What's the catch on these?

[David1961]

Occasionally, I hear on an infomercial about a wealth management group saying you can invest in their product and be guaranteed of at least a 6% return each year no matter how the market does. The pitch goes like this. "Invest with us and if the market tanks, you will still earn a 6% guaranteed rate each year. If the market does well, you will get higher than the 6% for that year". Then they talk about if someone retied at the top of the market, this product would have saved their butt.

My main questions would be "guaranteed by who"? and show me the fees. But still, how can folks promise this? They have got to be making money on this or they would not offer it.
Are there any links that offer an explanation of these services?

 

[REWahoo]

Google "variable annuity".

 

[aja8888]

Occasionally, I hear on an infomercial about a wealth management group saying you can invest in their product and be guaranteed of at least a 6% return each year no matter how the market does. The pitch goes like this. "Invest with us and if the market tanks, you will still earn a 6% guaranteed rate each year. If the market does well, you will get higher than the 6% for that year". Then they talk about if someone retied at the top of the market, this product would have saved their butt.

My main questions would be "guaranteed by who"? and show me the fees. But still, how can folks promise this? They have got to be making money on this or they would not offer it.
Are there any links that offer an explanation of these services?

If it was that good, why would they be hawking it on TV (and paying for that infomercial)? Start by Googling Variable Annuity scams.

 

[RockyMtn]

In general be very leery of any financial product being sold via infomercial. Actually, be very leery of anything being sold via infomercial!

 

[gauss]

Does the 6% "return" include a return of principal?

 

[kcowan]

Does the 6% "return" include a return of principal?

No the one common thread of such scams is that you forfeit your principal.

 

[ProGolferWannabe]

In general be very leery of any financial product being sold via infomercial. Actually, be very leery of anything being sold via infomercial!

Except for the ShamWoW towel of course. (Kidding)



Sent from my iPad using Early Retirement Forum

 

[frayne]

The words "guaranteed return" automatically raises a red flag for me. I just wonder how many people are sucked into buying these financial products. The financial industry has more slick snake oil salesmen than the old west ever did in its hay day. Buyer beware !!!!

 

[LOL!]

The guaranteed return does not include the fees you pay. Your investment gets the 6% guaranteed, but certain restrictions will cause you to pay 3% in fees or more which leaves you with much less than 6%.

I have yet to find one single person who purchased one of these and did get the quoted 6%. There are lots of people on this forum, so there must be at least one person who bought one of these that can give us a report.

 

[robertf57]

The explanations so far are not quite right. What is being hawked is usually an indexed annuity. There are two "values" to this contract: the "real value" which is what the contract has actually earned based on the index it tracks with all its exclusions and fees, and the "income base". The 6% guaranteed return is on the "income base". That is the value from which the contract is annuitzed. You cannot withdraw your money from the contract and have the principal plus the 6%. You can get the real value minus the fees. When you actually annuitize the contract, you receive a payment that include principal and interest. If you actually do the IRR, these contracts may turn out to return only a percent or two at life expectancy. Google it or look at some of the better you-tube demonstrations about how this work (or don't).

 

[H2ODude]

Sounds like something from one of the episodes of "American Greed!" If it sounds to good to pass up, passing it up would be a good idea!

 

[aja8888]

Sounds like something from one of the episodes of "American Greed!" If it sounds to good to pass up, passing it up would be a good idea!

Like the Alan Sanford CD's @ 12% backed by a bank in Antigua which he sold $Billions of dollars worth? Sanford got a Loooonnnggg prison sentence, around 200 years, if I remember correctly.

 

[Tadpole]

My last 6% PenFed CD ends in October. Sigh, I got all 6% for 7 years.

But anything promising that same percent today might be more risky than it appears.

 

[MooreBonds]

The explanations so far are not quite right. What is being hawked is usually an indexed annuity. There are two "values" to this contract: the "real value" which is what the contract has actually earned based on the index it tracks with all its exclusions and fees, and the "income base". The 6% guaranteed return is on the "income base". That is the value from which the contract is annuitzed. You cannot withdraw your money from the contract and have the principal plus the 6%. You can get the real value minus the fees. When you actually annuitize the contract, you receive a payment that include principal and interest. If you actually do the IRR, these contracts may turn out to return only a percent or two at life expectancy. Google it or look at some of the better you-tube demonstrations about how this work (or don't).

I haven't picked apart any such products with a fine tooth comb, but I'd imagine one of the many 'gotchas' is that they probably just track the indexes WITHOUT taking into account dividends (i.e. strictly the price of the index from January 1-December 31 each year). Dividends, over time, make up a substantial part of the index's total return, so when you hear people say "the S&P has returned 10% on average over the past 60 years", if you take dividends out of the equation, the total cumulative return is much lower.

But people hear things like "can't go down regardless of what the market does" and "gets all of the gains of the market", and don't bother to read the fine print. Although, even if they did read the fine print, they might as well be reading an ancient Sumarian text, as the average consumer probably wouldn't understand 10% of the various terms used.

Of course, another gotcha is probably that they stick you in their proprietary index fund with a God-awful high expense ratio, on top of mortality expenses, insurance expenses, etc.

 

[Walt34]

Actually, be very leery of anything being sold via infomercial!

A few weeks ago at the gym I watched one (it was in front of the treadmill with the sound off) advertising a "Power Pressure Cooker" that actually looked interesting. Except for the "three easy payments of $33".

So I looked it up when I got home. Walmart sells that one for $75 and several others for less.

Their operators are still waiting for my call.

 

[mathjak107]

i looked at one piched by our bank.

the fine print and pages and pages of stuff was very complex. i did my best to interpret it as best i could and i believe this is what it boiled down to so dont quote me. it is still making my hair hurt as to what that plan is. it takes an mba in finance to figure out that prospectus.

i have to say it sounded so good i almost bought it myself lol.

it started out with them promising me a minimum of 10% a year return for 10 years if the annuity was on myself or 5% a year min if it extended to marilyn too.. if my variable investments were worth less they would increase me to either 5% or 10% min depending which i took. . if i died my wife gets to continue the plan and she gets the 5% minimum option.

thats where it got interesting.

i asked if i could take that money out and of course no you cant.

that 10% a year guarantee are only bonus bucks good towards an annuity conversion into a lifetime income stream..

however heres the catch. you pay expenses on your average yearly account value. those bonus bucks after 10 years have your expenses running double because they are based on that phantom value.

if you started with 100k had 3600.00 a year in expenses before the fund expenses those bonus bucks after 10 years have you paying 7200.00 a year plus fund expenses .

there were options everywhere to add to the plan each one increasing costs as well.

as best as i could tell here are the expenses,and keep in mind historically the return on a 50/50 mix is about 7% when not in an annuity.

the expenses below are based on the total account value with the phantom bucks being included they give you.

mortality and expense risk charge 1.10%...

administrative fee .20%

combination enhanced death benefit .45%

beneficiary protector .35%

10% lifetime income option charge 1.2%

10% spousal continuation charge .30%

total 3.60% but we havent included the fund expense fees so tack on another .45 to 1.94% depending what funds you picked..


is that an amazing fee structure for the un-aware?.


those bonus bucks are only good if at the end of the investment stage i annuitize into a lifetime income stream locking in more expenses on the payout for life.


folks becareful of these offers. we guarantee you a 10% a year minimum regardless of what your investments do isnt exactley as you think it is.

 

[Andre1969]

My grandmother got talked into something back in 2006 that was guaranteed to pay 6% for a certain amount of time. I don't know the specifics of it, just that it was through Suntrust bank, and it was something that my Mom helped her out with

I have no idea what this thing was though, or what became of it. My Mom handles all of Grandmom's finances, which annoys me a bit, because just about all of it is in low-paying stuff...CD's, checking account, savings, MM, etc. I hate the thought of Grandmom's savings slowly eroding due to inflation, but I guess at her age it doesn't matter, since she's 90 and needs the stability in case something major comes up.

 

[panacea]

In general be very leery of any financial product being sold via infomercial. Actually, be very leery of anything being sold via infomercial!

Except for the ShamWoW towel of course. (Kidding)

First thing I thought of was the "Snuggie."

 

[thefinancebuff]

The explanations so far are not quite right. What is being hawked is usually an indexed annuity. There are two "values" to this contract: the "real value" which is what the contract has actually earned based on the index it tracks with all its exclusions and fees, and the "income base". The 6% guaranteed return is on the "income base". That is the value from which the contract is annuitzed. You cannot withdraw your money from the contract and have the principal plus the 6%. You can get the real value minus the fees. When you actually annuitize the contract, you receive a payment that include principal and interest. If you actually do the IRR, these contracts may turn out to return only a percent or two at life expectancy. Google it or look at some of the better you-tube demonstrations about how this work (or don't).

This. To pick apart the catch, define "earn" and "on what" and "for how long."

 

[pb4uski]

The catch is high fees and generally high surrender charges if you want access to your money.

One way to look at it is ask them to tell you in writing the minimum (worst case) amounts that you would get back under the contract if your asked for all your money back after one, three, five or ten years if you made a lump sum deposit of $x.

You'll likely find that the amounts are lower than your initial deposit in the early years due to fees. Be careful. Don't trust and do verify. Better yet, stay away from these shysters.

 

[Hamlet]

Yup. I don't think its worth trying to figure these things out. They are better at selling these things that you will be at buying them. They've spent years creating tricks and traps in the fine print. Unless you are willing to spend years to become an expert in annuity fine print, its a pretty good bet that they will get the best of you in one of these transactions.

I've never heard a good outcome from the purchase of these complex products. If you must have an annuity, buy a low-fee basic product from someone like Vanguard.

Better yet, stay away from these shysters.

 

[Senator]

You need to look at what it takes to change the plan too.

Often, the company can change the plan with a short notice period. Just like a crediy card company can change it's terms. So, when you think you are getting a great deal, the deal changes.