When a Financial Product Sounds Too Good to Be True

It probably is. I’ve recently heard about such a product, one that guarantees you 10% return for the next seven years, and 5% for life after that. It’s even in writing. Doesn’t that sound great? Who wouldn’t want that?

But the devil is always in the details. Let’s examine the details of this particular offer, which is an annuity. Let’s say you invest $100,000 in this product. At 10%, you’ll double your money in about seven years. You’ll have $200,000.00. Fantastic. So far, so good, right?

But here’s where the details come in. If you read the fine print, you’ll probably discover that the $200,000 does not belong to you. You can’t ask for a check for that amount. You’re not allowed to touch that $200,000. In fact, if you do, there are penalties. Instead, you can take an income from the 5% for life that was guaranteed, which will be $10,000. So let’s say you were paid $10,000 a year for the next ten years. How much have they paid you now? $100,000. Guess what just happened? Over that ten-year period, you were paid back the money you originally invested. In a nutshell: You invested $100,000 in this product, you waited seven years to see $200,000, and then you had to wait ten more years while you were paid $10,000 a year. You made back your money 17 years later.

The guarantee was all true. The value of your investment rose by 10% and you did get 5% for life. But I don’t think this is a good deal. If it were, I could retire right now. I could put all my clients in this deal and never have to do another day’s work. I wouldn’t have to worry about the market. I wouldn’t have to worry about anything. Unfortunately, there is no free lunch, and there’s no such thing as a risk-free product that guarantees a 10% return. And if someone tells you there is, read the fine print very carefully. Ask questions. Be an informed consumer. Remember that the devil is in the details, and if something sounds too good to be true, it probably is.

TO POLITICIANS: STOP BEING NICE

I wish the politicians would stop being nice. We’re getting closer to the fiscal cliff, and all this playing nice stuff is getting on my nerves. We’re all Americans. We’re not Democrats. We’re not Republicans. We’re Americans, and the politicians need to do what’s best for the American people. Take the gloves off and let’s get the fight going.

They’re wasting time. The fiscal cliff deadline is January 1st. We don’t have a lot of time to get this thing resolved. I’m concerned that they’re just going to talk nice, not resolve anything, and have a fight at the last hour-and that the market will drop dramatically as a result. I don’t doubt that they will find a way to extend the deadline, but they might wait to make a decision with only seconds left on the clock, like they did last year.

During the debt ceiling debate last year, we saw the market go down 19% before they finally decided to raise the debt ceiling. I think we’re seeing all the earmarks of the exact same thing. Do you want to take massive losses while you wait for those guys to resolve their problems? Why not take some profits off the table? Then, when they do announce that they’re gonna postpone, band-aid, or resolve the situation, how about going in the market at that time? Maybe buying in at 19% down? I don’t know if the situation will play out like that, but I think we can learn from the past. We can use past experience to navigate this market in hopes of coming out without losing too much money. And we can hope that the politicians stop being nice and get down to work.

Financial Products Aren’t Bad, They’re Just Sold That Way

Oftentimes when meeting with clients and prospects, we caution them about putting too much credence into the rantings of the popular financial press. We remind them that these writers and pundits are in the business of selling magazines, newspapers, books or investment courses (or some combination thereof). Due to limited space, and in order to stand out from the crowd, they must take very strong stances, pronouncing some financial products “good” and others “bad”.

It has been our experience that, save for outright illegal products, it is ridiculous to attach a “good” or “bad” moniker to a particular financial product. Any tool, financial or otherwise, is “good” for some situations and “bad” for others. Very rarely is a particular tool flat out good or bad in all circumstances. Would you say that a screwdriver is a “bad” tool because it doesn’t cut wood? No, of course not. What you might say, however is that the screwdriver is a bad choice for cutting wood but a good one for it’s designated purpose of turning screws.

All financial products are, like that screwdriver, merely tools to help you achieve your financial goals. Most financial products available are good for some situations and bad for others. Problems arise not from the design of the tool, but when it is sold for an inappropriate purpose by either an unscrupulous or poorly trained financial advisor.

Let’s use a product that we see getting bad press all the time – annuities. Various columnists we’ve seen (who shall remain nameless), when asked about annuities will say simply that they are “bad”. They’ll argue that annuities are illiquid, expensive, pay huge brokerage commissions and that you absolutely don’t need one. What these columnists fail to tell you is that annuities are a great tool when used for their primary purpose – providing a stream of income that you cannot outlive. When annuitized, they work much like traditional pension plans, providing a steady stream of income that will last a lifetime. For a segment of the population this guarantee provides the priceless benefit of peace of mind. Is your money illiquid? Generally speaking yes, for a finite period of time. Does the guarantee of not outliving your money come with a cost? You bet. We all know there’s no such thing as a free lunch. Did your broker get a commission? More than likely, yes. The fact that the broker receives a commission doesn’t make it a bad product; it just makes it imperative that you understand the potential conflicts of interest the broker may have had in selling it to you. Do you not need an annuity? We don’t have a clue. Until we’ve met with you for a full review of your entire financial picture, we can’t tell where an annuity fits in the mix. Nobody can. In fact, we recommend you run far and run fast from any advisor that makes a recommendation without asking a LOT of questions first.

Hopefully we’ve learned two important lessons here: 1) Remember that newspapers, magazines, radio and TV shows are in the business of selling more of their product, so take what they say with a grain of salt, and 2) Be very wary of anybody that tells you that a product is “good” or “bad” without understanding your unique financial situation. To paraphrase a line from the movie “Who Framed Roger Rabbit?”, “Good products aren’t bad, they’re just sold that way.”

Combining Financial Products For Starting a Business

If your business is not able to obtain financing on itself, you can resort to personal financing. Though personal financing doesn’t always provide the amounts needed for such projects, you can combine different loan products and other financial products like credit cards and store cards in order to obtain all the financing you need to get started.

Unsecured Loans And Credit Cards

By combining unsecured loans and credit cards you can raise enough money in order to finance your business when you can’t apply for a secured form of financing due to lack of collateral. This combination can aid you get funds for common expenses that you can pay with the money obtained from the loan and you can purchase particular goods and equipment with credit card taking advantage of those special promotions that most stores have. This includes of course, store credit cards that are particularly useful for this purpose.

The only problem with this combination is the fact that both unsecured loans and credit cards are expensive forms of financing and thus, it is always preferable to resort to cheaper sources of funds. However, sometimes it is possible to take advantage of special promotions like 0% APR promotional periods or subsidized rates for particular purchases, etc.

Secured Line Of Credit And Unsecured Loans Or Credit Cards

A Home Equity Line of Credit is an excellent tool for financing your business everyday expenses and cash flow. A home equity line of credit is a revolving source of funds with a credit limit that is guaranteed with the equity on a property. Up to the amount determined in the line of credit contract, you can withdraw as much money as you need and repay it the way you want with minimum payments consistent usually only of interests.

Home equity lines of credit provide a lot of flexibility in terms of financing for your business and they constitute a cheap source of funds. However, you should use them for everyday expenses or unexpected expenses as those situations are the ones where you will take more advantage of these financial tools.

For financing the purchase of particular equipment like computers, printers, scanners, etc. you can resort to unsecured loans or unsecured credit cards that can provide you with an additional and alternative source of funds. Credit cards can provide you with special offers at stores and unsecured personal loans can be obtained in the very store you purchase the item so the store will finance your purchase. This will liberate your home equity line of credit from financing expensive equipment and will leave more credit available for unexpected expenses and everyday cash flow difficulties.