Financial advisers preying on senior citizens
If you've attended a seminar with financial advisers pitching annuities, proceed with caution.
NEW YORK (Money) -- Question: I was at a presentation to senior citizens who have most of their funds invested in fixed income products (CD's). The presenter showed how our investments are taxed and we don't keep up with inflation. He scared the hell out of us. Then came the product he sells which was a fixed annuity that guarantees you get all the gains from the stock market and none of the losses. Is this real?
The Mole's Answer: This type of product - and the tactics used to sell it - are the proverbial pebble in my shoe. Steer clear of this annuity salesman, as he is preying on your emotions and selling some righteously nasty stuff. Let me first address his sales technique and then I'll tell you what he's selling.
Any financial sales person knows that the two most powerful motivators are fear and greed.
Fear. "Do you want your money to be there when you need it?" "Do you want money for groceries?" Lines like these are especially powerful to seniors, because the prospect of running out of money is a scary thing.
This fear of coming up short is reinforced in the sales presentation when the adviser shows a low paying CD or savings account being taxed at a rate that is probably the highest, to demonstrate how it's not keeping up with inflation.
Then the financial salesperson will usually segue into the stock market and all its risks. She may bring up terrorism, recession, war, etc. to convince you that you don't want to take this risk.
So now the salesperson has left you with two bad options - have your money eaten up by taxes and inflation, or risk it all by putting it in the stock market.
Greed. Now the presentation becomes an adult version of ghost stories around the campfire. And once the audience is scared to death, convinced their very futures are hanging by a thread, the presenter offers up the perfect solution. You can bet the "perfect solution" will always be some version of a guarantee that panders to our sense of greed.
The fixed annuity in this presentation is called an equity-indexed annuity. The presenter likely told you that you'd have the upside of the market without any downside risk whatsoever. The pitch may go something like the illustration. Dilemma solved, crisis averted, now everybody get out your checkbooks.
Sound too good to be true? It is. Here's why the equity-indexed annuity doesn't work.
There are thousands of different versions of these annuities, though there is a commonality with each and every one. And that common thread is that they're complicated: It would be easier to map the human genome than figure out how the earnings on these annuities are calculated.
In the oral presentation or meeting, the salesperson will tell you that you get all of the upside of the market, but read the fine print and you'll find something quite different - if you can understand it. They always seem to have what are called caps, spreads, surrender schedules - things that will cut into your returns - and then conveniently leave out the portion of the market return that comes from dividends. In the end, you're really only getting a fraction of the gains of the overall market.
In addition to the list of complicated fees and penalties, the insurance company selling this product will put the majority of your funds in bond-like investments that generate low returns to begin with. It then takes those earnings and pays handsome commissions to the financial planner (a.k.a salesperson), covers its overheads and collects a profit for itself. Anything left over will go to the annuity holder (that's you).
So the salesperson created the perfect illusion by first "scaring the hell" out of you and exploiting your fear, then exploiting your greed with the prospect of profiting off market gains and eliminating the risk.
But an illusion is exactly what it is. In fact, when I sit down with a client that has previously bought one of these annuities, I usually have to explain that they ended up with only about a quarter of the actual return of the market, and that they would have been far better off in a decent CD.
My Advice: First, always be on the lookout for anyone pitching a financial product using scare tactics. Never buy any financial product on the spot. Go home and sleep on it. Discuss it with friends.
Steer clear of those can't-lose funds. It's natural to want market returns without risk but it doesn't exist. If the insurance company knew how to earn those returns without risk, they would have billion-dollar investors and wouldn't need to bother with small fish like us.
Manage any anxiety you might have about financial security by keeping your safe money safe. Don't settle for an average-paying CD, however. Shop for the highest rates on sites like Bankrate.com or Bank Deals. Always make sure your money is insured by either the FDIC (banks) or NCUA (credit unions).
Keep in mind that some financial planners exist just to separate you from your money, and they are quite skilled at manipulating your emotions. I recommend funding your retirement, rather than theirs.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail email@example.com.Send feedback to Money Magazine