If It Sounds Too Good To Be True

[INTRO] BOB: Welcome to Christian Financial Perspectives, a weekly program where we talk about ways to integrate your faith with your finances. This is Bob Barber. MJ: This is Mary Jo Lyons. Bob: Are you ready to learn the truth about money from a biblical perspective? MJ: Join us as we discuss what God’s Word says about money and integrating your faith with your finances… If it’s your first time listening, welcome to the program. If you’re a returning listener, welcome back. [EPISODE] Bob: Proverbs 2:2-12 “Make your ear attentive to wisdom, Incline your heart to understanding. For if you cry for discernment, Lift your voice for understanding. If you seek her as silver and search for her as for hidden treasures, then you will discern the fear of the Lord and discover the knowledge of God. For the Lord gives wisdom. From his mouth comes knowledge and understanding. He stores up sound wisdom for the upright. He is a shield to those who walk in integrity, guarding the paths of Justice and he preserves the way of his godly ones. Then you will discern righteousness and justice and equity and every good course. For wisdom will enter your heart and knowledge will be pleasant to your soul. Discretion will guard you. Understanding will watch over you to deliver you from the way of evil from the man who speaks perverse things.” So, the key words in this passage from Proverbs 2:2-12 are wisdom, discernment, understanding, knowledge, and discretion. Mary Jo: You know, these words are so very important for today’s podcast because the topic for today is “if it sounds too good to be true”. Wisdom and discretion play a major role in seeing the truth. Our goal is to help you at discerning the truth when it comes to promises made about financial products -promises of high interest rates and stock market like returns without any risk, guaranteed income with no strings attached, financial advice for free – if it sounds too good to be true, it probably is. Another good scripture that came to mind as we were talking about this topic is from the second chapter in Peter Verses 2-3 , “But there were also false prophets among us just as there will be false teachers among you. They will secretly introduce destructive heresies, even denying the sovereign Lord who bought them, bringing swift destruction on themselves. Many will follow their deprived conduct and will bring the way of truth into disrepute. In their greed, these teachers will exploit you with fabricated stories. Their combination has long been hanging over them and their destruction has not been sleeping.” Wow. That’s pretty deep, Bob. Bob: Wow. You know, as I listen to these scriptures, have you ever listened to AM radio on Saturdays and heard these shows where these financial planners are promoting these products that offer great returns at little to no risk? I’ve heard a lot of them. What about you Mary Jo? Mary Jo: Oh, it amuses me. My husband and I will take a trip or go run errands on Saturdays and we always turn it on just to see what makes us laugh, and it’s so unregulated. We’re going to talk a little bit more about that. If our listeners could see us, we’re doing that “financial planners” in parentheses in the air, if you will, because anyone can call themselves a financial planner or an investment advisor. Another reason that we want to improve our regulation, but there is more to understand there, and we’re going to talk about that in a little bit more detail. Bob: Rachael always says to me, Bob, why do you listen to this? Cause you get so mad at it because there’s so many false things that are said, and whenever I hear these things I cringe because I know it sounds too good to be true and listeners are getting sucked into a promise that is misleading and something they really don’t fully understand. They want to believe it’s true Mary Jo, but it’s just not. And what we’re talking about many times are these financial shows that are pushing annuities, both index and fixed annuities. So, in today’s show we’re going to talk about some of the things they don’t tell you on the radio. There’s going to be nine key points that we’re going to share about indexed and fixed annuities. But then we’re going to talk about some other things that sound too good to be true that doesn’t just have to do with annuities. The first key point I want to make, and this is kind of funny in a way, but in way it’s not, you know, we all get those invitations in our mailbox it says, come have a free steak dinner. Mary Jo: I always wonder. Bob: Yeah, you always wonder about that. Mary Jo: Do they know who they’re mailing that to? Bob: Oh yeah. They probably don’t want to email it to us, but you know, come get that free steak dinner and nothing is free, and there’s no free steak dinner in the long run. So be very careful when you get one of those invitations that is offering you a free steak dinner for some financial information. Mary Jo: And you know, you may be getting that free steak dinner, but you will be paying a commission and it’s probably a pretty big one because somebody actually paid for that steak dinner. The company actually takes the commission out of your money, and this is why at the end of things, there is a surrender charge if you ever want to try to sell it or get out from under it. Bob: Another thing that is a key point to understand when you’re talking about these index and fixed annuities and thinking about them is they’ll speak of cap rates on these radio programs or if you go to one of these workshops. But, you gotta be careful what is referred to as a cap rate because they can be very low and have expensive management fees. So what is a cap rate? It’s a maximum you can achieve. And many of these are marketed as you get the market upside with no downside risk. And this is usually tied to a cap rate or what we call a maximum participation rate. So, let’s say as an example, we have a stock market that goes up 15% which we’ve had in some recent years, and your cap rate may be three, four, or maybe as high as 7% what happens is you give up the spread for the promise of no downside, but that’s a very high cost to pay, wouldn’t you think? Mary Jo: I sure would, Bob. Participating in the upside, but very little of that upside. So, it’s really a misrepresentation, and again, it does make me cringe when I hear it. Bob: Some of these cap rates or even sometimes just 3% or 4% so if the markets go up that 15% in one year, the company’s taking much more than you made. Mary Jo: They gotta make money somewhere. Bob: Exactly. And that’s okay. We understand money’s got to make money, but be careful when you hear these terms of all stock market returns with no downside risks because the risk here is, is you’re giving up so much of your return. Some of these contracts give an option of what they call a spread instead of a cap rate. This can allow a limited upside of the markets, like if the markets go up 15, but the spread can range from 3-10% depending on the contract. So let me explain what the spread is. What the spread is is actually an expense. So let’s say the market goes up that 10%, and a spread is 3% or 4%. Well, they’re taking away from that 10% that you made, taking away 3 or 4% of that. They’re taking away 40% of the return that you made if it computes to a 4% spread and the markets go up 10%. Does that make sense? Mary Jo? Mary Jo: Yes. You know we’ve gone over a lot and that can be kind of confusing. As always, we’re here to answer any questions but again, there’s no free lunch and you’re definitely giving up something on that upside, whether it’s in the form of a spread or a cap rate Bob: And you’re giving up a lot. Mary Jo: You’re giving up a lot, but those are terms you really need to understand. And remember, we started off with saying these are products that are very complicated, and people don’t really understand what they’re buying. So we really encourage you to lift the hood and really investigate those terms. Bob: But Mary Jo, when you go to one of these workshops, you hear this on the radio, they never talk about the cap rate being low. They never talk about that spread. Mary Jo: No, they use language that makes it sound so promising. There’s another one to pay attention to and the cost for ensuring a guaranteed income and there is a cost to these and there’s lots of rules. They sell these as if you’re getting a guaranteed income and that’s the benefit of an annuity, but you also need to look at how that guaranteed income is structured. You’re usually limited to taking only 3-5% a year in the way of an annual pay out, and if you have to dip into principle, you forfeit that guarantee. They also charge you an additional expense for those guarantees. Those guarantees don’t come free. That increases the expense of the product that you’re buying. Bob: Another thing that you’ll hear a lot is that people will get bonuses when they put money into these types of annuities, like a large upfront bonus. Sometimes, it’ll range from 5%. Mary Jo, I’ve even heard as high as 15 or 20%, but with that bonus comes higher expenses or lower returns in the following years. Once they get you into it, then they have these huge surrender penalties. So it’s like you can’t get out. You’ve gotten this, maybe this 10% bonus upfront, but then the following years, the rate of return, let’s say on fixed annuity, the rate of return is only 2% a year. So, they’re making up for it. Where if you’d have bought one without the bonus, maybe you’d have made 4% a year. So, you gotta be very careful of these bonuses. Mary Jo: They’re sweetening it. They’re dangling a carrot out there, but they’re putting on some really tight handcuffs to keep you from going after that carrot. Bob: Yes, they are. This next one that you’re going to share is so important to understand the annual statements when they get them. Mary Jo: Your annual statements will come out and there will be numbers on them about your account value. But you know, it states that it’s worth far more than it actually is. It can be quite misleading. So, here’s an example. Let’s say you put in $100,000, and you got a 15% bonus from the annuity company. So your statement reflects a value of $115,000, but if you try to surrender that policy and the bonus is taken away, plus the commission is taken out, leaving you with much less than what you actually put in. So again, you need to lift the hood. Bob: Yeah, this is another occurrence that you gotta be so careful of. I see this a lot and people were like very surprised because they’re saying, “Well, my statement says I’m worth $115,000, but if I surrender, I only can get back $90,000?” And I always say, “Well, you know, something’s only worth what somebody would give you for it.” Mary Jo: That’s true. Another good one, Bob. Bob: Yes, it is. Another occurrence that often sounds too good to be true turns out to be nothing but a Ponzi scheme. You don’t realize it at first, but again, they make promises that are better than you can get in the market, and they promise inflated returns and little to no risk. Mary Jo: Wikipedia defines a Ponzi scheme as a form of fraud that lures investors and pays profits to earlier investors with funds from the more recent investors. It’s a scheme that leads victims to believe that profits are coming from product sales or from other means and they remain unaware that other investors are the source of those funds. A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds and as long as most of the investors do not demand full repayment and still believe in the nonexistent assets that are purported to own. You know, Bob, I always think that once there’s this big Ponzi scheme in the news and we all remind ourselves of Bernie Madoff and how that hit the headlines. But you know, even today we still hear about new Ponzi schemes out there and how many people are fooled by them. So, it’s not a thing of the past. It’s an everyday happening. Bob: Yeah, there’s that program called American Greed. They make a whole program on this. And it’s interesting though, how people get into these and there’s four key points to understand before you get into a Ponzi scheme. The first one is very interesting, before I say it, because this is something that you just got to think about. Why are you getting into this? So the first thing is don’t allow greed to blind you from the truth. If it’s promising consistently higher returns than normal, Year-After-Year, that means something is up. So as an example, if it’s saying it’s going to make 10% every single year guaranteed when we know the interest rates that you would get from a good high quality bond or down at your local bank is two or three, something’s up. So if you’re getting into that, be careful because it could be your own greed as getting you into that thinking, well, I’m going to make more than everyone else. Because, like we said in the definition of a Ponzi scheme, they’re usually robbing from Peter to pay Paul until it finally catches up and the whole thing explodes. And you’ll see it’s crazy. I’ve watched American Greed and they’re always falsifying statements. They’re generated to show you that you have more than you do. So look at those statements too, because many a times will statements are generated in a falsified manner. Mary Jo: You hear that all the time. I’m not really sure how they’ve managed to do it, but they do. And people don’t ever question it, which amazes me. Common sense reminds us that nothing is really free. But I’ve been writing a book, and I don’t know if I shared this with you, but I have a title and the book is called “Common Sense – Whoever Said It Was Actually Common”. And no for-profit professional gives their time away without some form of compensation or a hope of some form of compensation. And that would be a nonprofit or a not for profit type of business model. You know, that’s not something that an advisor would be entering into. So you gotta really think about that. And despite what you hear on am radio on Saturday mornings, free financial advice is anything but free. Someone’s paying for the radio time. It may be time again to lift that hood and see how this thing really ticks. Bob: So this takes us into our next one. We’ve talked about annuities. We’ve about Ponzi Schemes. So, now we’re talking about free financial advice, and key points that you need to know is number one, you pay for financial advice and it’s either in the form of a commission, a fee, or underlying expenses of the financial products you invest in. Somebody’s making their money some way. Mary Jo: The company takes money from your investments or your returns and pays the advisor, or you pay the advisor from your investments Bob: Or you pay the advisor directly. Financial products, mutual funds, ETFs, et cetera. All of them have expenses and they may be hidden or unhidden, but they all had those expenses because how else are the companies, I always say, paying for all that expensive advertising. Mary Jo: They sure are, Bob. They’ve got to pay for their brochures, they’ve got to pay for the marketing they do to the advisors that are selling them, their TV commercials, all the forms that they have to generate. So, there’s just the cost of doing business, so they’re paying for that somehow. All the financial services company put their names on the size of stadiums and sponsor professional sports teams and bowl games. Well, who do you think paid for all that? If it sounds as if we’re coming from a position of suspicion or cynicism and doubt, and I know that’s really a very negative approach to life, is that who we’ve become, you think? Bob: I hope not. I hope not. But yeah. Mary Jo, we need to bring this up cause you make a great point. It may seem that way, but we’re really talking from experience, and we know this from clients all the time that we meet. We’ve done the research and we could sell these commission based products if we wanted to, but we’ve made a commitment to avoid doing business that way because as fiduciaries we don’t see this as being in the client’s best interests. Many of those commission-based advisors who sell these types of products are not serving their clients as fiduciaries, so they’re not held to that higher standard of care. Mary Jo: And another thing we want to look at before we wrap up today’s show, let’s look at income streams for a minute. Retirees are often lured by the promise of income for life. You know, who wouldn’t be? Creating an income stream that you can outlive, it’s important and it’s attractive for many clients. We fundamentally agree with this concept. Everyone should have this in some form or fashion, but we look at these annuities a very expensive way to obtain this promise. So, you’ve got to consider the total return and the true cost. Bob: It’s interesting. We can just look at the math. Let’s say they advertise a contractual guaranteed growth rate of 4% or maybe even higher. Once you figure in the commission costs of these products, which is the true taxable equivalent yield of these products, you may be paying 5%, sometimes 7%, commission to get that guarantee of 4%, so all you gotta do is the math. Does that make sense? Mary Jo: You’re paying 7% in commission for guarantee of 4% now come on. Does that really make sense? Bob: There has got to be more cost effective ways to achieve the same thing, and this is what we do for our clients. Mary Jo: And much like the way the media describes the market each day if you turn on CNBC or any of the other market shows, the Dow, it’s soaring or it’s crashing, it’s diving to new lows, or climbing to an all time high. And they use these extravagant adjectives to get your attention. And these insurance companies, they do the same thing. They use words like safety, conservative, prudent, guaranteed, and all these words make us feel good. They’re reassuring and they use them for that reason – to lure you in and get you to lower your guard and lower your defenses. So if you start hearing this kind of language, you need to be wary. Bob: The little bit of last minute education when it comes to these annuities, there’s three types. There’s the fixed annuities and these are insurance products that are regulated by the state insurance departments. And they’re usually not categorized as securities because if they were securities, the sales associates would have to be securities licensed and as such, they’d be subject to much higher regulation. So as a result, these products and these sales tactics, they pretty much go unregulated. And then there’s variable annuities that are security products and are regulated by FINRA and the SEC. And then there’s hybrid annuities, which are combination of these two. They’re very complex, difficult for even the advisor to really understand them. They pay even higher commissions to the broker or planner selling them. And the name became popular when you guessed it, the hybrid cars became popular. They appeal to a certain consumer and it makes them feel all warm and fuzzy. I’m guessing much like the new green deal they’re coming out with, with a lot of hidden costs. Mary Jo: Oh, you know it. There’s another thing that sounds too good to be true, but that’s another podcast. And you know, we talked about this earlier. These products you hear, they’re sold and they’re marketed on TV and radio and the Internet. If these products were regulated by the Securities Industries, these ads, they wouldn’t fly. They would immediately be prohibited advertising practices. And you know, that’s something that impacts you and I, Bob, we are very limited to what we can say. We can’t ever use the word “guarantee” because of our licensing and the standards that we have to adhere to. One other thing we can ever do is put an image of a rainbow. So all those promissory words – we’re prohibited from using them, and there’s a good reason for that. As we’ve said, having some form of income you can’t outlive, it’s a good thing. And if the features of an annuity appeals to you, there are some good eggs out there. So, there are some good annuities with low cost and there are some great products that serve this specific need. However, you don’t see these widely advertised because there’s very little money to be made by the provider or the issuer, and they’re fairly priced. It’s one of those products that after you talk about them or try to sell them, you don’t feel like you need to take a shower. And I get that way when I talk about the fixed and indexed annuities, don’t you, Bob? Bob: Well, yeah, I do. And knowing from years of experience now, I’ve seen it all, Mary Jo. And it has made me a little suspicious. In closing of today’s program, if it looks like a duck, sounds like a duck, and quacks like one, it probably is a duck. In other words, if it sounds too good to be true, it probably is. [CONCLUSION] You’re listening to Christian Financial Perspectives. Join us next week as we explore what God’s word says about money. Don’t forget, you can sign up for our free newsletter on ciswealht.com or give us a call at 877-71-TRUTH. That’s 877-718-7884. To make sure that you don’t miss any of our podcasts regarding the truth about money, make sure to subscribe to Christian Financial Perspectives at christianfinancialpodcast.com for free. If there are any specific topics you would like to hear more about, we would love to hear from you. That’s all for now, until next week! [DISCLOSURES] Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors®, a registered investment advisor.