Wednesday, August 22, 2012

The Three Villains

Who are The Three Villains? Banks, Wall Street firms and insurance companies. Why? Because they do not care about anything but making revenue off of your money. Do not be fooled into believing anything otherwise.

Often as part of our services to new clients, we run an analysis on their existing investments. If I know that they do business with one of The Three Villains, I can almost predict what they are going to hold in their portfolios. Typically, they will own things on my Do Not Buy List. (Search this blog for my Do Not Buy List.) Things like UIT's that pay 2.95% commission. Things like variable annuities with guaranteed withdrawal benefits. Variable annuities with 10 year or sometimes longer surrender charges that pay 6 - 10% in commissions. Let us not forget Non-Publicly Traded REIT's (Real Estate Investment Trusts) that pay around 8 or 9% in commissions. Of course, last but not least, the Class A share Mutual Funds that pay as much as 5.75% in commissions.

I can literally close my eyes and write those four investments (don't make me laugh) down on a piece of paper and I would be able to check off at least three of these every time someone does business with one of The Three Villains. Usually, I can guess which of the four investments they own, by virture of which one of The Three Villains that they have their accounts with.

By the way, approximately 85% of every investor out there does business with one of The Three Villains. Yes, that means there is an 85% chance that you are a victim of The Three Villains.

It all boils down to one thing that guarantees that the deck is stacked against the average investor. Any registered representative that works for one of these Three Villains has to produce enough revenue to keep their jobs. In other words, they have a Quota to hit. If they do not hit their Quota, then they can be fired. These Quotas can be as much as $250,000 to $300,000 per year! This means that these registered representatives need to produce that much in commissions and fees for their Villain firm each and every year!

Now, ask yourself this question. How does my advisor, who works for one of The Three Villains, look out for my best interests? Do not tell me that your advisor is different. The truth is, like or not, that your advisor, who works for one of The Three Villians is most likely raking you over the coals.

Another critical point.

The liquidity factor is very important, in my opinion. Why do you want to invest in something that is not liquid? In this economic environment, that would be foolish. Let me repeat that. In this economic environment, that would be foolish. Three of the four investments mentioned above are illiquid, have penalties for early withdrawals, or have surrender charges.

Can it get even worse?

Sadly, it can. The typical variable annuity today is sold with roughly 2.6% in expenses and charges. Then, when you add on multiple guaranteed-withdrawal and guaranteed-stepped-up death benefit riders, you are adding probably another 1 or 2% on top of that. I routinely analyze variable annuities with these riders and in almost all cases, the expenses are north of 4% and closer to 5%. It is easy to make money when you are paying out 4 or 5% in expenses, isn't it? (I am being facetious.) Why in the world do you want to keep a variable annuity that is going to cost you 4 or 5% each year?

Think about this fact. If you give them your money and they charge you the laughing low figure of 4% in expenses and invest that for 20 years, the odds are they might be able to give you a guaranteed-withdrawal benefit of 5%. They are doing it WITH YOUR MONEY!!!

By the way, do not tell me that the reason you will stick with your variable annuity is because of the guaranteed-withdrawal benefits. Insurance companies are under pressure and some of them are writing their clients asking to be let go of those guranteed obligations in exchange for cash. I would not count on your guarantees, if I were you.

Non-Publicly Traded REIT's are built like Ponzi schemes. They take your money then generally, take a big chunk off the top for management and commissions. Then, they pay you back your capital as a "income stream". What a joke. You cannot sell these investments once you buy them for anything close to what you put in. Typically, you have to wait 10 years or more to even have a chance at getting some of your money back. Lots of times, the failing Non-Publicly Traded REIT's are rolled up into another REIT and you had no idea that this could even happen. I have seen people who thought they were going to get an 8% dividend, suddenly find after a roll up that their dividend is cut in half. Would that make you mad? Mad enough to want your money back? Sorry, you have to wait 10 years or more to hope and I do mean hope that you might get 80% of it back.

You are probably thinking that your advisor would not do that to you. Think again. They have that Quota, remember? If your advisor is like most, the only thing he or she really knows about a Non-Publicly Traded REIT is that it pays him 8.5% commissions. They do not know all the bad stuff I just described.

Mutual funds are okay, aren't they?

Sorry to disappoint you, but after your advisor makes his cut of your 5.75% commission, then you have ongoing 12(b)-1 expenses and management fees that can be north of 1% per year. I have seen instances where registered reps have made their 5.75% commission, then months later come back to you and put you in an assets-under-management account for 1.5% a year. So, now, you have paid the 5.75%, you are paying 1% plus in fund management fees, then on top of that, you are paying your advisor 1.5% a year. So, after two years, you may have paid 8.25% or more to be with your advisor.

Is this picture getting any clearer for you? I hope so.

Unfortunately, 85% of the people walking around out there are getting advice from The Three Villains.

You can stop the madness. Here is how. We can run an analysis on your investments to show you the truth. Feel free to contact me if you are in FL, IN, KY or TX. I can prove it to you.