Financial Sleight of Hand

Financial Sleight of Hand

This blog is courtesy of Russ Thornton of Wealthcare for Women.

Sleight of hand is commonly associated with magic, especially card tricks.

Common definitions of “sleight of hand” describe it as being primarily used for entertainment or deception.

And based on my 24 years serving as a personal financial advisor, I believe many advisors are performing financial sleight of hand and either intentionally or, more likely, unintentionally attempting to deceive rather than entertain.

For example, I often encounter client portfolios with dozens of tax-free municipal bonds in them. You would think the advisor and their client are tax sensitive and want to avoid unnecessary tax liabilities.

But in the same client portfolio, I’ll see a ridiculous amount of transaction activity in their equity allocation (comprised of stocks and/or funds) that’s generating a ton of unnecessary tax liabilities due to short- and long-term realized gains.

Or let’s say you RSVP to one of those “financial education” dinners you’re always getting invited to.

You sit down to a plate of grilled chicken, green beans, and mashed taters, complimented by a glass of iced tea and a fire and brimstone presentation deliberately designed to scare the living hell out of you. The market’s going to crash. The economy’s days are numbered. The dollar is going to hell.

And all this is going to happen in the next few years. When you’d planned to retire.

But never fear, these same soothsayers of doom and destruction have the answer: equity indexed annuities.

You’ve probably heard of these things. They promise to give you the upside of the stock market but protect against any losses.

Interestingly, these annuities aren’t technically registered as investment securities, so it can be quite the wild goose chase trying to get all the details and read the fine print.

I suspect many of the people selling these things haven’t even read the fine print. But I’m sure they are definitely aware of the 8-10% sales commissions they get if they sell one of these to you.

But back to the financial sleight of hand . . .

If you weren’t already worried about your financial future, that chicken dinner certainly put you over the edge. And while these equity indexed annuities sound like the perfect solution, that hard-to-find fine print is important.

For instance, your money is typically locked up in these annuities for at least 6-8 years. Sometimes 10 or more.

They’re expensive. With the cost of insurance and everything else, the internal fees can and often will exceed 2.5% per year.

The way these contracts “credit” your market participation doesn’t include dividends. And dividends have historically played a significant role in the return available from the investment markets.

And your market upside is “capped.” This means you can participate in the market upside to a fixed ceiling each year. If your cap is 12%, for example, and the market goes up more than 12% in a year, you forfeit any return above 12%.

Again, I suspect many of these annuity sales people don’t even understand these things themselves, so while they may not intentionally be deceiving you, it’s still your money on the line.

How about those “let’s just be conservative” assumptions in your financial plan?

While you certainly don’t want to be unnecessarily aggressive, being too conservative can come at a cost. Both to your money and your lifestyle.

Too conservative financial planning could mean you’re working longer and deferring retirement longer than you need to.

You might be taking more investment risk than you need to.

You might be saving more money than you need to.

You might be planning to spend less in retirement or on other goals than you could actually afford.

If you’re going to err in any direction, it’s probably best to err on the side of conservatism, but not at the cost of making the most of your one shot at life.

I can think of at least 2 or 3 other examples of financial sleight of hand. Maybe you can too.

Just remember when it comes to your money, you shouldn’t be looking to be entertained, and I know you’re not looking to be deceived. But it happens, and I see it all too often, especially with a lot of the women I work with. Here’s one of the worst examples.

Many advisors use complexity as a way to justify their existence and their fees. But simple beats complexity any day.

And the more simple the solution, the less chance that you’ll be an unwitting victim of financial sleight of hand.

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