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Today I will be a guest on “The Specialist” National Radio Show. Charles Kettner, aka “The Specialist”, is a professional sales and management trainer and published author, having recently released “The Specialist” Sales and Management Bible. He resides with his family in Virginia Beach, VA, where he is the host of a national daily radio show, The Specialist Radio Hour, dedicated to sales and management training.
The show will feature a quiz about Investiphobia. If you would like a headstart, here is the quiz.
1 Investiphobia is:
a A new book available on Amazon.com
b The abnormal, irrational, paralyzing fear of all things that are related to investing.
c characterized by the inability to make sound investment decisions.
2 Investiphobia is caused by
a one or more of eighteen different fears
b too much sugar
3 I may have investiphobia if:
a I avoid the stock market completely
b I haven’t bought or sold an investment in over three years
c I can’t sleep at night because I worry about my portfolio
4 I know that I don’t have investiphobia if:
a I follow the markets constantly trading several times a day
b I have a money manager or advisor who handles that for me
c I’m comfortable with my portfolio, my investments, advisor, and the markets
Answers will be given tomorrow, good luck! Hint: Some questions have no correct answers
The following is an excerpt from the book, Investiphobia – You Can Invest Without Fear. There are eighteen fears that cause investiphobia. To successfully treat investiphobia, you must know the cause. The following fear is common and directly relates to the previous post about Equity Index Annuities. Almost all annuities have surrender charges and some have lengthy surrender periods. You should know the access you will have to any investment, prior to purchasing, and you should make sure that you are comfortable with any limitations to your access. It is perfectly fine to use products that have surrender fees for a small portion of your portfolio. But, no matter how good a product sounds, you should make sure that you have access to the majority of your funds. We do not know the future, plan accordingly.
To purchase the book, visit, www.amazon.com.
Fear of Losing Access to Money
Every day, senior citizens across the United States buy investment products that have lengthy surrender periods. You have probably heard on the news, or read in the paper, about someone who cannot get access to their money because of the product that they purchased. This happens fairly regularly, and it is scary to anyone who is retired.
I read an article in a professional journal recently about a woman in her seventies who bought a product with a limitation on access that lasted for over twenty years. She would not have full access until the age of 105! Someone convinced her to put most of her money into this product. Thankfully, the company canceled her purchase and returned her money with interest. How did this happen?
The article did not cover the specific product that she bought. It may be an appropriate product for someone, somewhere, but it clearly did not fit her needs. In my opinion and experience, the cause of this type of sale is either greed or inexperience on the part of the salesperson. They probably attended a seminar and heard great things about the product and the commission that they would earn if they sold it, and they thought she might benefit from it. I’ll bet it had a tax-deferral feature and some guarantees.
Some of the products that have these lengthy surrender charges are good products, and some, unfortunately, are not. In either case, we know that there are products that limit our access to our own money. Some people are fearful that this may happen to them. Some people are paralyzed by these fears, and their paralysis prevents them from using many types of investments. They become singularly focused on access to their money and suspicious of anyone in my profession. Speaking as an insider, they are right to be concerned, but they are hurting themselves more than anyone else if this fear prevents them from investing.
It is not a matter of knowing the answers; it is a matter of knowing the right questions.
The advisor you select is critical to your success. If you select an advisor who is knowledgeable and compatible with you, you can expect them to be willing to help you understand what you need to know before you invest in any product. But not all financial services professionals are advisors, as a matter of fact, most are not. Many are salespeople, hiding behind titles such as financial advisor, investment consultant, vice president–investments, and other equally innocuous, but misleading and legitimate-sounding names. Sometimes salespeople also have the Certified Financial Planner, CFP, which is a very legitimate designation. Always remember that a salesperson with a CFP is a salesperson first!
It is not a matter of knowing the answers; it is a matter of knowing the right questions. I have included several questionnaires in the appendix that will help you. These questionnaires do not require any investment knowledge. You should know exactly how much access you will have to your money. Whenever you are asked to purchase a new investment, use these questions to make sure that you understand what the product will do for you.
The US District Court of Appeals has ruled that the SEC cannot regulate Equity Index Annuities. The SEC may reconsider it’s approach and could justify the regulation of a product that is not a security at some point in the future, but for the foreseeable future, these products will continue to be regulated by the Department of Insurance in each state. Insurance is not federally regulated, it is handled at the state level. Either way, you should know about Equity Indexed Annuities in detail before considering purchasing one.
Annuities are a product sold by insurance companies that offer tax-deferral of any income and gains that are not withdrawn from the contract. Fixed annuities offer guaranteed principal and an interest rate that is either fixed or based on a market index. Variable annuities offer the ability to invest in sub-accounts, similar to mutual funds, that can be in equities, fixed income, cash equivalents, and alternatives such as real estate. Gains and income are not taxed until they are withdrawn from the contract. Both fixed and variable annuities are offered either as deferred or immediate contracts. An immediate annuity offers a regular income stream that is generally a fixed amount for life, a time period, or a combination of both. As an example, the payments are for ten years guaranteed and for life thereafter. In that case, the insurance company agrees to pay the purchaser an amount for ten years whether they are alive or not. If they are alive after ten years, the payments are guaranteed to continue until their death.
Equity Index Annuities(EIAs) are a type of fixed annuity. They are not a security and although they contain the word equity, you should not expect an EIA to offer performance that is similar to the stock market. In exchange for the guaranteed principal of the EIA, you give up a portion of the markets return. Many EIAs base their interest rate on a market index like the S&P 500. If the S&P 500 falls, your annuity value remains the same. If the S&P 500 gains, your interest rate will rise either as a percentage of the gain (for instance 50%) or up to a limit or cap (for instance 6.5%). It is important to understand that the index that the EIA uses to determine the interest rate only uses the principal return, dividends are not included. As a result, these contracts are not an alternative to equities but they can be a valid option for funds that might be in fixed income or bank accounts.
The problem with EIA’s is that they are very complex products. Most have high surrender charges and long surrender periods. The worst EIA’s do not allow withdrawals and must be converted to an income stream (annuitized) when you want your money back. Do not buy an EIA if your agent is unable to fully explain the product to your satisfaction. Do not work with any agent, or company, that advertises that you can get the return of the market without the risk! That will not happen!
This overview is minimal, you should go to the NAIC website and request one of their consumer guides. The National Association of Insurance Commissioners offers insurance guides for Auto, Home, Life, Long-term Care, and Annuities. Their guides are educational and not advertising. You can download some of the guides but the annuity guide must be mailed. To get yours, visit NAIC.
<a href="SEC’s EIA rule may resurface – Investment News“>
The reporter for Investment News, Sara Hansard, asked my opinion of these products and was kind enough to include my comments and my picture in her article. To read the article, just click this paragraph or the link below.
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I continue to be concerned about the use of leveraged ETF’s by retail clients. These complicated products offer the exact opposite return of an index multiplied by a factor of either 2 or 3, but this performance is only for one day. Basically, if the S&P drops 5%, an inverse ETF goes up 5%, a 2X Leveraged ETF goes up 10%, and a 3X Leveraged ETF goes up 15%. However, when these products are held beyond one day, their performance can be wildly different than what most investors would expect.
The leverage creates a characteristic that is called volatility drag. It is very similar to compounding and causes the longer term performance to be much higher or lower than the underlying index. These products have a place, but only the most knowledgeable active managers should use them. I’m not convinced that they reduce risk and believe, that for most investors, they dramatically increase portfolio risk!
Evidently, one major brokerage firm agrees. Here’s the article from the Wall Street Journal.
Had a great weekend but didn’t follow up on the fiduciary rule, which I had promised. The following article does a great job in covering this issue. It is a must read, and written by a very knowledgeable expert on the fiduciary rule.
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It’s always nice to read an article that is written by a knowledgeable peer in your industry. The following article is from the Redlands Daily Facts Business Section and is written by Bill Beeler, a Redlands resident and fee-only Investment Advisor with the SEC Registered Investment Advisor named Regal Wealth Group.
His article is educational and he clearly understands the concept of the fiduciary standard, which Registered Investment Advisors must accept and comply. His advice is solid and I hope you enjoy this excellent article.
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FPA, NAPFA, state regulators and other groups urge Congress to impose fiduciary standard on all advi…July 17, 2009
The new administration and congress are considering sweeping investment regulatory changes that are stronger than we have seen in many years. Many of these changes are needed. The following article from Investment News summarizes the fiduciary versus suitability rules that govern investment advisors and brokers. I will add a post this weekend that breaks down both rules, but until then, enjoy this great article! Paul
FPA, NAPFA, state regulators and other groups urge Congress to impose fiduciary standard on all advi…
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Fear and confidence tend to alternate in the financial markets. This article from Investment News gives an indication of the continuation of fear. If there were a Center of Disease Control in the investment industry, the prognosis would be an epidemic of investiphobia!
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