By CHAS P. SMITH, CPA/PFS
Excerpts Published Thursday, October 23, 2014 by Lakeland Ledger
Most investors don’t realize that certain advisors, including bank associates, insurance agents, and brokers are not required to give objective investment recommendations. In fact, a large insurance company is in the process of having all of their Certified Financial Planner professionals remove themselves from the CFP Board of Standards as their obligation to the insurance company is, by Florida law, more important, than their obligation to clients. Which means that some products sold, such as annuities, were not in the best interest of clients. The lesson here is not that insurance company advisors are bad by any means, but rather some advisors have other goals to meet.
WHY ADVISORS SELL ANNUITIES
At most brokerage firms, advisors are compensated to bring in new money and their firms pay those brokers anywhere from 40-60% of the fees and commissions they generate. Not only that, if they meet other goals, extra benefits to the top performers are given for things like vacations, prime parking, private club memberships, and other fringe benefits designed to keep the sales competitive.
Specific to annuities, these products offer the advisor an upfront commission of 7% on average and a trailing commission that is paid annually of 1%-3% as long as the policy stays in force. It’s possible that an annuity is the right product for a specific person, but often times that is not the case. Many investors think they are receiving sound recommendations when being sold annuities, when in fact, the advisor is looking for an added payday. That is why it’s best to take investment recommendations with a grain of salt from commission-based advisors. The litmus test we recommend is to ask the advisor to show you his or her personal investment statement and see if an annuity is included in his or her portfolio.
FOLLOW THE PLANNING STANDARDS
When listening to the advisor you’re meeting with, make sure they are gathering a thorough understanding of your personal financial situation. They should be gaining your trust and performing a fact finding mission about you before recommending any investment ideas. The advisor that knows what to sell you before you say too much about yourself may have another agenda.
BATTING AWAY THE SALES PITCH
If an advisor is ready to recommend a security or product before gathering your personal information, walk out of the office immediately. In an October, 2014 article in The New York Times, a couple was sold an annuity for their entire nest egg as a means to guarantee lifetime income for the next 20 years. What they weren’t properly educated on was the amount of annual fees, which were above 4%. Additionally, there were surrender penalties they were subject to when they needed money to cover unforeseen medical expenses. Most of the time, the advisor and insurance company selling the annuities will show proof that the client fully understood the product and even signed off and/or did nothing during the free-look period to cancel the policy. The truth is that most people who are sold annuities don’t know any better.
HOW TO RESEARCH THE ADVISOR
The vast majority of advisors are honest and make recommendations in the best interest of the client. However, it is always prudent for the investor to research any advisor and their firm they plan to obtain advice from. To research backgrounds including education, licenses, certifications, and any pending or past litigation, use the following sites to gain knowledge about the advisor:
For Brokers or Registered Representatives of Broker/Dealers, visit finra.org.investors.toolscalculators.brokercheck. It covers brokers and firms registered with the Financial Industry Regulatory Authority (FINRA).
For Registered Investment Advisor firms or Investment Advisor Representatives, visit advisorinfo.sec.gov. This government site of the Securities and Exchange Commission scans SEC data as well as the BrokerCheck from FINRA as well as state securities regulators’ sites.
Source: The New York Times
Next time: When You Should Buy Life Insurance
Chas P. Smith, CPA/PFS is president and chief investment officer of CPS Investment Advisors