Investor Self-Protection Guide 2019

As a securities/ERISA attorney, Certified Financial Planner® professional and an Accredited Wealth Management Advisor®, I am interested in providing the public with quality financial advice and helping to address the ongoing problem of financial abuse and fraud. One of the reasons I created this blog was to help people be more informed about financial issues and allow them to be more proactive in protecting their financial security.

The public loses billion of dollars each year due to poor investment advice and financial fraud. Two of the primary groups targeted each year are the elderly and women. The exact figures for financial fraud on these two groups are hard to calculate due to the fact that it is estimated that as much as half of such cases are never reported due to fear of embarrassment and possible loss of independence and personal freedom.

When I speak with the public or potential clients, a frequent question is how to determine who to trust. My answer is to heed the advice of former President Ronald Reagan – “trust, but verify.”

Trying to understand all the investment products on the market is understandably challenging. I can tell you from experience that many of those peddling investment products do not truly understand the products. Many of these “financial advisors” try to impress the public and create a relationship of trust with clients and potential clients by referring to various titles and designations. However, a study by respected financial firm CEG Worldwide, concluded that only 93% of those holding themselves out to the public as “wealth managers” were simply salesmen trying to sell investment products. As the article warned, “[j] because your business card says ‘wealth manager’ on it, that doesn’t mean you’re a true wealth manager.”

Three Investments to Avoid

Three of the most questionable investment products currently on the market are variable annuities, fixed index annuities and actively managed mutual funds. My white paper on variable annuities, “Variable Annuities: Reading Between the Marketing Lines” is by far my most viewed post on this site. My feelings about the abusive practices connected with variable annuities are clearly set out in the Congressional Record – “the most overhyped, oversold and least understood investment product in America.”

Variable annuities are usually marketed with such claims as to financial security, such as “a never-ending stream of i come” and “income for your entire lifetime.” What is not mentioned is that in order to receive such lifetime income, the owner of the variable annuity has to give up possession of the money in the variable annuity. So eventually the money that a variable annuity worked a lifetime for and hoped to pass on to his/her family goes instead to the insurance company that sold the variable annuity.

As the white paper points out, even if an annuity owner does not activate the lifetime income option, the high fees associated with variable annuities can significantly reduce the end return a variable owner receives. Each additional 1% in investment fees and expenses reduces an investor’s end return by approximately 17% over a twenty year period. Since variable annuities charge minimum cumulative annual fees between 3-4%, a variable annuity owner can easily lose over 50% of their end return over 20 years.

Fixed indexed annuities are often marketed as a means to participate in the returns on the stock market without the risk of the market, to earn a higher return than the low-interest rates paid by traditional fixed annuities. The truth is that while fixed indexed annuities may pay a higher rate of interest than traditional fixed annuities, most fixed indexed annuities impose various restrictions and limitations on the actual interest that fixed indexed annuity owners can receive. Many fixed indexed annuity owners often end up receiving just a little more than the interest earned on a regular fixed annuity.

One marketing strategy fixed indexed annuities often use is to offer purchasers a “bonus” in the form of an additional cash investment in the annuity or a higher cap or participation rate. What investors need to remember is that there is no free lunch. The cost of such “bonuses” is usually a longer surrender period or a limited period for such higher cap or participation rates.

The evidence on actively managed mutual funds establishes that the overwhelming majority of actively managed mutual funds underperform their relative index. The most recent SPIVA report stated that over the five and ten-year period ending June 30, 2016, 94 and 87 of actively managed underperformed their relative indices.

Compounding their record of underperformance is that such funds are often cost inefficient, as the funds’ additional costs result in even lower end returns for investors. In order to prevent significant variances in returns from less expensive index funds, an increasing number of actively managed mutual funds are ensuring that they invest in such as way as to closely track their relative index. Such “closet index” or “index hugging” funds may achieve similar returns as comparable index funds, but the higher annual fees charged by such funds for such similar returns results in investors in such funds paying significantly higher effective fees, often 4-5, or higher, than a comparable index fund’s fees.

When I published an article disclosing how to calculate one of InvestSense’s proprietary metrics, the Active Management Value Ratio™ 2.0 (AMVR), many people asked my why I would do that, when I could charge hundreds of dollars to the public to prepare reports using the metric. However, by freely providing information and instructions on using the AMVR, the public does not have to ask who to trust and can privately use the “trust, but verify” strategy. Investors can then use the results of their AMVR analyses to either make changes in their portfolio or reject unsuitable investment advice. Investors can also use such analyses to consult with professional financial advisors such as a Certified Financial Planner® professional.


Investment fraud, including abusive marketing strategies, is a serious, and growing, problem. As our web site’s byline indicates, the best way for an investor to protect their financial security is to seek objective sources of information and to use such information in managing their financial affairs. Variable annuities, fixed indexed annuities and actively managed mutual funds reasons for customer complaints. Investors willing to take the time to research and analyze potential investment using tools such as the Active Management Value Ratio™ 2.0, can better protect themselves and avoid unnecessary financial losses.


Variable Anuities

9 Reasons You Need To Avoid Variable Annuities

5 Reasons Why You Should Never Buy a Variable Annuity

Fixed Indexed Annuities

Don’t Buy a Fixed Indexed Annuity Until You Read This

6 Questions to Ask Before Buying a Fixed Indexed Annuity

Actively Managed Mutual Funds

The Mutual Fund Industry Is a Huge Scam That Costs Investors Billions of Dollars a Year

Determining the True Cost of Actively Managed Mutual Funds

Investment Management Fees Are Much Higher Than You Think

© 2017-2019 InvestSense, LLC.  All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

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