1. “We have FEES and COSTS for everything. Most are not necessary.” For instance, your life insurance policy is probably one with a higher premium than necessary. Compare the cost of $200,000 benefit for a 50 year old in good health--$356 versus $481 per year. Also, it does not cost $50 to buy 200 shares of IBM. You can buy them for $0. And why should your broker charge you $160 when your account is inactive? Why are you paying 50 cents to deposit a check? Banks should pay you to deposit checks. Is your 401k money manager really worth 1.54% of your assets each year? And looses money too? Your employer should buy a retirement plan that costs you $0.30% or less with no kickbacks.
2. “We offer products that are best for our firm, not for you. We don’t show you all the fees and commissions and financial kickbacks and perks we earn when we sell you our products. Our products are the “best” available because we sell them. We are the best in the industry because our marketing image says we are.” One pension plan provider charges 2.75% a year for their tax-deferred annuity. It has over 9 years of surrender charges so you can’t transfer your money if you change employers. It charges another $30 a year for ‘recordkeeping.’ Its mutual funds are among the poorest performers. One brokerage firm steered customers into their own funds because they have a higher broker payout. Your agent doesn’t sell SBLI, your broker doesn’t sell Vanguard, your banker does offer really free checking, and your money manager doesn’t price your funds at cost—0.1% or less.
3. “We will discuss your financial needs with half truths.” You are told you need $1,000,000 of life insurance but the policy type that your agent picks is the most expensive in the world. Even if you agree you need $1 million, you pay more for permanent, 30 year guarantee term or “return of premium” term than just term. You want a guaranteed income for the rest of your life but your broker doesn’t mention that the annuity payments loose half their value in 24 years. You want to save for college but your banker doesn’t mention that 529 plans are NOT taxed like the custodial account just opened for your child. You want to save for retirement but your broker put you in ‘hot’ funds.
4. “We don’t tell you about other alternatives. We don’t get paid to tell you there are less expensive alternative ways to solve your problems.” You can buy a FREE checking account from your credit union. The CDs pay more, the checking costs less and the loans are cheaper. You don’t need an ATM on every corner. You can defer taxation on your account earnings by buying and holding stocks or tax-managed funds. You can save on liability insurance by buying only what you need. Wealthy people buy “assets that grow by themselves” so they can self-insure and self-fund their needs. Consumer Reports reviewed 47 policies and concluded that “for most people, long-term-care insurance is too risky and too expensive.”
5. “We don’t explain how you can reach your goals in the least costly way.” Banks offer life insurance to cover your loan because you want to get the loan. They don’t explain that your existing term policy will cover the loan. Also, you can build a much larger retirement nest egg by investing in stock mutual funds costing .07% vs. 1.3%. Compounding magnifies the difference—20% more money over time. When new employees sign up for the retirement plan they are encouraged to pick the ‘safest’ option—treasury bonds. Stocks are more likely to grow in value over the long term.
6. “Our products must be ‘sold not bought. We use half-truths in order to contrive an ‘urgent financial need’ that you can solve only by buying our products.” One firm charged a 91-year-old “client” more than $35,000 for four trades over two years, at approximately $8,800 per trade. The largest annuity seller is accused of misleading policyholders regarding bonus payments promised on annuity products. Life insurance is not the foundation of every financial plan—you are more likely to run out of money than die in the 21st Century.
7. “We believe the hype of our industry: We give good financial advice that you can’t get anywhere else.” There are no classes in our high schools called Financial Health Class. You can’t easily find out the “tricks of the trade” used to sell you the products created to pay high fees to sellers. Young single people don’t need life insurance. They need to invest 10% of their income at an early age to become wealthy. Also if brokerage firms actually followed their own stock selection advice, they would have negative returns. The average return for the top 10 brokerage firms was minus 2.26% from 1997-2001! Most were negative (Investars). 88% of managed mutual funds earn less than the market.
8. “We are experts at figuring out what your “hot buttons” are and using them to get you to buy our products. We exploit the fact that everyone wants to buy the next Google stock or become a millionaire overnight buying and selling real estate or gold. We exploit the fact that seniors fear losing money and want to earn 10% on their money with a completely guaranteed investment.” Finding the next Google is like finding a dime in a football field on the first try. The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually, 1984-2002. You pay for guarantees by earning less and not keeping up with inflation. So even though you don’t lose money, inflation reduces money’s buying power. Putting your money into different investments reduces your chances of losing money and increases your chance of beating inflation.
9. “We don’t sell products from companies that don’t pay a commission—so you never obtain the least-cost product. We only sell products with commissions and fees and kickback incentives and “soft dollar” reimbursements.” When was the last time your broker offered the funds with the highest returns over a 20-year period? Vanguard Primecap--13.6% over 20 years--#1 in large company growth stock funds. Vanguard Health--17.4% over 20 years--#1 in Sector funds. Vanguard Energy--16.4% over 20 years--#2 in Sector funds. Did your agent call to tell you that life insurance rates are dropping so you should apply?
10. “We charge you fees whether we give good service, good rates, good returns, or good benefits.” One money manager charges 1.5% for the same exact fund that charges .07%. With $250,000 invested, you will give up about $700,000 (2,723,138 vs. 2,022,979 over 20 years of compounding at market rates). Only 12% of managers can beat their benchmarks over long periods of time. You don’t get a refund if your manager can’t beat the index. You can’t get a refund if your CD or annuity renews at a lower rate. You can’t get a refund if we mess up your trustee to trustee transfer. We don’t give you a “better” death benefit check for $200,000 when your loved one dies. Many banks hit customers for fees they didn’t know about.
11. “When things go wrong, we treat you like you’re the enemy.” All brokerage firms disallow you to sue for bad service—you must use their arbiter and settle for the decision. One firm has the worst call response service in the industry. Another company pressured outside engineers to prepare reports concluding that damage was caused by water rather than by wind. They just denied all of them in the same geographic area. Another insurer dropped coverage and stopped signing new policies in coastal areas of 9 states. Some long term care insurers aren’t paying claims.
12. “We don’t care if you have been a loyal customer. We buy and sell customer accounts anytime we can make more money from it.” In the last few years, hundreds of customers have had their accounts dumped on others. For instance, John Hancock’s president sold the company to Manulife [Canada], Fireman’s Fund was sold to Allianz [Germany], Household Finance went to HSBC [Hong Kong], and Sage Life went to Old Mutual [S. Africa]. Brown & Co and HarrisDirect went to E*Trade. Golden West Financial went to Wachovia. MBNA and Fleet Bank went to Bank of America. A complete list is available at http://www.theinsidersguides.com/whoowyoacno.html. More consolidation is expected: HSBC, Rydex, Gateway Investment, GAMCO Investors, Julius Baer Investment, UBS AG. Your accounts could be next. You can do it yourself and save.
"Investors should purchase stocks [financial services] like they purchase groceries—not like they purchase perfume…” Benjamin Graham
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