| By :
Brian Fricke
Have you ever heard a stock broker, financial advisor, maybe even an insurance agent say something like, "Don't worry the investment company pays me, or the annuity company, or the mutual fund, or the insurance company pays me, so you don't have to?" That's the answer one of our clients got from their former financial advisor when they asked a real simple question. They had just bought an annuity from their prior financial advisor. And their question simply was, "how are you getting paid?" The answer? "Don't worry; the annuity company is going to pay me." You might not see anything wrong with that. But I sure do. We all know there is no such thing as a free lunch. So where is the annuity company getting the money to pay this advisor? From you. They might camouflage it and hide it, but at the end of the day, bottom line, that money is coming out of your pocket. In this particular situation, our client was shocked. They had over $15,000 a year in hidden fees and expenses coming out of their annuity contract, and yet they were getting statements from the annuity company that said their administrative fees were zero. That's a pretty big difference. Is the annuity company lying? Well, yes and no. The annuity company may not exactly be lying, but they certainly are misleading their customers. It's true there are no administrative fees — as defined by the annuity company — being charged or assessed to the annuity contract. However, there is a boatload of hidden fees and expenses that aren't being properly disclosed, to the tune of over 2-3 percent per year. What does that mean? Well, say you put money, $100,000, into a variable annuity. Most annuity companies charge hidden fees and expenses of around $3000 a year that you don't see! Are they breaking the law? No. Are they meeting the current disclosure requirements? Yeah. Are they treating their customers in an honorable and ethical manner? I'll let you be the judge. But let's get back to that $100,000 variable annuity. You now know you're paying $3000 a year in hidden fees and expenses that you didn't even know about. Now, on top of that, the annuity also comes with a surrender charge or withdrawal penalty that could amount to another $5000! So what should you do? Since you're going to pay the fee one way or the other, my advice is that you stop the bleeding now. By that I mean, your best move is probably to go ahead and pay the surrender charge and move on to a lower cost investment vehicle. You could put the same $100,000 into low cost, no load index mutual funds. They also have hidden fees and expenses that aren't clearly disclosed. But for an index mutual fund, those fees on $100,000 might be $500-$600, not $3000. That's a huge difference — especially when you multiply the savings over the next 5, 10, 15, or 20 years. Think of all that extra money that could be in your pocket instead of sending it off to an insurance, annuity, or mutual fund company. Make sense? I hope so.
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