50 Community News
Ponte Vedra Recorder · November 12, 2015
Wha’choo talkin about?
An attractive investment product that
many are talking about is the guaranteed fixed index annuity or FIA. With
the market collapse of 2008, along
with the recent completion of the
worst quarter for stocks since 2011,
fixed indexed annuities are arguably
in more demand than ever. When we
own a guaranteed FIA, we are essentially handing our money to an
insurance company creating a contract
between the insurance company and
us. In return, we receive a guarantee
that we will receive our initial investment, at a minimum, at the end of the
term. In addition, we will receive yearly
tax-deferred interest based on the
performance of an index such as the
S&P 500 up to a limit (cap rate). Please
understand that there is not just one
type of FIA. There are hundreds of FIAs
to select from, all with many different
moving parts.
Tony Robbins, author of Money:
Master the Game discusses in his book,
the “upside without the downside” risk
regarding fixed index annuities. This
upside/downside unregulated sales
pitch is unfortunately used far too
often, and it is not entirely accurate.
Yes, the FIA owner
has no downside
risk, but they still
can lose money!
I can hear your
mind verbalizing
the legendary
catchphrase from
an episode of
Harry Pappas
Different Strokes,
Columnist
when the puzzled
Arnold Jackson
would utter, “Wha’choo talkin’ ‘bout
Willis?” Please hang with me for just a
little longer as I connect the dots and
explain this stuff for you.
I suggest that anyone would love
to own an investment that provides
upside potential of the stock market
with no downside risk. However, as
an avid reader of this column, you
know how critical it is to employ our
nonsense filters when we get pitched a
perceived to-good-to-be-true idea. Our
baloney screens remind us to remain
skeptical, keep asking questions, and
maintain both hands on our wallet or
purse. While there are no fees for a
simple and straightforward FIA, there
can be charges if we yank our money
out too soon. For example, if we take
out money or terminate our FIA before
the contract period, most insurance
companies will levy a surrender charge.
Therefore, we are only guaranteed not
to lose any money if we hold the FIA
for the term of the contract. Now, do
you see how one can lose money but
have no downside risk? Regrettably,
far too many advisors ignore this small
but significant FIA feature. It is worth
noting that most insurance companies
allow us to withdraw 10% of our principal each year without any surrender
charges. Another noteworthy feature
that is frequently not mentioned to the
client is that the insurance co mpany
has the option to change the rules of
the FIA contract at their discretion on
how they credit our interest. Perhaps,
the omission of certain critical facts
is the reasons that FIAs are subject to
numerous alerts and bulletins from a
variety of concerned regulators. For
example, FINRA, the independent securities regulator, noted that FIAs were
“anything but easy to understand”.
This is how I see FIAs; guaranteed
fixed index annuities are not bad, people are bad at explaining risk/reward
features. The debate over the good and
evils of FIAs is no fault of the product
itself. It is more the fault of the financial system and some of the advisors
that promote these products. Perhaps
this is why AARP Magazine ran a scathing article about FIAs in their May 2014
issue titled, “Don’t Buy It “with a picture of Leonardo DiCaprio, star of the
movie The Wolf of Wall Street. In the
film, DiCaprio plays a dishonest, immoral, and unethical investment banker. As in every profession, while there
are some wolves, there are also many
trustworthy advisors, who are advising
clients to include FIAs in their portfolios. Of course, FIAs are not appropriate for every investor, but they do have
their place and can be a nice complement to help create a well-diversified
portfolio. In the end, increasingly more
investors do not mind locking up some
of their safe money to earn potentially
above average rates in exchange for no
risk to principal assuming you hold the
investment to term and avoid taking
withdrawal above what the FIA allows) and significantly less volatility in
returns. Perhaps it is like having your
cake (some of the stock market gains)
and eating it too. Should you have
questions regarding FIAs or any other
financial matter, feel free to drop me a
line or give me a call.
Prior to purchasing a FIA check with your Financial
Advisor to see if a FIA makes sense for your situation.
Please note that Indexed annuities can be expensive
and have been known to have substantial surrender
charges if you surrender the policy early, and you may
incur a tax penalty that could reduce or eliminate any
return. The surrender period is the time which you
must wait to take withdrawals from your annuity to
avoid a penalty. The surrender period and penalty
differ by annuity.Wells Fargo Advisors is not a tax or
legal advisor.
Fixed annuities may have a higher initial interest rate
which is guaranteed for a limited time period only.
At the end of the guarantee period, the contract may
renew at a lower rate.
Guarantees are based on the claims-paying ability
of the issuing insurance company. Guarantees apply
to minimum income from an annuity; they do not
guarantee an investment return or the safety of the
underlying funds
Insurance products are offered through our affiliated
nonbank insurance agencies.
The material has been prepared or is distributed solely
for information purposes and is not a solicitation or
an offer to buy any security or instrument or to participate in any trading strategy. The opinions expressed
here reflect the judgment of the author as of the
date of the report and are subject to change without
notice.
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