For many years, when the financial markets find turbulence like we have seen in the last several months, out of the investment product abyss comes the offer of either buying commodities like gold and silver, or in many cases annuities.
While each has a reasonably narrow use to achieve asset growth or protection, they are typically some of the most misused investment vehicles available.
I titled this article after a common persona that is used in the financial services profession as for many years, financial advisors or insurance salespeople have coined the term “Plate Licker” because of prospective purchasers’ penchant to listen to a presentation when they are offered a free dinner at usually a pretty exclusive restaurant.
Once the “Plate Lickers” arrive, they are treated likely to the best restaurant meal they have had in months, if not in years. In trade they just have to listen to a presentation from a very well-dressed sales person that offers a way to protect their retirement assets from market loss.
For the sales person, it’s a pretty good preposition, as he trusts the people that arrive like good food, and want to only grow their financial assets and protect against loss, so it’s a pretty good idea that if he could find just one eager prospect, it would pay for the entire dinner for a room of 15 people.
How so, if you know anything about the relationships that financial advisors or insurance sales people have with clients, many times you find that most work on commission. Therefore, when a sales person sells you an annuity and you turn over your retirement savings of say $250,000, that product may generate a commission of 7% or more. This means a $250,000 sale could generate a commission of $17,500! That is a pretty good day at the office or at the country club; often times where these plate lickers are held.
So, if the salesperson, that by the way is not required to tell you how much they will make on selling you an annuity, sells just one, it could easily pay for the entire dinner with a generous payout left for them.
And that is just the start of the problem.
If you happened to be the unsuspecting annuity purchaser, in my experience here’s how the relationship typically progresses. Bear with me, as there are actually many chapters to this story, but due to the respect of your time, I’ll just name a few.
Before I do, in all fairness I will say that gold, silver, and annuities do have a place in investment planning. Although a very narrow and specific place, mostly not used and misused like you would buy at the conclusion of these vague presentations.
When individuals buy annuities, it is usually at the behest of the “guaranteed” qualities of the product. What people don’t realize is that the guarantee typically is either for an accumulated value (not cash value) and for the determination of a guaranteed payout. What this means is that the insurance company that backs the annuity will offer you a guaranteed income stream or series of payments that will be paid out according to the provisions in the insurance policy, thus limiting much flexibility on how you utilize your own money. In addition, most policies will institute a surrender schedule that will charge you a percentage-based fee for withdrawals over the course of the surrender schedule which typically last for 7 to 9 years and sometimes as long as 12 years or more.
The unfortunate tale of these plate licker presentations is that they are meant to drum up business, or as I call them, transactions. Once the ink is dried on these contracts, the person that sold it is no longer legally obligated to service or support your investment needs. So many times, you don’t hear from them unless you have more money to invest in the next product with all of its bells and whistles, that are often times, never used, including all of these baseless guarantees.
For the sake of full disclosure, this is not about sour grapes for me, I have been on the sales side of annuities before, and like I said earlier, there is a very narrow use for the product, and a very high percentage of people are not candidates for such an investment. In addition, there are annuities that are NON-COMMISSION products, which means there is no surrender schedule (or it doesn’t cost you to get your own money) and the person that placed the investment will not be paid a commission, which eliminates one major conflict of interest. But I assure you, you will not see this type of annuity offered at a plate licker event! One of you will be paying for that dinner for everyone else.
So please beware, the only certainty I have seen with investments is that over time, when you invest in a properly diversified portfolio of investments, they have made money, without the need of a high-cost guaranteed provision that is almost never used. In my time as an advisor, I have rarely seen any guarantee utilized on an annuity.
Hence, save yourself some money first by not subjecting your hard-earned retirement money to annuities that are not set up to benefit you, invite your friends to dinner, even pay for dinner if you are into wasting money in the name of feeling safe, and have a conversation about money that has lasted the test of time. Allocating your money to a properly diversified portfolio managed by a professional that has your best interest at the core of the relationship.
Thanks for listening.