Caviness Wealth Management, LLC
15660 Dallas Parkway, Suite 1425
Dallas, Texas 75248
Toll Free: 877-468-3505
Category Archives: Retirement
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