Financial planners and annuities

[clifp]

It's frustrating. Maybe I'm getting more upset about this than I need to be, but don't financial planners have some sort of fidiciary duty to do what's best for their clients?

My older brother self-admittedly knows little about finances. I thought the advisor might suggest a blend of solutions vs just writing up a large annuity that my brother doesn't understand fully.

One would think that financial planners have a fiduciary responsibility to act in their clients best interests. In reality the majority do not.

There are two basic standard that financial adviser/broker have to adhere to. The most common is a suitability requirement. "which requires them to reasonably believe that any investment recommendation they give is suitable for an investor's objectives, means and age."

What this basically means that sticking 50% of 90 year old lady's money, in Twitter, Facebook, Netflix stock etc and the other 50% in to a commodities trading account would be unsuitable if her objective was to not run out of money and be burden on her kids. However for a 30 year old who wants to retire by the time he is 50, this same strategy is perfectly suitable. Cause after all you could make a fortune doing this.

Annuities (even variable or Equity-Income varieties) are suitable for any age and pretty much any financial objective. About the only thing they wouldn't be suitable for is somebody wants to turn $100,000 into a $1 million in 10 years.

The fact that a particular investment maybe more beneficial for brokers/annuity salesman wallet than yours is pretty much irrelevant.

The Fiduciary responsibility that requires to the advisers to place the financial interest of their client ahead of their interest is relatively rare. It especially doesn't apply to stockbrokers, insurance/annuities salesman, and pretty much any financial adviser that works for Ameriprise.

I know from taking a CFP class, that Certified Financial Planners CFP (TM) (Sarah is one) do have a fiduciary responsibility. Bank trust officers also, beyond that I am not sure.

You and your sibling should explicitly ask the financial adviser what their fiduciary responsibility is. I know if you sit down with an Ameriprise adviser they will give you 100 page booklet (the first pages are filled with pictures, of kittens, puppies and babies) and the remain 98 pages are 10 point type and legalese. (Ok a slight exaggeration)

 

[prudent_one]

On the fiduciary question... I was once in a meeting with a group of relatives who were being pitched on some investments (I was not directly involved with the investments, but was asked to attend by the relatives because I knew something about investments, and they knew zero).

A little ways into the spiel as the pitchman waxed eloquent about their vast experience and skills, I asked the pitchman, "Would you be acting in a fiduciary role, or an advisory role?"

This definitely caught him off-guard, and his response was, "What do YOU do for a living?" as though I had a lot of nerve asking such a direct question.

Of course was he was not going to be acting as a fiduciary, and he had to explain to the relatives in legalese what the difference was, and I was able to helpfully clarify that what it meant was he had no duty to act in their best interests, no matter how things might sound. I don't think that the pitchman appreciated it.

 

[Sarah in SC]

Agree with what Clif and Prudent said above. And though I am a CFP, and work in a fiduciary capacity, some with my designation do work in non-fiduciary jobs (like Ameriprise and the like). We do have a code of ethics that requires us to act in a client's best interest, but I still suggest that you ask outright how their role in the client relationship is legally defined.

Any legit CFP should be very happy to explain how they get paid, in honest and clear language. If they don't...well you know you are talking to a salesman.

Nothing annoys me more than seeing people get ripped off with these kinds of "products". It is disheartening to see how often it happens. And to people who otherwise have good sense about their finances.


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[RE2Boys]

In my experience, most "financial planner" are really salesman in disguise. They look for your weakness or vulnerabilities and SELL.

 

[haha]

<>, but don't financial planners have some sort of fidiciary duty to do what's best for their clients?

Yes, and the moon is made of green cheese.
​

 

[mathjak107]

the only annuity i would ever consider is an spia, single premium immediate annuity.

there are so many investment stratagys that use them in conjunction with your own investing to replace dead cash and low paying bonds.

results have been pretty good both in terms of income and heirs.

 

[2B]

What's sad is that dd564's siblings are likely to buy annuities. No matter what dd564 passes on to them. One or more of them will succumb to the "can't lose money, tax deferred and guaranteed lifetime income" chant of the salesman. Mathematics, financial rules and history all show that diversified index funds will outperform any indexed / deferred annuity but they still sell. People just want to believe.

 

[mathjak107]

on the other hand spia's instead of cash and bonds combined with stocks have been shown to be quite successful and in monte carlo studies surpassed investing on ones own using stocks ,bonds and cash..

the increased spending money from the spia's that you get allows higher stock allocations and less in bonds and cash. the extra allocation to equities coupled with higher cash flow has shown the retirees really do not need bonds .

not only were incomes higher not using bonds but what was left for heirs was more often higher as well.

zero roi on an spia works just fine since you can take out your own money at a higher draw rate than you can take your own money out on your own investments since if you exhaust your money the insurer gives you his money for as long as you live.

higher spendng cash means less stocks have to be sold along the way to provide that spending money.

i just have a hard time forking money over like that so my opposition is more mental than real or mathamatical.. dr pfau already did the math on it.

 

[Independent]

I don't know how to reverse calculate these numbers, but we have a single payment fixed annuity that was taken out just 30 years ago. The initial amount was$8,000. The current annuity value is about $51,000, and the surrender value is just over $45,000.

It was our part of the "inheritance"... and the initial interest rate for 2 years, was 11 1/2%, with a guaranteed minimum interest of 4% after that, a rate to which it dropped immediately after the first 2 years.

It just happened, and we have done nothing with it over the years. I never hear about this, wonder if it still exists as a product, whether it's something that is still offered. (not at that initial rate).

I have one that I purchased in 1981. I keep it because it has a guaranteed rate of 4.5% and the surrender charges disappeared a long time ago.

And, yes, they are still available: https://personal.vanguard.com/us/whatweoffer/annuities/fixed

 

[Chuckanut]

on the other hand spia's instead of cash and bonds combined with stocks have been shown to be quite successful and in monte carlo studies surpassed investing on ones own using stocks ,bonds and cash..

<snip>

the increased spending money from the spia's that you get allows higher stock allocations and less in bonds and cash. the extra allocation to equities coupled with higher cash flow has shown the retirees really do not need bonds .

Here's the Dr. Pfau's paper on the above strategy

Wade Pfau's Retirement Researcher Blog: An Efficient Frontier for Retirement Income

And an updated blog entry here;

http://wpfau.blogspot.jp/2012/09/efficient-frontiers-with-stocks-and.html

 

[pb4uski]

I have one that I purchased in 1981. I keep it because it has a guaranteed rate of 4.5% and the surrender charges disappeared a long time ago.

And, yes, they are still available: https://personal.vanguard.com/us/whatweoffer/annuities/fixed

The 4% or better minimum rate guarantee has gone the way of the dodo bird and if you have such a contract is is looking good right now.

 

[Taxman59]

Two thoughts:
First, financial planners should have their clients best interest at heart. That being said, most do see the $ sign of the high commission products. I worked with an agent and wasn't impressed with his product. I spoke with a friend who was also licensed, and he pointed out that there are several different commission schedules and you can ask to see them. The difference in the schedules was significant (a policy collapsing in 20 years at a high premium vs. self supporting at a lower premium!). If the planner won't show you the various commission schedules, he/she isn't looking out for you.
Second, I had a pension that was terminated and with the payout, I bought an annuity. With a 7% daily compounding guarantee, I felt it was a winner. Add in an equity kicker, and is was a slam dunk! In less than 6 years, I have passed the 10 year guarantee mark, and in 5 years at the 7% guarantee, I will pass the 20 year mark! And, yes, the agent got a 40% commission on what I put in! Long way to say that annuities have their place, and if you are smart going in, and plan on holding and annuitizing the money, they can be a good thing for a portion of your portfolio (not everyone has a COLA'd pension).

I am a CPA with 25+ years working with high net worth clients and assisting them with their financial planning, and have a bias against annuities and insurance policies unless they are for a specific purpose.


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[mickeyd]

Along this same line, I was recently speaking with a family acquaintance (we NEVER discuss $) during a Christmas celebration and she blurted out that one of her main income sources is a "financial instrument". I had to inquire on that vague reference and she hesitantly said that her financial planner "has her invested" in a product that is linked to the market, guarantees no loss, but limits "real high" returns. I told her that what she appears to have sounds like what used to be called an equity indexed annuity. I advised her to Google it to get more info. This is a woman with 3 university degrees.

Crickets....

 

[dd564]

What's sad is that dd564's siblings are likely to buy annuities. No matter what dd564 passes on to them. One or more of them will succumb to the "can't lose money, tax deferred and guaranteed lifetime income" chant of the salesman. Mathematics, financial rules and history all show that diversified index funds will outperform any indexed / deferred annuity but they still sell. People just want to believe.

I feel this way a bit because I tried to warn my brother about possible bad investments before he went to the Edward Jones guy, but they "felt comfortable" with it, and I'm his little brother who always did things a little differently. (Live in suburbs vs in the country, got an office job, vs not office job), etc. My brother works hard for the money he has and his family suffers because of it, so I felt I should try and help him out.

But when he got this money he was genuinely fearful of it. He had never dreamed of having this amount and he was worried about "losing it" so that's what the Edwards Jones guy ran with.

It gets a little difficult telling a financial novice how the stock market works and although investing in ETF's could lose principal, it's a better route over time.

I wish he'd ask me to go with the next time he meets with the planner so I could ask a bunch of "innocent" questions like, "Can we withdraw all the money now?",
"Why not?"
"Why was a portion invested in the market where it could average 9% return"?
"In the best interest of my brother, how did you make this recommendation?"
"Is this really the best option you had?"

It would get uncomfortable I'm sure.

 

[2B]

I feel this way a bit because I tried to warn my brother about possible bad investments before he went to the Edward Jones guy, but they "felt comfortable" with it, and I'm his little brother who always did things a little differently. (Live in suburbs vs in the country, got an office job, vs not office job), etc. My brother works hard for the money he has and his family suffers because of it, so I felt I should try and help him out.

But when he got this money he was genuinely fearful of it. He had never dreamed of having this amount and he was worried about "losing it" so that's what the Edwards Jones guy ran with.

It gets a little difficult telling a financial novice how the stock market works and although investing in ETF's could lose principal, it's a better route over time.

I wish he'd ask me to go with the next time he meets with the planner so I could ask a bunch of "innocent" questions like, "Can we withdraw all the money now?",
"Why not?"
"Why was a portion invested in the market where it could average 9% return"?
"In the best interest of my brother, how did you make this recommendation?"
"Is this really the best option you had?"

It would get uncomfortable I'm sure.

There are numerous threads on Edward Jones. You can search for them and you won't see much, if anything, positive about them. You and your brother should run away from Edward Jones as fast as you both can.

 

[Chuckanut]

FWIW, I have known people who have tossed away sizable inheritances on all sorts of useless toys, outright frauds, limited partnerships and just general high living. An EJ annuity would have been a much better alternative.

That said, I would recommend putting the cash in 6 month to one year CDs and then doing a lot of reading, including the group wisdom right here.


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[dd564]

My other older brother (a 3rd brother not mentioned previously), is a saver. I'm not worried about him because he spends about $2,000 a year total I think. (food and that's about it I think).

He owns some farmland and gets a annual check for rent of $20k or so and then he works otherwise.

He'll just save it in a CD or something forever.

He joked that he was going to take it to Vegas and bet it all on black.

I asked him, "Problem is, what are you going to do if you win. You'll have twice the problem with twice as much money and you'll end up doing it again until you lose.

Instead he should give it to me, I'll kick him in the nuts and he'll have the same result".

 

[dd564]

FWIW, I have known people who have tossed away sizable inheritances on all sorts of useless toys, outright frauds, limited partnerships and just general high living. An EJ annuity would have been a much better alternative.

That said, I would recommend putting the cash in 6 month to one year CDs and then doing a lot of reading, including the group wisdom right here.


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True to your point about worse ways to spend it.
Mine is going into a couple rental houses and ETF's.

 

[Sarah in SC]

FWIW, I have known people who have tossed away sizable inheritances on all sorts of useless toys, outright frauds, limited partnerships and just general high living. An EJ annuity would have been a much better alternative.

That said, I would recommend putting the cash in 6 month to one year CDs and then doing a lot of reading, including the group wisdom right here.


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True. My MIL has been in 1 year CDs for all the time I've known her, 25 years. I'm happy with her choices, but did make a call to her bank and offer the guy there a warning that if he ever tried to sell her anything else, he'd be getting more than a phone call from me.

 

[haha]

FWIW, I have known people who have tossed away sizable inheritances on all sorts of useless toys, outright frauds, limited partnerships and just general high living. An EJ annuity would have been a much better alternative.

That said, I would recommend putting the cash in 6 month to one year CDs and then doing a lot of reading, including the group wisdom right here.


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I know woman with modest money generating skills who inherited slightly more than $2mm and had blown through all of it in ~10 years. She had an upper middle class background (both parents college educated professionals) and was well educated herself but probably had the overall worst social judgment skills I have ever encountered. If there was some stupid way to get taken, she was guaranteed to find it. I gave her one of the books recommended on here but she never opened it. Now, at age 60, she has lost her customer service job and is drawing on her meager savings.

I suggested she stake out recent widowers in churches in affluent neighborhoods, keep her hair dyed and stylish, dress well and conservatively, get one or more of these guys into bed and gun for marriage. This is maybe the first time I ever gave her any suggestions that she seemed ready to listen to. I felt a bit of a traitor to the men she might snare, but overall if they keep control of the money and don't need earnings help, she would make a fully satisfactory wife. Anyway, an older man who gets snared probably feels it is an OK bargain.

Ha

 

[Walt34]

FWIW, I have known people who have tossed away sizable inheritances on all sorts of useless toys, outright frauds, limited partnerships and just general high living. An EJ annuity would have been a much better alternative.

I've seen that too. Decades ago where I worked they changed the pension plan for new hires and offered current employees the option of moving to the new plan as well. If they did they would get back in cash half of their previous retirement contributions. A red flag to me was that this was an irreversible decision so I figured, even before doing the math, that this would be a bad deal for me so I declined. Was I ever right!

But I was astonished at what I saw people doing with the money. Boats, new Harleys, new cars, bigger houses, pricy vacations, the whole lot of excess luxury spending. Anything but save or invest it.

Those folks are severely regretting it now.

 

[pb4uski]

He who laughs last...

 

[travelover]

..............
I suggested she stake out recent widowers in churches in affluent neighborhoods, keep her hair dyed and stylish, dress well and conservatively, get one or more of these guys into bed and gun for marriage. This is maybe the first time I ever gave her any suggestions that she seemed ready to listen to. I felt a bit of a traitor to the men she might snare, but overall if they keep control of the money and don't need earnings help, she would make a fully satisfactory wife. Anyway, an older man who gets snared probably feels it is an OK bargain.

Ha

Geeze, I owe you an apology. I had you pegged as some kind of a male chauvinist.

 

[2B]

Geeze, I owe you an apology. I had you pegged as some kind of a male chauvinist.

That would be difficult.

I knew a woman at NASA that had the "marry well" mode well ingrained. She was on husband 4 and she managed to financially ruin all of them.

 

[haha]

I am totally bewildered by what you guys may be talking about. I guess you may think that a 60 yo old woman should suddenly be able to do something she has never before done in her life, and be self sufficient. I say everyone has talents, and the only talents that she has that might secure for her a middle class life in her older years likely involve men. I try to live in the world as it is, not as some would like to pretend that it is. Some women are expert doctors, nurses, lawyers and engineers, some are also intelligent and attractive but have never accomplished much that might earn them money. Maybe she should become a coder at age 60?

So is there some remarkable revelation involved here?



Ha