My general rule of thumb is the worse the financial product, the higher the commission to compensate a broker to sell it. On the one end of the spectrum are index funds (the lowest cost products you can typically find). On the other end of the spectrum you will find annuities, where commissions can run into the double digit percentages and annual ongoing fees can reach nearly 5%. My friend, Tim Maurer has a post up at CNBC expaining the different types of annuities. It is actually a pretty balanced view of the pros and cons of these products. What is interesting is reviewing the comments section. You can see what happens when you even talk about killing the golden goose. Brokers come out of the woodwork to defend their livelihood and the “great” uses of these complex products.
Tim and I have something in common…we were in their shoes once. Selling products for a commission. We now only accept compensation directly from our clients so product sales have no bearing on how we get paid. And guess what? We don’t recommend these types of annuities. In fact, I have never seen a fee-only advisor recommend a variable (with extensive living benefits) or equity index annuity. Why? There are just better alternatives for clients. The pitch on these products is very convincing, but please consider yourself warned. If you really want to understand more about how they work, please watch a short webinar I did in reviewing the most popular product on the market today. You can find it HERE.
This morning a number of positive reports were released showing that our country’s output (GDP) accelerated at a much faster pace than most expected. In addition, unemployment claims dropped more than anticipated. All of this points to a continued healing in our economy. We thought it would be good to revisit some data showing this trend:
As you can see, during the recession (shaded area), GDP (blue line), employment (red line) and corporate profits (orange line) all saw declines, but since the recovery has taken hold, all are showing tremendous improvement. This chart gives us some good visibility into what is happening in the economy. Corporate profits are visibly the most volatile metric, plunging during the recession and then subsequently racing back during the recovery. Part of the growth in corporate profits can be attributed to a growing economy (blue line) alongside a stagnation in employment (red line). Companies continue to generate tremendous profits due to revenue growth, but just as important, cost controls. At some point economic theory would suggest that there is no longer capacity at these companies and they will be required to invest and hire additional workers in order to continue to grow their revenue and profits. It will be interesting to see if 2014 will be the year where we see this take place.
This is one of the greatest charts I have seen in a while and one you should memorize. JP Morgan takes a look at the stock market returns over the past 33 years, but in addition to the year’s return, it also shows the largest intra-year drops (red dots).
This is a great reminder to all of us. The market is going to drop at some point every year. In looking at this chart, it is very common for the market to lose at least 10 percent in years where it is still positive overall. It also shows the difficulty in trying to market time. If you got nervous and moved out of the market every time a sell-off occurred you would miss out on spectacular gains. When speaking to clients we often use the wording “when the market falls” instead of if explaining investment strategy. This chart reinforces the concept that markets will be volatile and sell-offs will happen every year. If we can come to expect it, we can make sure we don’t act on it.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.