Welcome Back! I must apologize. I got extremely busy with COVID-19 in the spring/summer of 2020 helping clients of our wealth management firm navigate their financial worries that I had to take some time away from writing. Once that settled down, I just got lazy and didn’t come back to writing. Nearly two years later though, I still think there is a place for folks seeking WealthAdviceMadeSimple so I am going to commit to getting back to a more regular posting schedule.
Every time I turn around these days, I find more prospects coming to my wealth management firm with complex, opaque, expensive, and inefficient investment or insurance products in tow. These are products that are sold by marketers, not advisors. Recently, I have seen the following examples:
- Annuities, annuities, annuities – An annuity was originally designed to allow someone to give a lump sum of money to an insurance company and in return receive a series of periodic payments much like the traditional pension plan. It was a simple contractual deal between two parties that helped the individual insure against running out of money. Today, annuities can be so complex that even a 20 year veteran of the financial services profession (like me) struggles to understand them. These annuities are terribly expensive, oftentimes they dramatically limit flexibility, and rarely deliver on the promises they make. Often sold on consumer fear, they are marketed with such claims as “all the upside without the risk of loss,” or “don’t let the market wipe out all your gains, lock them in with the (fill in the blank name) rider on our annuity.” These annuities come with several hundred page prospectuses. Has anyone ever read one of these? Here’s another way to look at this: Do you think insurance companies paid legions of attorneys to draft these documents to protect you from a bad stock market, or them from a convoluted product?
- Cash Value Life Insurance – Yes, people are still selling cash value life insurance as a good investment. Just recently, a prospective client came in with an expensive whole life insurance policy claiming to “be banking on themselves”, a clever marketing ploy to get people to believe in the idea of over-funding a life insurance contract and withdrawing from it as they need to. Think about this – a savings account ripe with a surrender charge, paying for life insurance that costs more than term insurance, and little flexibility if you need to make a large withdrawal because of a life-altering event, which we all have at one time or another. Simplify your life – buy term insurance to cover your death benefit needs, and invest the rest of your money in more liquid and flexible accounts. A life insurance policy is not a good place to build wealth. Don’t believe me? Find the most wealthy people in your life and ask them “what percentage of your net worth do you regularly invest in a permanent cash value life insurance policy?” You shouldn’t be surprised to find out very little, if any.
- Private placements – These seem to be the new “cool” thing for investing. I’m lumping a lot of categories into this: private equity, hedge funds, non-publicly traded REITs, others. In general, these types of investments require the investor to have a minimum net worth and income, though those rules are softening and beginning to allow more investors “in the club.” A common request we receive from clients is “can you review or help me find deal flow?” It sounds cool to say “I am looking at a few deals” or “I turned down that deal.” It conveys a sense of exclusivity. And truth be told, private investments have created a lot of wealth for folks over the years, but those people often are the ones who have held some kind of advantage: early to market, exploiting an inefficiency in a market, or generating a scale to box out competition. Like any market, the more you water it down, the harder it becomes to outperform. It is important to understand how private placement firms make their money in most cases. First, they establish a fund that is going to invest in typically some specific market, they raise capital through investors who agree to invest money (usually large minimums of $250,000 or more), the private firm then makes a series of investments and hopes over time to return capital to the investor, plus a healthy return. The private placement firm makes an administrative fee (routinely 2.00% of the money you invested) plus a carried interest amount (the percentage of your gain they get to keep, most common amount is 20%). For easy math, assume you invest $500,000 their Administrative Fee would be roughly $10,000 per year, and if after 10 years your investment were worth $750,000, they would take another $50,000 in carried interest (20% x $250,000 gain). Note: Not all private placement opportunities are bad, in fact I have recommended a few to clients over the years, in the correct situation. However, they come with a great deal of uncertainty, are usually very illiquid for long periods of time, and can represent the greatest risk in investing – the permanent loss of capital. More on these in a future post.
These are just a few of the things I see these days that continue to surprise me. Today, as much as ever, I favor low-cost, tax-efficient, liquid investments. They can provide great peace of mind as we deal with geo-political issues, inflation, and rising interest rates. Concerned about today’s volatility, please take a look at this POST I wrote in the eye of the COVID storm in March 2020 exactly two years to the day. It still holds true. Keeping it simple never made more cents.
Keep Calm & Invest On.