost index funds that have about a million middlemen taking the majority of your returns? Who knows, probably why 10% of people in this test are still using the “pull out method” as their form of birth control?

A little off topic but just making sure you are still awake there because financial education is very important.

Check out this podcast with a CFP telling us of the insider secrets in the industry. Link

Speaking of less know tricks… Last year I learned this cool financial hack utilized by the smart money. By being your own bank and using the “Infinite Banking Concept” you can create a dividend-paying whole life insurance. Its called life insurance but its just a tax code loophole to make a tax free yield in an account that is sheltered from lawsuits and creditors. I can assure you this is another thing you financial advisor or life insurance sales guys just does not get… likely because they are still working for a paycheck and it actually decreases their commissions.

Go to SimplePassiveCashflow.com/banking for more info.

And for you high net-worth professions still dabbling in paper assets you won’t want to miss this other trick that I will reveal on there too.

Financial advisers and portfolio managers get paid no matter what.

They make money by taking a percentage of your portfolio called an asset management fee. They have skin in the game.

Here’s how it works when things are good and the tide is floating all boats:

  • Your manager creates your portfolio but doesn’t really out preform the index funds
  • You have a gain and your manager takes 1% of that sum.
But in a bear market this is how it works:
  • Your manager cannot save you from a market downturn because they don’t put you in hard assets (cause they can’t get paid off of it)
  • You lose 20% of your nest eff and yet your manager takes 1% of the sum.
  • They still invite your to the customer appreciation party 😉

In bad times these managers rarely take any blame. Conventional conversation says nobody could see a downturn and we were dollar-cost averaging anyway.

If the market is good, they can take full credit for their supposed management skills.

They try to make things confusing with their complex trading systems which no one can explain in order to glorify their position and allow you to just let them drive.

No one really gets rich with Wall Street investing other than the insiders. Not retail, mainstream investors. As real estate investors, we do not buy retail (turnkey is sort of retail) but syndications and private placements are not retail.

I only invest in things that make sense. Where the income has to exceed the expenses. And where there is a forced appreciation (not market appreciation) where you have control over your destiny.

In the end, you want to buy direct as possible. Buying REITS is the same thing as buying mutual funds with a bunch of middlemen. Crowdfunding sites remove a few layers but as a syndication working with a Crowdfunding site is very expensive way of acquiring capital. Sometimes I wonder who are the people using this high cost of private equity… Perhaps they are “desperate syndicators?”

Do you believe in the Easter Bunny?

Annuities are products of insurance companies peddled by their agents. And built upon a pyramid scheme with an older guy (which white hair) employing a bunch of young guys to find warms leads to a fancy office.

Annuities pay extremely high commissions, often 7% or higher. On a sale of a $200,000 annuity, an insurance salesperson can earn $14,000.

When you have to pay Peyton Manning and Brad Paisley to advertize your product.. I’m out.

The drawbacks of an annuity (especially the opportunity costs of buying your first turnkey rental) are often ignored by ignorant salespeople.  An annuity is one of the worst investments you can make!

Insurance salespeople use scare tactics to sell annuities using terms like 1) capital preservation, 2) diversification, 3) risk.

They claim, with an annuity, you’ll never run out of money. The one so-called advantage every insurance salesperson will tout is the guaranteed monthly income the holder will receive once he reaches retirement age. No matter the state of the economy, the salesperson touts, “you will always get paid, and your principal will not lose value.”

Protected principal and a fixed income sound nice but here is the truth…

Before we get into the drawbacks of annuities, it’s important to discuss the principle differences between the two main types of annuities, fixed and variable annuities.

Fixed annuities are very much like a bank CD. You deposit a sum of money, and the insurer agrees to pay a certain interest rate over a specified period. Supposedly, you’re protected from downside risk in that your principal is contractually guaranteed.

Variable annuities, on the other hand, are more like mutual funds and can go up and down with the market. However, there are some significant differences between annuities and mutual funds that make choosing mutual funds over a variable annuity a no-brainer.

With the differences between fixed and variable out of the way, here are the primary reasons why you should avoid annuities:

1. Limited Upside

With fixed annuities, in exchange for the security of a monthly income, you give up most of the upside on your investment. Fixed annuities protect principal but also limit the upside. Some fixed annuities allow the holder to participate in the upside of their investment; however, they usually cap it at around 4% per year.

So even though it’s true if the market falls 20%, the investor won’t lose any money with a fixed annuity, on the flip side, if the market gains 20%, in most cases you will not participate in the upside. If you do, you’ll be limited to 4%.

With fixed annuities, even with the highest paying offerings, the most you will top out at is 4% per year. Factoring in inflation, that 4% on your principal in today’s dollars, may not be worth much when you retire in 20 years.
2. Fees & Expenses

Some compare variable annuities to mutual funds, but there’s one big problem with that comparison. Even though you can enjoy more upside than with fixed annuities, variable annuities are saddled with additional management fees not associated with mutual funds.

These high fees, usually known as insurance costs or M&E (mortality and expense) charges, result in higher annual operating expenses than mutual funds. Average annual expenses are up to three times higher than a typical mutual fund’s expenses, sharply reducing your future investment returns.

3. Taxes and Penalties
Annuity distributions are taxed at ordinary rates. The monthly distribution on a fixed annuity is taxed just like interest on a CD. That fixed annuities are taxed like CDs is not unexpected. That variable annuities, invested like mutual funds, are taxed at ordinary rates when money is withdrawn should make every potential buyer of annuities run for the hills.
So on top of the already high management fees, you’ll more than likely pay more in taxes when withdrawing your money at ordinary rates instead of the capital gains rate you’d pay from withdrawals on your mutual funds. On top of the obvious tax disadvantages of investing in annuities, the various penalties associated with annuities should also deflate any enthusiasm for these products.

Annuities are contracts that require you to hold them for a minimum amount of years (i.e., surrender period) before the guaranteed payments kick in. If you withdraw your money within this surrender period, you’ll incur early withdrawal penalties. Surrender periods vary from two years to 10 or more, and the corresponding charges typically decline with time.

For example, a deferred annuity with a 10-year surrender period would charge 10 percent on money withdrawn the first year, 9 percent the second year, 8 percent the third year and so on. On top of the early withdrawal penalty, if you make a withdrawal before age 59½, you’ll be subject to a 10 percent federal tax penalty. With these types of penalties, annuities are designed to keep you in for life.

4. Their Guarantee is not Exactly a Guarantee
Unlike bank deposits that are guaranteed by FDIC for up to $250,000, annuities are not federally insured. The insurance companies themselves make the guarantees, and those guarantees are only as secure as the insurance company making them. If the insurance company goes belly up, you’ll be out of luck.
5. About That Guaranteed Income
It doesn’t sound so great when you really dig into the math. For example, if you bought an annuity at age 35 that doesn’t start paying until age 65, you’re tying up your money for 30 years. For what? The chance to make a maximum of 4% a year on a fixed annuity, taxed at ordinary rates? Variable annuities aren’t much better as outrageous fees absorb any potential upside.
To illustrate how bad annuities are as an investment, especially for retirement, consider the performance of the S&P 500 over the past 30 years, which had an average annual return of 6.73%. You’d be far better off putting your money in an index fund for 30 years and letting that money compound so by retirement age, your return will far exceed the 4% return on a fixed annuity, and you will enjoy the advantage of your withdrawals being taxed at the capital gains rate instead of at ordinary rates with annuities.

Like a subpar cell phone pushed by an overzealous salesperson, annuities are subpar financial products pushed by overzealous insurance agents who stand to make a killing on commissions if they sell you one. They prey on the fear that you’ll run out of money in retirement if you don’t go with something that pays you a guaranteed fixed income.You may want to think twice before considering annuities as an investment. I can’t think of one person annuities would benefit and the only ones profiting from them are the insurance companies and their agents selling them. Don’t fall for their incentivized sales pitch.

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