Caviness Wealth Management, LLC
15660 Dallas Parkway, Suite 1425
Dallas, Texas 75248
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Category Archives: Investing
At some point, you’ve probably received a piece of mail or heard the guy on the radio with the following too-good-to-be-true sales pitch “No Taxes, No Fees, & No Risk”. If you haven’t heard it yet, just wait. You will.
This sales pitch is usually accompanied with an invitation to a free lunch or dinner that is most often being held at your local steakhouse or senior center. And – this is the part that bothers me the most– it’s also almost exclusively directed towards retiree’s and seniors.
Many things about this “investment” concern me – specifically the “no taxes, fees and risk” part, as these cannot be avoided – only minimized – in investing. Once the layers are peeled back, the “investment” being sold is an insurance product commonly known as an Indexed Annuity – or a variation thereof such as: Equity Indexed Annuity or Fixed Indexed Annuity. If you find yourself on the other end of this sales pitch, here are a few key points to know and ask:
Taxes: While it’s true that you may be able to defer taxes to an extent, you (or your beneficiaries) absolutely can not avoid paying them. How are distributions treated from the account? For example, if you need money how will any attributable interest credited be treated for tax purposes – Will it be taxed at the higher ordinary income tax rates or will it receive the more favorable (and possibly lower) long-term capital gain rate?
Fees/Penalties: We believe fees should be transparent. That is, you know exactly what you are being charged. In the case of indexed annuities, you typically only see your initial investment into the product and any interest credited each year. This gives the appearance that there is no fee or cost associated with this product. However, the reality is, indexed annuities still do incur costs that reduce returns. Rather than being transparent and showing the fees (i.e. commission to the selling insurance agent, investment operating expenses etc..) directly from the account, those costs are taken from the gross return, crediting your account with what (if any) is remaining.
Additionally, annuities limit your ability to access your money without penalty. If you take a distribution from your account, will there be any fees charged? Are you limited to only a small percentage each year without penalty? How long must you hold the annuity before you can access all of your money without a fee charged? Without some sort of fee structure, how would the insurance company pay a commission (as high as 10%) to the agent for selling the product?
Risk: All investments carry an assumed risk. No risk = no return. The glaring risk with an indexed annuity (despite the promise of market-like returns without ever losing your money) is the actual low returns received by investors. Additionally, what is often found buried deep within the legalese of the prospectus, is the fact that most indexed-annuity contracts allow the insurance company to change the terms (fees, participation rates, and spreads) at their discretion. Just like casinos, the house almost always wins.
Unregulated Investments: If you haven’t deciphered by now, indexed annuities are insurance products. As such, they are also generally unregulated by the securities regulators. FINRA, the investment regulatory agency, has issued an investor alert on indexed annuities, which you can read here: FINRA Indexed Annuity Alert.
Most often, the “financial advisors” selling these products are simply insurance agents that do not currently hold a securities license, and thus are not being held to the same stringent requirements and background checks as a licensed representative. If you want to know for sure, you can check the status of anyone putting themselves out as one here: FINRA Brokercheck This site will also show any prior complaints or disciplinary items, providing the person is currently or has previously held a securities license.
There is an economic theory called “There is no such thing as a free lunch”. As the theory states, whatever goods or services are provided, they must be paid for by someone. In the end, the person paying for an indexed annuity is the person that buys it. Often times by subpar investment performance.
If you would like to know more, or want to discuss your specific circumstances in more detail, please don’t hesitate to contact us by writing or calling.
Additional Resources to review:
Things the Attorneys Make us Say:
Equity Indexed Annuities (EIAs) are not suitable for all investors. EIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. EIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims paying ability of the issuing insurance company
In 2016, financial markets, the economy, and geopolitics experienced an unusual number of milestones. While markets are testing new directions, it’s easy to overemphasize change, putting a spotlight on uncertainty and playing up the worst case scenario. The way to assess the new dynamic is not to ask, “What’s broken?” or “What’s fixed?” but “How will businesses, markets, and the economy adapt?” Being prepared for 2017 is about gauging the milestones, understanding their significance, and responding without overreacting.
The LPL Research Outlook 2017: Gauging Market Milestones, contains financial market forecasts, economic insights, and investment guidance for the year ahead. Some of LPL Research’s expectations for the upcoming year include:
- Accelerating U.S. economic growth*. LPL Research expects the U.S. economy—as measured by real gross domestic product—may grow modestly to near 2.5% in 2017, after spending most of the seven‐plus years of the expansion averaging just over 2.1%. The potential growth lift is based upon expectations that rising business investment and fiscal stimulus may complement steady consumer spending. The details and timing of the passage of President‐elect Donald Trump’s proposals on taxes and infrastructure, and the speed of implementation will be important growth impact factors in 2017.
- Mid‐single‐digit returns for the S&P 500**. LPL Research forecasts mid‐single‐digit returns for the S&P 500 in 2017, consistent with historical mid‐to‐late economic cycle performance. Gains will likely be driven by mid‐ to high‐single‐digit earnings growth and stable valuations (a stable price‐to‐earnings ratio of 18 – 19). In addition, LPL Research expects the current bull market to reach its eighth year. However, gains will likely come with increased volatility as the economic cycle ages further and interest rates may rise (bond prices fall), increasing borrowing costs and making bonds a more competitive alternative to stocks.
- Limited bond return environment. LPL Research expects the 10‐year Treasury yield to end 2017 in its current range of 2.25–2.75%, with a potential for 3%. Scenario analysis based on this potential interest rate range and the duration of the index indicates low‐ to mid‐single‐digit returns for the Barclays Aggregate Bond Index. The recent rate hike shows the Federal Reserve may start gradually normalizing interest rates in earnest. Importantly, rising interest rates, along with a pickup in the pace of economic growth and inflation, will limit return potential.
This research material was prepared by LPL Financial, Member FINRA/SIPC. Important Information
*Our forecast for GDP growth of 2.5+% is based on the historical mid‐cycle growth rate of the last 50 years. Economic growth is affected by changes to inputs such as business and consumer spending, housing, net exports, capital investments, and government spending.
**Historically since WWII, the average annual gain on stocks has been 7–9%. Thus, our forecast is in‐line with average stock market growth. We forecast a mid‐single‐digit gain, including dividends, for U.S. stocks in 2017 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid‐ to high‐single‐digit earnings gains, and a largely stable price‐to‐earnings ratio (PE). Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2017.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted.
The S&P 500 Index is a capitalization‐weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Barclays U.S. Aggregate Bond Index is a broad‐based flagship benchmark that measures the investment‐grade, U.S. dollar‐denominated, fixed‐rate taxable bond market. The index includes Treasuries, government‐related and corporate securities, MBS (agency fixed‐rate and hybrid ARM pass‐ throughs), ABS, and CMBS (agency and non‐agency).
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non‐ diversified portfolio. Diversification does not ensure against market risk.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Tracking #1‐567541 (Exp. 12/17)
Finally, we made it! The day we’ve all been waiting for. By the end of the day, we’ll either have a new president-elect, a contested outcome or even the possibility of a split electoral.
And while the market protagonists are out in full force today, whatever the outcome, there’s one thing I know with near certainty. The world will continue to spin. The sun will rise and we will all go about our normal weekday routine.
While it’s likely that any sort of surprise can cause the market to react (a la Brexit), as investor’s, it’s easy for us to get caught up in the headlines of the day and loose sight of our long-term goals. Remember, geopolitical events tend to be short-term in nature.
As our research team at LPL wrote last week (“Could There Be A Big Sell-off After the Election”),
“Election anxieties have many on edge and questioning if we could see a big drop in equities during the rest of this year, given the recent eight-day losing streak. Well, the good news is history would say no. In fact, the only time we’ve seen large drops in the final two months of the year during an election year going clear back to the election in 1952 were in 2000 and 2008. Both of those times, the economy was a larger factor in the weakness than the election. With the earnings recession finally ending and the best gross domestic product (GDP) print in two years in the third quarter, the economy is fortunately on improving footing as we head into 2017.” – Ryan Detrick, Senior Market Strategist
I will be monitoring the political outcome and market reaction throughout the night. As always, I encourage you to CONTACT US with any questions or concerns you have.
Two good reads from our research team at LPL:
When it comes to investing, no words ring truer than the old adage – “If it sounds too good to be true, it probably is.” Back in March, I wrote a post on this very subject. You can read it here.
This past weekend I happened across this from the Dallas Morning News:
A well-known Frisco wealth manager is in hot water with Texas authorities after being accused of helping perpetuate a Ponzi scheme and using as much as $1.4 million in investors’ money to pay off a tax lien.
On Monday, the State Securities Board ordered Bob Guess to stop selling investments in multiple fraudulent financial dealings, according to the agency’s emergency cease and desist order.
The order said that Guess’ firm, Texas First Financial LLC, has been offering investors 9 percent annualized returns on securities that aren’t registered, and that Guess himself is an unregistered securities dealer.
Texas First Financial has widely advertised its services and investment forums on local radio stations, including ESPN Dallas 103.3 FM and WBAP News Talk 820 AM. Guess is also the host of the “Dollars & Sense” radio show.
If you’ve ever driven around Dallas listening to talk radio, I’m sure you’ve heard the advertising mentioned above. In it, a pitch for an investment with 9% returns using adjectives such as “Safe” “Predictable” and “Like a CD”. All used to imply a sense of safety and security.
In reality, as we know, the only way to earn returns astronomically greater than that which you can get at a bank is to assume some level of risk. Implying otherwise, well, that’s just deceitful.
“If it sounds too good to be true, it probably is.” This sounds like commonsense; yet oftentimes, this is one of the most ignored pieces of financial advice I see.
It is my belief, that your investments should be managed in a way that is straightforward and directly matched to the risk level and objectives outlined in your written financial plan.
DMN 8.19.19: Dave Lieber – Watchdog Column
Texas State Securities Board: Emergency Action Filed Against Dallas-Area Investment Promoter
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
I had the pleasure of spending 4 hours of quality road time yesterday driving to East Texas for a client meeting. On multiple AM channels, I heard an advertisement for an “investment” that was “like a CD” using words such as “Safe” “Predictable” “Stable”.
Here’s the kicker. This 1 year investment offers a 9% return.
Think about this for a minute.
A 1 year – “Safe” “Predictable” “Stable” – “investment” yields a 9% return. Who wouldn’t want that?
ME. And neither should YOU.
Let’s put this into a little perspective….As I write this, the current yield on a 1 Year Treasury is .6923%. Let that soak in… A 1 year US Treasury — what is widely considered to be a low risk investment — currently yields .6923%.
9% — That’s 1,200% higher than a 1 year US Treasury.
I stopped by the bank this morning on my way to the office. A 1 year CD yields me a whopping .05%. That’s right. An FDIC insured CD only yields .05%.
9% — That’s 17,900% higher than a FDIC Insured 1 year CD at the bank.
I’m not saying this advertised “investment” is a scam – I don’t know. Nor am I implying that earning 9% for 1 year won’t happen. But I will say that the only way to achieve 1,200% greater than the 1 Year Treasury is to accept a certain degree of risk.
Investing 101 taught me that. It also taught me that when it sounds too good to be true, it probably is.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.