Going to the Hammer Store
What if there were a store that only sold hammers. When you go to the store with your particular problem, the answer was “you need a hammer”. You might have a nail that needs to be driven, so, yes, you are in the right place. But what if you needed to change a tire. ”Oh, yes, you need a hammer. Just bang those nuts till they come loose”. What if you need to mow your yard? ”Yep, this hammer will do the job”. What? You need to get the back off of your watch. ”Absolutely, this hammer will work”. Ridiculous, right?
Well, I am writing this in response to a “financial services” person that I heard is saying bad things about me since I did not agree to do an “exclusive relationship” with him/her, meaning, I send him/her all my clients and he/she sends me all of his/hers. The problem with this (and a few other) “financial” services provider is that they work in the hammer store. Their hammer though is an annuity. It’s amazing how this “advisor’s” solution to every financial situation is an annuity. It really doesn’t matter what your problem is, an annuity is the fix.
Why is this? Annuities pay really good commissions. ”But wait Todd, the advisor told me that there was no fee. She said when I get my statement, you will see that all of the money was deposited into the account”. That is true. However, the person who sold you this got a commission of near 10% and possibly 15%. Where did that money come from? The company paid them. If you notice (and listen or ask the right question) there is a surrender charge for the next number of years where you will lose a certain percentage of the investment if you want your money back. Usually, the numbers of years of the penalty for cashing in is the percentage amount the advisor got of your investment. So, if you cannot get to your money (all of your money, not the 10% they brag about) for 10 years, your advisor most likely got a 10% commission of what you gave them. The company is not going to lose money. They know that they will get that commission back if you cash in early. They will invest your money to make back that 1% per year commission and get significantly more than the 1%. That’s how they make money.
People (and these advisors) sometimes get upset when I charge maybe $7500 to save them hundreds of thousands of dollars which require me to do many months of work, but that is because they are writing me a check directly. However, if you gave your annuity salesman $100,000, there a good chance he or she made that much off that sale, basically for filling out an application. What if you invested a few hundred thousand? Commissions could easily reach tens of thousands of dollars. The commission on other products is not nearly as lucrative since your money is not locked away for a period of time. Now you see why they work in the hammer store?
I’m not saying all annuities are bad. There is one particular annuity we use in Medicaid planning but it’s not used as an investment but as a huge exemption in the Medicaid policy that is dictated by Congress. This is the ONLY annuity that works with Medicaid. If your advisor tells you that the annuity they are selling you prior to the need of Medicaid will protect you from Medicaid, please have them call me and discuss this. The DHS policy does have some language that would make you think that annuity payments are not counted, but that is not how it works.
I don’t sell financial services. There may be a time when you do need an annuity but I think that is only after you have been given all of the options of the different financial devices available with legitimate pros and cons of each. When an “advisor” i.e. annuity salesman, answers every question with “you need this annuity” just think of the hammer store and wonder, “am I driving a nail or am I needing to change my tire?”.