At Blueprint, we are an advice driven company. Products aren’t discussed until a financial plan has been completed and we assess where the data has taken us. Often times in the financial business folks will lead with products or quickly move there, why? Because that’s where the money is. Below are what I call the dirty half dozen of financial products. It is worth noting that these are sometimes appropriate for a client, but typically they wholly unsuitable. These products do have some common characteristics: 1) High commissions, 2) Illiquid, 3) high annual expense ratios, and 4) Complicated.
These are sometimes appropriate for a client, but we’ve found that most of the time clients aren’t aware of negatives to these products. Here is my dirty (half) dozen products that you should be wary of if proposed by an advisor/broker:
- Whole Life Insurance Buy insurance for insurance sake and invest the difference in a brokerage account and you’ll come out WAY ahead. The annual expenses on these products destroy investment returns, plus they are pretty illiquid, these products are pretty complicated. Commissions are usually the first year premiums. Term insurance is perfect for most folks. Very affordable and most of the time 20-30 year term policy is sufficient for most households.
- A Share Mutual Funds, or “Front Load”. C shares aren’t terrific either, their annual expensive ratios are 2%+/year. Front Load funds, also known as “A” share typically cost 4.75%-5.75% up front, meaning it’ll cost YOU $5,000 on a $100,000 just to invest in a fund that is most likely going to underperform the market since you are already starting behind. These are always a bad idea, the only reason this is being presented is because your advisor is a salesperson and not looking out for your best interest. There are plenty of investment options out there that are affordable and competitive.
- Non-traded REIT’s. These are tenants-in-common (TIC) real estate investments, 7% commissions to the broker, illiquid and they’ve been struggling with redemption issues, meaning the hold period is sometimes indefinite. If you want real estate exposure without owning a hard asset, but buy a Vanguard REIT. They are cheap, liquid, and transparent.
- Variable Annuities- The most complicated of all these products are variable annuities.6%-7% commissions, up to 7 year surrender charge period, illiquid, with annual expenses that can get up to 3.5%-4%/year. There are some benefits, but they usually aren’t worth the cost in the long term.
- Variable Insurance Products (VUL or VL). Along with it’s Whole Life brethren, variable insurance products are pitched as the best of both worlds (investments and insurance). Surrender charges can up to 15 years & internal expense ratios are 2%+ annually. These products can be heavily manipulated by the salesperson by tweaking investment returns, target premium funding, etc. This is a pretty complicated “investment”, don’t let someone tell you it’s not. If someone calls it a “Super Roth IRA’ walk out the door immediately.
- Equity Indexed Annuities (see link provided below if you want more information).
There are great advisors out there and there are not-so-great advisors out there. It is difficult to tell who is who, but a good place to start is to look at their incentives and how they approach advice. We offer a “second opinion” service at Blueprint where we’ll break down the product being proposed, show you all the costs and propose some alternative to consider. The only product we sell besides advice is term insurance and the commissions generated by those sales are donated to either the Oregon Food Bank or March of Dimes.