Why Stock Brokers and Bankers are anxious to sell them to you
Bankers, stock brokers, insurance brokers will always push “financial products” that give them maximum commissions. Your interests are very much secondary to nil.
In this Grandpa Gem, we will show you why “structured investment products” will almost always be guaranteed losers for you.
Let’s start with “traditional annuities,” then go on to “Structured Guaranteed No Loss Deals.” Finally, we will discuss Hedge Funds, Mutual Funds, Discretionary Banker Investment Funds & finally, “new issues.” New Issues are not great either, but may be the least bad of the lot.
Before you read further, here’s Grandpa’s advice: Always consider the source. Why is someone trying to get you to invest your money in this or that product?
The answer is that if they will get a generous commission for steering you in a certain direction, they will of course prefer to sell you worthless junk—not an investment suitable for you. We highly recommend that you see a 2014 film called The Wolf Of Wall Street. It will entertain and painlessly give you some understanding of this process. And then you may ask, what is “Grandpa” pushing, and why? Fact is Grandpa is a very old investor who has been both burned and successful in passive investments and active businesses. These days he is retired, living in Monaco, and being a paid personal advisor to a very small number of high net worth individuals. Grandpa’s many books and articles like this serve as a calling card. They bring in new clients for short personal trial conferences, or longer term relationships. If you like Grandpa’s analysis and want to speak to him personally by email you may contact him at <[email protected]>. Comments, criticisms, corrections and kudos are all welcome.
There are many variations, but the basic idea of an annuity is that the customer, puts up a certain sum in cash called a premium. Then the issuer, almost always an insurance company guarantees you periodic annuity payments for a lifetime. They stop when you die. The variations can be structured so that the payments are made (for instance) immediately or at any future time. If set up for maximum payments at retirement, the annuity pay-outs might not start for 25 years or more. The possible variations are infinite: One common variant is that payments will continue (for instance) after you die, to a surviving spouse. In order to understand why annuities are such a bad deal, let’s look at a standard, basic annuity policy.
The annuity sales pitch is designed to appeal to the customer, mislead, and make money for the insurance company. The most important thing the customer is seldom told, is that from the initial premium a generous brokers commission – as much as 20% of your upfront cash – is lost to you from day one.
Here is how it works from the point of view of the insurance company that creates and services the annuity. Interest and exchange rates are always changing. Thus, please note that the figures we have chosen as an example are always going to change. But what never changes is the fact that you could, with very little effort, create your own lifetime annuity deal that would yield you an infinitely better return on your money. And when you die, instead of the insurance company keeping your capital, you can pass it to your heirs. They can theoretically keep receiving the same periodic payments forever.
The annuity/insurance broker gets say, €1 million cash from you. He pockets €200,000 immediately. That commission money is gone forever. No refunds, no cancellation is possible. The broker turns over €800,000 net to the insurance company . They agree to pay you €1,000 per week, €52,000 per year, as long as you live, starting in 25 years (assuming that is the time you expect to retire). The insurance company puts your €800,000 in safe tax free long term bonds yielding 4% per year. The calculations will be a little more complex than this. If you want to gamble on the stock market averages, or other investments, you can do it with annuities. But basically, in a standard annuity the insurance company figures that with compounded interest over 25 years, they will have a €1,600,000 balance on hand in your account. This will service the promised lifetime payout to you of €52000 per year. At 4% interest, they will be earning €64,000 a year giving them a comfortable €12,000 per year profit.. But best of all for the insurance company, if you will live long enough to collect the annuity for say 25 years, when you die, they keep everything in your account. In other words, the insurance company ends up with your original €800,000 plus around €12,000 annual net investment gain for around 50 years. A nice net profit for them in the area of €1.4 million, plus.
Why is this annuity such a lousy deal for you? You could invest your million in the same bonds, or probably much better passive investments, and collect €40,000 per year from day 1. Assuming the same facts as above, over 50 years, you would collect a total of €2 million in interest. When you passed on, you would leave your heirs or favorite charity, at least the original €1 million. Total minimum payout to you or your heirs from a simple self-managed account = €3 million.
With the annuity deal you got a €1.3 million payout. Nothing left when you passed away. The insurance company picks up all the chips. There is no way they can possibly lose on the deal. But you have lost 2/3rds of your capital.
For 50 years, you had no flexibility or control over your assets.
Why then, did so many people buy annuities when they are such a terrible deal?
If you were a broker with a € 200,000 that you could potentially earn from a few-hour sales pitch, you would have a big incentive to create attractive reasons. What would your main points be?
The last annuity broker I listened to gave me this example: A certain rich Americans came out smelling like a rose with an annuity as described above. How? He bought the annuity with dollars but contracted for the payout to be in Swiss Francs. As it turned out, with perfect timing he bought his annuity in Swiss Francs before the Swiss Franc tripled in value vs. the dollar. So his monthly payout calculated in dollars with the annuity (using the above earlier figures) was close to €4 million on the original $1 million he “invested.”
What the broker didn’t say, was that performance like this would be a rare fluke! If the same guy was so astute as to choose a Swiss Annuity had simply bought Swiss denominated bonds with the same timing, his net return (in $) would have been closer to $9 million. The annuity “lost” him $5 million.
Of course, currency exchange rates both long and short term are difficult to impossible to predict. There is no reason to assume that you can choose a payout currency that will not be a lot lower. If you had stay in your home-country currency both for the pay-in and the pay-out your results are predictable. As a matter of fact, there have been periods in the last 50 years where the dollar tripled against the Swiss Franc. Less than perfect timing on currency speculation could result in the loss of almost all your money.
Another big selling point is that annuities offer considerable protection against creditor’s claims and judgements. This is true. But for a person worried about future creditor claims, there are much cheaper and more effective means of gaining protection: Liability insurance or using trusts. These are just two ways to insure yourself against creditor claims.
Next, Annuities offer a certain amount of tax-shelter. This is also true, but tax free bonds certain government approved retirement plans, and other tax shelters offer far better alternatives than annuities.
Finally, Annuities offer protection against your own stupidity in making lousy investments and losing your capital.
Grandpa’s comment: If someone is stupid enough to buy a guaranteed loss with an annuity, I suppose they could be even more stupid by gambling it away, buying a fictional gold-mine or otherwise being conned out of your money.
Another consideration applying to all investments, is that money, cash, all bank accounts are another wrong place to keep and grow your capital. Current newsletter writers and most financial analysts have been correctly predicting the collapse of almost every “fiat currency” for as long as anyone can remember. There is no future collapse coming. It is here now. After inflation, the price of most things reflects a loss of 80% or more in almost every currency over the last 50 years. Thus, any “investment” that does not return around 6% after taxes, is a loser.
What is good in Grandpa’s opinion?
An active business, profession or “Portable Trade” of the sort I wrote about in my book of that title (Portable Trades & Offshore Opportunities).
Real estate is also good (THINK LIKE A TYCOON).
If we ever meet personally, ask me (Grandpa) about the family house and lot we bought in 1940 as a “distressed property” for $300 total. Unfortunately this old home was sold many years ago for much less than it’s current value of $30,000,000. However it stands as an example of investing in well located property where you have some expertise. Art, antiques, anything where you are a dealer is going to be better than anything that is delivered to you as a package deal where all you do is pay for it and watch it devalue.
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