Yesterday I was in North Georgia in connection with a possible case. I took the opportunity to have lunch with a high school classmate who now lives in the area. Both the company and the food were excellent, but both gone too soon. Then again, I’ve never met a pimento cheese sandwich I did not like.
I took the opportunity to take the long way back to Atlanta so that I could enjoy the fall foliage. Once I left the mountains and got back to the highway, my phone exploded with all kinds of bells and whistles. I pulled into a fast food restaurant and checked my phone. Twenty-seven voice mails! So much for what had been a good day.
As I checked the voice mails, they were all meant to alert me to the House of Representatives’ decision to vote on a bill to delay the proposed fiduciary standard for pension plan service providers. In effect, the pension plan service providers have led Congress to believe that the financial services industry cannot operate profitably unless the industry is allowed to continue to put their financial interests ahead of the public’s interests. And the House obviously bought it hook, line and sinker, voting to prevent adoption of a fiduciary standard that would protect the investing public by requiring that the financial services industry always put the public’s interests ahead of their own.
I have written several posts and articles about the Active Management Value Ratio™ (AMVR), a proprietary metric that uses simple subtraction and division to allow investors and fiduciaries to perform a cost-benefit analysis on actively managed mutual funds. In most cases, the AMVR shows that the incremental cost of actively managed mutual funds far exceeds the incremental benefit of such funds, often by at least 300-400 percent. The results of calculating a fund’s AMVR often indicates that the fund in question is not a prudent investment decision. And yet, most pension plans choose actively managed mutual funds as the primary, if not only, investment option for plan participants.
The current debate is largely over imposing a fiduciary standard on advice regarding IRA investments, specifically the recommendation to put one’s pension funds in a variable annuity within an IRA . In many cases one’s pension fund is one of the largest assets a person owns.
Variable annuities are one of the most oversold, most abused and least understood investment products sold to the public. The saying in the industry is that “variable annuities are sold, not bought.” I addressed the marketing tricks used to sell these products in a popular white paper, “Variable Annuities: Reading Between the Marketing Lines.” The paper has been used by the Financial Planning Coalition in connection with its lobbying activities before Congress in support of a universal fiduciary standard for the financial services industry. I highly recommend that anyone who owns a variable annuity or is considering purchasing a variable annuity read the article.
The financial service industry want to protect their right to abuse pension plan and IRA owners for one reason, greed. During my compliance days, I would estimate that 90 percent of my objections had to do with recommendations involving variable annuities. The sales assistants would dread bringing me the paperwork, as they knew I would probably reject the trade as presented with my signature mantra – “All God’s children do not need a variable annuity.”
Variable annuities usually pay commissions in the range of 7-8 percent, approximately twice the commissions of mutual funds. Various annuities typically use an equitable method of computing a variable annuities annual fees, producing a significant, albeit unmerited, windfall for the annuity issuer at the annuity owner’s expense.
The typical annual fee runs in the range of 2-2.5 percent a year. Given the fact that each additional 1 percent of fees reduces an investment owner’s end return by 17 percent over a twenty year period, many variable owners are losing a third or more of their returns to variable annuity fees alone. Throw in another 1 percent for an advisor’s fee and the annuity owner has thrown away over half of the investment’s return!
The proposed fiduciary standard generally discussed would not prevent financial services salesmen from selling reasonable investment products or from receiving reasonable commissions from the sale of such products. The only change would be that the sale of such products would have to always be in the customer’s best interests. The financial services industry knows that it is not, and cannot, meet that standard, as evidenced by their continuous objection to the adoption of the proposed fiduciary standard.
Check the voting records of your representative and your Senator. If they voted against providing you with the protections that a fiduciary standard would provide, if they basically told you that they care more about the financial services industry and their money than you and your financial security, I strongly suggest that you consider sending them a message the next time they are up for re-election, a message that you want them to serve and protect you rather than special interest groups.
My five-year-old “agent” just walked into my office. Someone stole her jacket so we are going to “de-stress” and buy her a replacement jacket. Then it’s to our favorite restaurant for pimento cheese sandwiches, Arnold Palmers and probably a sundae with tons of sprinkles. The fiduciary fight will have to wait until tomorrow. After all, there’s more than one way to skin a cat. To quote the unsinkable Molly Brown – “Nothin’ nor nobody wants me down likes I wants me up!”