If your financial advisor only recommends annuities, they aren't a financial planner or advisor

Sean explains why someone who specializes in pushing annuities could be dangerous for your financial well-being — and the three red flags you need to be aware of.

Transcript

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Okay, so here's why if you're dealing with someone who only focuses on insurance products, you have to be extra specially careful about thinking of them as your advisor or giving advice. So I uh I have the licenses to do insurance products and have used them over the years. So somewhere between 15 and 20 percent of my um the assets I take care of for people or help them with are insurance-related vehicles. So I'm not completely ignorant of them, I don't dismiss them out of hand, but there's a lot of um, in fact, I get a little bit frustrated. I'm a certified financial planner, I get frustrated when there's an automatic people only do these things for the commission, they're terrible, watch out for them for any kind of vehicle that has some sort of guarantee attached to it. Um, but then every now and then I come across a scenario where I see exactly why that uh advice or sort of talk is out there. Um you know, these things unfortunately get a reputation for a reason. So a lot of tools, investments, or insurance vehicles are used the wrong way for various reasons, uh, bad incentive structures, etc., sometimes ignorance. Um but yeah the set of investment slash insurance products that has a uh a guarantee either to protect principal and or to make your money last as long as you do to have an income, lifetime income guarantee. They're very complicated, a lot of moving parts, but they can I think they can still be used very appropriately, um depending on the circumstance and the specific uh instrument. Um, but they're hard to explain, and that's um a downside even for someone who really, really likes them. So unfortunately, they're not explained very well a lot of the time. I'm not sure I do the best job explaining all the ins and outs, but I try to give the pros and the cons. One of the cons is they're fairly high cost compared to a low-cost ETF or index fund portfolio, which I also use often. Um so they're costly and they're complicated. Um again, some of the complexity is to be able to, it allows them to get the income for life no matter what, but the gotchas, what ifs are very important. So I talked to someone recently who had a uh fixed index annuity that he's had for about three years. And the reason we were talking was he's trying to figure out if it's worth getting out of it. And normally I would say, you know, get don't get out of something that's gonna be a big cost to it. But this presented an unusually uh interesting example of why someone focusing on annuities, you've got to be very careful about taking advice or taking their word for it. And what's interesting about this case is he he didn't really. He asked, he called the ad, he talked to the the advisor agent about the product that had a lot of security that appealed to him. Um he went to the agent advisor, asked questions. The advisor agent could not answer some of those questions. So again, big obvious red flag. Um so he called the insurance company himself and started asking questions, was able to understand more of the bells and whistles and how it worked. But apparently the insurance company said, wait a minute, are you an advisor? He said, No, I'm I'm just a customer trying to understand this. And they stopped talking to him. Uh said, You need to talk to the the advisor. That's red flag number two. Um, and so then this product that has security, principal protection, etc., also has a 12-year period, one, two years, 12-year surrender period, where there's a cost, fairly significant cost to get out of it. Um, in the 12th year, it's still 4% of the original investment. In the first few years, it's over 10%. Uh believe it was 12% the first couple years. So when it comes to these vehicles, some of the ones I've used have had a penalty, a withdrawal penalty period. If you don't hold it for at least four years, or in some cases, at least seven years, my clients would have paid a penalty. And I've had a couple here and there that did for various reasons. Um but the more I do this, the more I realize as long as you have a long-term plan and it fits and you understand the ins and outs, having your money not completely liquid for seven years should not be a major catastrophe because it's a long-term plan. Um, you only allocate to that investment the stuff you know you won't need for at least seven years. And in these cases, usually it's a lifetime income that you're playing for. So you're you're trying to think the rest of your life that you're gonna make withdrawals, not needing a big chunk at once. But 12 years and a 12 year surrender, uh 12 years with a 12% hit to get out, that's pretty steep. So that's kind of a third red flag. You've got to be real careful that you're 100% sure you want this thing, even with all the red flags considered. Then the the the biggest problem that he's really frustrated about, because he still did this, even with knowing those three things ahead of time or being aware of those three, what I would call red flags. Um, the way those things, uh those products work is there's a there's a calculation based on an index. You have to pick the index, and you have to you have every year you can change it. But in looking at the terms of this this contract, they are extremely uh limited on the upside, extremely. And again, most people that are in this world, advisors, know that. Um, but if you can certainly spit it to make it sound attractive, and by the time the the customer, the investor realizes this is not working the way I thought, you're in this case, he's three years into a 12-year penalty period, or but he's stuck essentially. If he gets out, uh it would cost him, I think it's 11%. So in his case, it's about $38,000 cost to get out of it. So that's that's obviously hard to stomach. Um he was looking for some thoughts on if it's worth doing that, and I think it's kind of a toss-up, and he's gonna have to make the final decision. Um, but I like I would offer you, I'm happy to talk through it because I love talking shot. Um, you know, in some cases I'd say it's a home run to get out, in some cases it's a home run to stay put. This one's a little trickier because he's looking for fixed instruments, so he's looking for something else that would pay. Now they're the interest rates are higher than they were three and a half, three years ago, so he can get a fixed instrument that will be safe, uh not liquid again, because you're gonna have a it's a seven-year title, but you can get a decent interest rate compared to three years ago. So he'll have to make the decision. But this is just a real life case study of um, you know, at some point as a professional, you think everybody knows to be very careful with this kind of instrument. But you know, as you get close to retirement and you're thinking, I want safety and security, this sounds great. I've done my homework, I've done my due diligence. He really prides himself on being a detailed person. Um but and again, as I told him, you'll probably be okay because you have he saved well, um, he has the ability to out, you know, kind of wait it out if he wants to and take the income guarantee later, or take the hit which hurts, take the hit in the balance of the account and do something better with it. Um, so he'll be okay because he saved well, but you hate to make those mistakes. And if you can avoid them, um again, happy to give my two cents. And what's in it for me? Well, again, the ego of helping people and people thinking I'm smart, and I'm trying to build the content of how to find a financial advisor so that over time I can sell a course or some other way to get compensated for the expertise. But as of now in early 2024, happy to do it for free. I'll add Dave Ramsey without the audience and the sponsorships and the empire that he's built. Uh, and I can do it on a more um professional specific level because I have the credentials that um despite his reach, Dave Ramsey doesn't have. He's done phenomenal things, but he has no particular professional licensing in the field. So um hope that case study helps. If you're considering a fixed annuity, uh I'm not opposed to them, but you have to be really sure of what you're doing because you might need to assume you're not gonna make much money at all. Um, although this product in particular, I guess that's what made this so hard. This is from a smaller insurance company I'd never heard of. Uh, it seems bad even for that suite of products. There are some that you can, you know, you can make some some income, some interest, you might make four to six percent maybe if things go well. Um, you're not gonna have the upside of the markets in the long run. Um, you at least protect the downside. I get it, it's appealing, but um get a second or third opinion. And when in doubt, take your time and um before you commit to anything for 12 years, that's not a marriage or a mortgage where you have an asset or something with a lot of upside to it. Just be sure, ask questions, ask me, uh reach out to someone you trust, take a friend or family member uh with you. So hope that helps and let me know if I can uh do anything for you. Thanks.