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Article Archives:
01/14/2004
Equity Indexed Annuities:
Agents Prey On Unsuspecting
Look Out! Millions of Americans feel unsophisticated when they discuss investment opportunities. If you are one of them, beware. A legion of commission-based brokers and insurance agents is just waiting to sell you the ‘perfect investment.’ Unfortunately, it can easily be an investment you will regret for years to come.
I am referring to the latest product served up by the insurance industry that is designed to meet your every investing need. Equity Indexed Annuities (EIAs) are selling like hotcakes. In this Guarding Your Wealth Special Report, I will expose three things you should keep in mind when your broker or agent recommends an EIA to you.
First, EIAs are purchased mainly by people who don’t understand investing and thus don’t understand that better alternatives exist. These investors are sort of like me when it comes to car repair. Because I’m not an expert on engines, I never really know if I can trust the mechanic’s advice, especially since it’s in his best interest to get me to replace as many components as possible. Luckily, I have a friend in the car industry who usually arms me with enough information to keep me from being taken for a ride.
For most people, it is the same when it comes to investing. Because of the world of investing has become so complicated, most investors seek the advice of a professional. But how can you know that what they recommend is really what you need, especially if you know they will make a bundle on the deal? Fortunately, I’m going to give you the information that will keep you from being taken for a ride and regretting your decisions.
That’s why I am so opposed to Equity Indexed Annuities. They are mainly sold to those who don’t understand the realm of investing. Seniors over age 70 are particularly vulnerable. Think about it! If EIAs were such a good investment, wouldn’t experienced investors be buying them?
Experienced investors don’t buy EIAs.
Experienced investors aren’t going to lock themselves into an investment for 7,10 or 12 years with only limited choices. Experienced investors recognize that better alternatives exist – alternatives that give them the flexibility to select from a wide range of investment options rather than just a handful. The next two Guarding Your Wealth articles will specifically discuss these alternatives and explain why they are better.
The second point to keep in mind is that those who recommend them may not have your best interests at heart. The advisors recommending EIAs are either insurance agents who don’t have access to better alternatives or brokers who have access to other alternatives but choose the investment that pays the highest commission. The only reason that EIAs require that you keep your money in them for 7,10, 12 years or longer is because it takes the insurance company that long to earn back the commission they paid the broker or agent to sell it to you.
If the ‘professional’ you are talking to gets paid on commission, a tremendous conflict of interest arises when they recommend an EIA. They will make more
in one hour by getting you to buy an EIA then you will make in 3 to 4 years at the minimum 3% rate. When an agent or broker has a choice between recommending a product in which they make 1%-2% commission and one in which they could make a 10% commission, which do you think they will recommend?
Third, when hidden motivations and conflicts of interests are removed, EIAs are rarely recommended. Many financial advisors, myself included, get paid solely on management fees as opposed to commissions. If EIAs were such a wonderful investment, wouldn’t it make sense that they would also be widely used by advisors paid by management fees? They aren’t.
Quite frankly, in my friendly opinion, if you are talking to an advisor that recommends you purchase an Equity Indexed Annuity then you should find another advisor. You need to work with someone who has
your best interests at heart. You should work with someone who gets paid based on how well they manage your money, not on how adept they are at selling you.
So look out! Explore all of your options and remember—it’s YOUR money!
Mr. Voudrie is a Certified Financial Planner™ Professional and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN. He can be reached at 877-827-1463, at www.guardingyourwealth.com or by emailing jeff@guardingyourwealth.com.
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