Market downturns don’t necessarily get average investors to run for cover, but they do convince a lot of people that it’s time for a free lunch or dinner.
That meal generally comes as part of an “investment seminar,” and while the food often can be good, the products pitched in these sessions can leave you with heartburn or worse. There’s a reason why the U.S. Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA) all have warned consumers — repeatedly — about the potential dangers hidden in “free lunch sales seminars.”
It’s not that every financial presentation made to a mass audience over a meal is a disaster waiting to happen. I have been to dozens of these events over the years, and the best ones — few and far between — were run by financial advisers and money managers who were prospecting, talking generically about planning and management without ever suggesting solutions or products.
The worst are sales-driven money grabs where truth is blurred and hucksters take advantage of ignorance, stupidity and/or greed to catch financial fish.
No one keeps statistics on how many of these seminars are done every year, but empirically anyone aged 50 and up can find the signs that they are on the rise by looking in their mailbox, reading the local paper or checking their “promotional” email intake.
The increase in this kind of activity was no surprise after the December swoon.
Market downturns make investors nervous, and fear is a salesman’s best friend when they’re thumping products that sell safety. After the December dive, there was a big increase in financial advertising by annuity companies; the hyperlocal sales meetings were the obvious next step.
Every time this stuff comes around, I check out the latest offerings to see if it’s just the latest twist on an old story.
That’s how I wound up at the Scarlet Oak Tavern in Hingham, Massachusetts, on March 18 as an area insurance firm hosted an “Understanding Different Retirement Strategies workshop.”
The free meal itself was excellent; the sales pitch was everything I feared it would be.
I’m not naming the agency involved because I could have gone to presentations from six different companies within a 15-mile radius of my home over the first three weeks of March. (I called the other presenters and said I would not buy certain financial products; three told me not to attend their events and the other two were using reservations services whose representatives said they did not know what was being pitched.)
Expecting the worst, I was not disappointed by what I heard, which was the sales pitch for a “fixed index annuity.”
It was not sold as one-size-fits-all, but rather “We have something in every size,” seemingly making it right for everyone. And no matter your market fears, the indexed annuity seems a cure-all; it is investment snake oil for people seeking financial miracle drugs.
Annuities are insurance contracts, and they aren’t all bad, despite what some critics say.
Consumers looking for guaranteed lifetime income — effectively, a pension — should ask two questions about an annuity: What do I want the money to do, contractually, for me? When do I need those contractual payments to start?
Indexed annuities take the buyer’s eye off the ball, promising “market upside with no downside risk.”
At the seminar I attended, there was a chart showing the performance of the Standard & Poor’s 500, and only if you got close enough to the poster could you see that it showed index results excluding dividends. (None of the other 30 attendees read that fine print.)
Never mind that dividends, historically, make up about half of the total return an investor gets from the market; the idea here was to show the market at its worst. What they also didn’t say is that annuity buyers likely would be giving up dividends too, since most annuities calculate the potential market returns based solely on month-to-month index movement, rather than on total return over time.
The indexed annuity charted a better, safer course — with investments effectively reaching the same place as an index-fund investment over the last 20 years — which was true only because dividends were excluded. (Performance-wise, fixed index annuities are more like an alternative to a certificate of deposit than to a market investment.)
“They’re pitching potential, hypothetical, theoretical, back-tested, hopeful, non-guaranteed, agent-return scenarios,” said Stan Haitchcock, better known as “Stan the Annuity Man,” a noted critic of the industry he works in. “Never buy an annuity for what it might do; always buy an annuity for what it is contractually obligated to do.”
The sales pitch was correct about protecting capital. Barring some strange withdrawal patterns or the collapse of an insurance company, no one will lose everything here. Your principal won’t decline in a down year.
The problem is that it may not go up in a good year, and that insurers typically can change contract details annually, with the buyer having no say-so and the adjustments significantly affecting financial outcomes.
Moreover, “immediate bonuses,” no commissions, zero fees and more are misdirection plays.
Your immediate bonus — cash added to your deposit — might as well be Monopoly money if it takes you years to access it without penalties, and the insurer pays for the bonus by reducing the way interest is calculated, tightening the cap on up markets, lengthening the time the money must remain in place, raising fees and more.
Likewise, even if you don’t see commission charges, you know that agents hosting these meals aren’t charities; they’re getting paid, somehow, from buyer deposits.
It’s not that the sales pitch on these products — like a free lunch or dinner — is too good to be true, it’s that it just isn’t true.
No matter how enticing the sales pitch sounds, expect to get the bare minimum of what is promised; if that doesn’t excite you, take your free meal, your money and your pride and go home.