Beware: A 'safety net' full of holes

Lie: Insure your portfolio

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(Money Magazine) -- People tend to feel pretty fearless in a bull market, but now that stock prices are down, fear is back, making it all too easy for financial advisers to exploit their clients' legitimate bear market concerns.

That's why I predict you'll be hearing more and more about "safety nets." What do I mean by that? Well, advisers use the term to describe an investment that promises you the upside of the market with little or no risk.

You might also hear about appealing guarantees, such as a minimum income or principal protection. You might even collect a bonus - 7% or more of your account value - if you sign the deal. It's a compelling pitch nowadays.

But while there are 64,000 flavors of safety nets, they almost all boil down to some kind of insurance product. Terms to watch out for: "equity-indexed annuity," or a variable annuity with a "living benefit guarantee."

Regardless of what they're called or the advantages they claim to offer, these products have two things in common: very high commissions for your adviser and, thanks to fees averaging about 2% to 3% a year, very low returns for you. And you often have to pay a surrender charge, or exit fee, of 6% or more if you want to withdraw the money in the first six to eight years.

Another feature you'll commonly find with these safety nets is confounding complexity. I've had plenty of clients who signed disclosure forms stating that they had read and understood the 473-page policy, yet they still had no idea what they were buying.

I've also seen the shock and despair on the faces of policyholders when I've shown them how low their returns have been and how a product that was so easy to buy can be so expensive to get out of.

Give up the fantasy that you can get stock-market-like returns without taking the risk. You can't.

If you don't understand exactly how an investment works, don't buy it. In fact, any product that comes with a 473-page explanation should raise a red flag.

If you know you'll need to access your money soon (for example, because you're already retired) and are worried about losing your principal, consider buying Treasuries or government-backed CDs, which provide a real safety net at a reasonable cost.

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 themole@moneymail.com.