For nearly a decade now, investors have been strapped for investment income due to interest rates that are basically zero. It shows little sign of getting better any time soon, which is hardly surprising, as the FED has created a dependency in the stock and bond markets for cheap money. Score: borrowers 1, savers 0. Consequently, most of us are in need of an income plan if we ever want to experience a retirement that would have been called normal a decade or two ago.
Where life sees a void, the market responds, and has been getting filled with a flood of new financial participants, each with a new twist for offering perpetual income. Their advertising is enticing, the products cleverly named, and most of the content is junk at best, and fraudulent at worst.
We’re going to ask you some questions that you might hear when you visit a non-fee-only advisor, who could be called “fee-based” or commissioned (note that if they don’t disclose their type of compensation, they are commissioned). Follow my line of questioning, and you’ll see what salespeople do to reel in their customers. Keep reading, and we’ll show you what they DON’T tell you. You will understand why very soon. This is a real-life example from a claim that uses the word “annuity” falsely.
- Would you like an “endless income plan?”
- Are you aware that bond yields are low?
- Are you aware that interest rates are low?
- Are you aware that many stock dividends are being cut?
- Are you aware that stocks are relatively expensive right now?
- Are you aware that many financial advisors are predicting a market crash?
- Do you know that the average annuity pays out only 3% interest per year?
- Are you aware that taxes and inflation will eat into your annuity payments?
So far, so good, right? Let’s continue the sales pitch:
- Would you like to earn 3 times more than the average annuity payout?
- Would you like to avoid all the paperwork that insurance companies demand?
- Would you like to have penalty-free access to your money at all times, unlike the typical annuity?
- What if the income AND the investment were available to your heirs upon your death, would that be good?
- Would you like to receive 8% - 10% annual payments?
- This “annuity” has a history of paying out two or three “extra” payments per year, many times you will get 14 or 15 payments in a year
- Your lifestyle could improve in many ways, illustrated by several pretty pictures, with happy people in beautiful settings, Livin’ la Vita Loca, in the words of Ricky Martin
Assuming you are in so far, who could blame you? Sounds too good to be true. Oops, there’s that pesky slogan again. Be thinking about how many “dog whistles” you have been hearing, which we will explain here. Now the “Paul Harvey” moment, “the rest of the story.” See if you stay interested in this claim as I go along:
- This is not an annuity, nor any other insurance product (despite the name the name it is given includes the word “annuity”)
- The ad says that annuities are popular because they are guaranteed, and they call the product an annuity. But it isn’t, ipso facto, it is not guaranteed (and they carefully avoid actually saying it is guaranteed)
- This so-called annuity is really a stock that pays dividends
- Stock prices, including this one, rise and fall with the market and other factors
- Dividends are declared by the Board of Directors and can be changed, suspended, and/or stopped any time at the Board’s discretion
- There is no dictionary definition of “annuity” that this might possibly fit, as all definitions include fixed or lifetime longevity of the payment stream, which is discretionary in this example
- This so-called system is to purchase a stock with the symbol MAIN
- MAIN is a BDC, or Business Development Company
- The market price of MAIN has varied over 12 months from $24.21 to $33.95, a variation of over 40%
- Variability is what advisors call “risk,” and this stock varies a lot, so it carries by definition a lot of risk
To be totally fair, let’s look at what claims are more or less true:
- MAIN has performed well against many other BDCs
- MAIN does pay monthly dividends
- The yield has been better than current annuity interest rates
- MAIN has loaned money to a variety of companies, diversifying their portfolio
- MAIN does pay extra dividends frequently
This positive information begs the question, “why do they think they have to package it as an annuity?” The answer, I surmise, is simple. And it is deceptive. The implication made by the term “annuity” is that there is a guarantee, backed by a major financial institution. This is false and misleading. Since they are not regulated, it is “merely” (in my opinion) immoral.
Many times you have heard us say that the first three rules of investing are similar to the “location, location, and location” rules of real estate, but in our business it is “diversify, diversify, and diversify.” Owning one diversified stock is not equivalent to diversifying a portfolio. It isn’t even diversified in the arena of Business Development Companies.
Here are few simply questions:
- After hearing the whole story, would you invest?
- Could you trust someone who uses deceptive advertising to sell a product?
- Is there a better way to achieve a portfolio with a yield that could assist you in the goal of providing retirement income, with more diversification and less risk?
- If so, would it be acceptable to have a somewhat smaller yield in return for a greater deal of safety?
Don’t be sucked into the tempting sales pitch. When in doubt, call us at the office, 904-685-1505. Van Wie Financial is fee-only. Always.