The typical FPP Lab blog is written for the financial planning community. We are going to mix it up a bit this time and talk directly to consumers. The thought behind this blog came up after listening to the radio during weekends over the past year.
Some of us in the Lab like to listen to talk radio and watch business news programs. During the week, this can be fun and entertaining. We started to notice, however, that during the weekend a strange transformation occurred on stations we typically like to listen to. Rather than broadcast syndicated shows or news, the radio stations in and around Atlanta hand the microphone over to a wide assortment of characters, including folks who give advice about lawns and gardens, a guy who sell cigars, and numerous ‘financial advisors.’
We are not totally naïve enough to think that local radio is the business of providing unbiased news and programming, but listening to the financial advisors on the radio got us thinking about how biased things have gotten. So, here is the breakdown of what you are going to hear on a typical Saturday afternoon, and why you should be worried.
Radio stations sells air time on the weekend to almost anyone who is willing to pay the per hour fee. This can be expensive, which means that typically the type of advisor who gets a spot on air is selling something. Okay, there are exceptions, but for the most part, if you dial in on a Saturday, you are going to get biased financial planning advice. Why? The folks who buy air time need to pay for that time. They do this by giving just enough advice to entice listeners to “come in during the week for a visit.” This is not a scam. It may not even be a bad idea to visit with one of these advisors. Just know that if you do make an appointment, you will most likely be sold some type of insurance product—most likely an annuity product.
The sale of annuity products is so lucrative it allows some financial advisors (as opposed to a CFP® financial planning professional [adviser] who follows a fiduciary standard) to afford air time. The upfront commission on an annuity sale can be 10% or more. Say, for example, that you invest $100,000 into an annuity. The salesperson could earn $10,000 that year, plus an ongoing commission every year you continue to hold the annuity. By comparison, if you placed the same $100,000 with an adviser who charged a flat fee of 1% to manage your money you would pay $1,000 for the year.
This is not to say that annuities are a ‘bad’ thing. If you have a very high income (think college head football coach) or you own your own business and make a lot of money, an annuity might be a good place to put aside some money on a tax-deferred basis. If this does not describe you, then an annuity may not be the best option—you would be better served maxing out your 401(k), 403(b), and/or IRA options.
What about using an annuity to help fund retirement? There is a lot of debate on this issue. An annuity may be appropriate for someone with very few assets that needs a guaranteed stream of income. For most people, however, it is possible to create portfolios that provide more liquidity and greater flexibility with a much lower cost structure.
Let’s say that you decide to listen to the weekend radio host, and he (they are almost always men) talks you in to buying an insurance product to help you meet a financial goal. Before signing the dotted line, you need to know that you will pay the following expenses (this comes directly from the Securities Exchange Commission):
Surrender charges – If you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a “surrender” charge, which is a type of sales charge.
o This charge is used to pay your financial professional a commission for selling the variable annuity to you.
o Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years, known as the “surrender period.” For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies.
Mortality and expense risk charge – This charge is equal to a certain percentage of your account value, typically in the range of 1.25% per year. This fee is more than what a financial planning working under an assets-under-management model would charge!
Administrative fees – The insurer may deduct charges to cover record-keeping and other administrative expenses. This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) or as a percentage of your account value (typically in the range of 0.15% per year).
Underlying Fund Expenses – You will also indirectly pay the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity.
Fees and Charges for Other Features – Special features offered by some variable annuities, such as a stepped up death benefit, a guaranteed minimum income benefit, or a long-term care insurance rider, often carry additional fees and expenses.
Now you know why you are bombarded by radio talk show hosts each weekend. There is a lot of money to be made selling insurance products. Yes, as a consumer, there is a role for insurance and even annuities. It is equally true that these products are not appropriate for everyone, or even most people.
Our suggestion is that if you have a question about managing your personal financial situation check out the CFP Board website (cfp.net) and search for a financial planner who charges an assets-under-management (AUM) fee or an hourly fee. You should also check out napfa.org. Members of NAPFA never sell annuities. If you are looking for financial counseling help, go to the Financial Therapy Association website: www.financialtherapyassociation.org.