One year at Thanksgiving my mom had the flu, so my grandmother and I went out to buy ingredients for Thanksgiving. This was about 5 days before the big event and we really didn’t know what we were doing (I think I was about 13). So, Thanksgiving Day rolls around and we opened our turkey and the most horrible smell filled the kitchen. Turns out we had bought a fresh turkey too early and it had spoiled in the refrigerator.
Note to self – buy frozen and thaw yourself.
Anyway, these four financial instruments often smell to me the way that spoiled turkey did all those years ago.
Whole Life Insurance
Okay, this can be useful if you need life insurance for the rest of your life to help offset estate taxes or support beneficiaries, but most people don’t. Generally, the need for life insurance diminishes as your wealth grows and your kids grow up. Whole life insurance can cost 5-10 times more in premiums than term life insurance with the same benefit. Sales people will tout the tax deferred cash value build up, but the returns have historically been horrendous on the cash value and the products are loaded with fees and commissions. You can invest tax-deferred elsewhere for less cost and better potential growth.
Equity Indexed Annuities
These insurance products promise to give you stock-market growth with a minimum floor of ever-increasing returns. Sound too good to be true? It is! The growth is not really based on stock market returns, but on options purchased by the insurance company betting on stock market performance. That results in growth that is really not that close to actual market returns. Plus, in up years, you only get a percentage of those increases because the insurance company needs to save those earnings for years when stocks or down, but they promised you a minimum return no matter what. Very high sales commissions and annual fees are a common feature of these products. Sales people do not have to be securities licensed or act as a fiduciary in their clients’ best interest.
Investment Advisers Who are Not Fiduciaries
Speaking of fiduciaries, you want one! A financial adviser who is a fiduciary is required to put clients’ interest first when giving investment or financial advice. Seems obvious, right? Well, many in the industry only must meet what’s called the Suitability Standard. This is a much lower standard of advice that says if the investment sold was “suitable” it can benefit the adviser as much or more than the client. Not sure which standard your adviser uses? Just ask! “Are you a fiduciary?” If the answer is a simple yes, great! Anything else, consider shopping for someone new.
Investment Managers Who Don’t Offer Holistic Financial Plans
If a financial adviser immediately presents you his best mutual fund/limited partnership/REIT/insurance product that is a red flag. Without finding more about your situation and modeling your savings and retirement outcomes, how does the adviser know what product is best for you? Having a financial plan done first (even if you pay for it out of pocket) is a way for you and the adviser to know how much risk to take with your investments and how to invest for the income you will need in retirement.
Well, that’s it for my soapbox today. I hope I’ve given you some warnings and help when evaluating the investment advice and products that are presented to you!