Downside Protection Has Downsides – WSJ.com

Our Comment by J. David Lewis – I really like this “Intelligent Investor” column by Jason Zweig.  He discusses the public’s reactions to recent market volatility.  Many are seeking safety in a type of annuity product.  Then he tells us pretty much what a fiduciary would tell someone asking for advice on these annuities.  I posted my comment on WSJ.com soon after I read the column, because we have seen the troubling aftermath from these annuity sales. Other WSJ.com comments are almost as interesting as the column itself.  A few attempt to justify annuity expenses and risks that are very difficult for typical consumers to understand.  Others support Mr. Zweig’s exposure of the expenses and other issues.  Potentially, the Securities and Exchange Commission will issue regulations that move all financial advisors toward a fiduciary standard that places clients’ interest first. If the regulations are strong, consumers will be better served.

 Mr. Zweig says, “Money has hemorrhaged out of “U.S. stock funds for 18 weeks in a row, with an estimated $15 billion flowing out in August alone. Much of that is being soaked up by a form of insurance sold as a safer alternative to stocks.

Fixed-indexed insurance products, commonly called “equity-indexed annuities,” offer the promise of protection on the downside combined with a guaranteed minimum upside. They racked up a record $8.2 billion in new sales in the second quarter and hit an all-time high of $168 billion in total assets as of June 30, according to Limra and Beacon Research.”

Read Mr. Zweig’s column via Downside Protection Has Downsides – WSJ.com.

Our Comment on WSJ.COM – Welcome back Jason.  I have missed your weekend stream of wisdom.  This column is particularly well timed.  Until April of this year, I was getting concerned that people were loosing some of the cautious mentality brought on by the bear market.  It seems the volatility since May 31 has injected a healthy dose of memory.  Of course, with that comes the tendency for people to fall pray to a sense of certainty, even if there are downsides they do not recognize.  There are always risks in everything.  The trick is to see them clearly and make good decisions with them in sight. 

In my experience, it is not the risks we can see that give us trouble.  We deal with those.  The risks we don’t see are the ones that get us.  And, the salesman, who is not held to a fiduciary standard of putting the client’s interest first, has great temptation to avoid giving his or her customer a clear explanation of all the risks that the customer is not able to see on their own.  In deed, being paid by commissions can motivate the sales people themselves to believe there is no risk in these annuities they are selling.  It is amazing what some people will believe if you pay them enough to believe a line. 

J. David Lewis founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.  Contact him using david.lewis@resourceadv.com.

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