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REVIEW OF

David Ortiz Safe Money & Income

"Radio Show" and Annuities in

General

 

AS HEARD ON KABC - LOS ANGELES

 

 

 

What others are saying about index annuities in general:

 

 

"Index annuities are a danger to your financial health." -- Clark Howard Article

 

"[The insurance company] is not playing Santa Claus. Even with interest rates near record lows, CDs may still do better than indexed annuities". -- William Reichenstein Article

 

"The opacity of [index annuity] fees and complexity of the return calculations makes it impossible for investors to figure out if they’re getting a good deal". -- Glenn Daily, a fee-only insurance consultant based in New York. Article

 

"[Indexed annuities] carry exorbitant and indeterminable costs, lack of federal regulation and an inability to decipher what the investments will earn... They are complicated investments sold to unsophisticated investors." -- Craig McCann, Ph.D. and CFA, and Dengpan Luo, Ph.D. and CFA

 

"[Indexed annuity] contracts have really high hidden fees. That’s why they’re terrible ideas for older people even though they’re peddled to them." -- Kent Smetters, a former U.S. Treasury Department economic policy official and professor of insurance at the University of Pennsylvania’s Wharton School

 

"...if the sales hype is replaced with analysis, most astute individual investor will avoid [index annuities]. Giving up dividends plus imposing a cap on market capital gains is far too severe a penalty to pay for protection against periodic market losses. Astute investors seeking long-term tax-deferred accumulation are likely to have their investment returns substantially muted by investing in indexed annuities, if history is any guide." -- Peter Katt, CFP, a fee-only life insurance adviser

 

According to Chris Wang, with the Allianz 222 index annuity you can expect "low single digit returns of 1 - 3%, which all indexed annuities will return."

 

"You never want to buy an annuity that has a surrender charge" -- Bob Brinker, consumer advocate and legitimate paid radio host of 30 years

 

"Index annuities are the 'poster children' for products that are too good to be true" -- Larry Swedroe

 

Ric Edelman's list of 15 investments to avoid includes index annuities.

 

REVIEW:

 

KABC 790-AM is a radio station in Los Angeles which incessantly airs a charade of infomercials on weekends. These infomercials are thinly disguised as bonafide radio shows. If you miss the disclaimers at the start and end of these shows you might be confused. David Ortiz' Safe Money and Income "radio show" is no different. Make no mistake. This show is not part of the regular line up of hired on-air talent. It is a paid infomercial announcement.

 

And like all of the other advertisements that you hear for annuities, Mr. Ortiz seems to use the same old strawman arguments, shell games and other one-sided sales presentations to puff up annuities.

 

What do insurance companies do with your money in order to make the promises that they make?

 

Before we delve into David Ortiz' sales pitch, let's first start by reverse engineering what insurance companies do with your money when you give it to them (putting it into an index annuity or immediate annuity). They don't do anything that you can't easily replicate on your own by investing in a couple of index funds.

 

According to William Reichenstein, a professor of investments at Baylor University who has studied index annuity contracts, an insurance company will typically pay your adviser his lavish commission, then invest 94.33% in bonds, 3.67% in derivatives linked to the S&P 500 index and keep the remaining 2%. Don't expect insurance salesmen to ever clue you in on how insurance companies make the promises that they make.

 

We know that insurance companies have to earn a profit, have to pay for their overhead costs and have to pay the "advisor" who sells you that annuity his lavish commission of typically 7 to 10% with index annuities. That's right, typically 7 to 10%! Immediate annuities "only" pay agents typically 3 - 4%. Now we have a good guess as to why people spend money for costly radio air time on KABC!

 

So what does it all mean? This should tell you that the insurance company cannot pay out greater than what bonds earn MINUS overhead costs, minus insurance company profit, and minus whatever commission is paid to the sales agent who manages to convince you to lock your money into the annuity. And 10-year treasuries have only returned 5.16% from 2006 to 2015. 3-month T-bills have only returned 1.16%. Those are not stock market-like returns.

 

Insurance companies are not stupid and they aren't playing Santa Claus. They hire armies of experts in math, risk and the financial markets called "actuaries" who make sure that the insurance company will come out the winner.

 

Strawman Argument: Stock market volatility

 

The number one strawman argument used by annuity salesmen is to appeal to conservative retiree investors who are ignorant of bonds and how bonds protect against stock market volatility. Ever heard the phrase "When stocks fall, money runs to the safety of bonds"? In order to sell their product, these annuity salesmen always talk about how someone who over-invests in the stock asset class is vulnerable to huge market loses. Strawman argument!

 

 

risk

 

Strawman Talk: "Guarantees Not Guesses"

 

On his "radio show" David Ortiz talks about "if-come" that can lose 50% and he suggests that the 4% is "antiquated" because investors "lost 38%" in 2008. He is ignoring diversification into bonds! And what is his solution for investors who can't handle wild stock market volatility? Annuities! He sidesteps discussing a better option: A simple LOW-risk portfolio that is heavy on the bond side! On his radio infomercial he never presents the sensible, time-tested option of diversification into bonds. This is not surprising because super low-cost stock and bond index funds don't pay Mr. Adviser anything, while it's well documented that insurance companies typically pay advisors a 7 - 10% commission if and when they manage to convince you to dump your money into an index annuity. Not only are bond index funds such as BND super low cost, but they are 100% liquid, meaning you can sell at any time for any reason and without penalty (unlike annuities). And since nobody earns any 7 - 10% commission with index funds, and you don't have insurance company overhead costs and profit to enjoy, odds are that you should easily outperform any annuity, as we'll learn in this article.

 

What annuity salesmen never talk about:

The Ibbotson 28/72 Rule

 

From 1970 to 2010 the lowest risk bond/stock allocation ratio was 28% stocks / 72% bonds. This is not cherry picking of time periods either. Bonds have always been low-risk, slow, boring and consistent, especially when held TOGETHER with some stocks. Money has to go somewhere! It is a mathematical fact that no conservative retiree investor who was properly diversified into bonds with a low-risk 28/72 portfolio ever lost 50% of their money during the so-called 'lost decade' of the 2000's. In fact since 2000, every single year has been positive except for 2009 when investors lost less than 1%. Don't expect insurance salesmen on the radio to ever discuss the Ibbotson 28/72 rule because once investors realize that if they diversify heavily into bonds, such as through a simple total bond market index fund like BND, there is no crazy volatility and thus no need to lock your money in an annuity prison for guaranteed mediocre returns.

 

chart

 

NOTE: If you're thinking that 1930 and 1931 looks scary then you need to understand that the stock market of today is not what it was back then. We also had double digit deflation in the early 30's. Click here for details.

 

The 4% rule works great!

 

The experts say that in order for your nest egg last through retirement, you should aim to take out no more than 4% per year. This assumes a 30 year time horizon (until death). It is important to understand that once you get to a 20 year time horizon, studies have concluded that you can take out between 5.1 and 5.5% per year. Many annuity salesmen falsely use the 2000's as their big compelling argument for dumping money into annuities. They deceptively look at a risky portfolio that is over exposed to the stocks. In reality the 4% rule held up perfectly during the 2000's even when increasing those 4% withdrawals with inflation. By 2015 you were taking out not $4,000.00 -- but $5,687.96. And notice how your nest egg (the green line) still grew to $114,871.12 -- All during the worst of times!

 

chart-mix

 

Note: The above chart factors in calendar rebalancing on Jan 1 of every year

Above rate of withdrawal for each year: Jan 2000: $4,000, 2001: $4,136, 2002: $4,251.81, 2003: $4,319.84, 2004: $4,419.19, 2005: $4,538.51, 2006: $4,692.82, 2007: $4,842.99, 2008: $4,978.59, 2009: $5,167.78, 2010: $5,147.11, 2011: $5,229.46, 2012: $5,396.81, 2013: $5,510.14, 2014: $5,592.79, 2015: $5,682.28, 2016: $5,687.96

 

 

Even if the 4% rule "fails", this doesn't make an annuity better

 

It is also important to note that the 4% withdrawal rate can be adjusted lower if needed. And it is critical to note that just because the 4% rule might "fail" certainly doesn't mean that an annuity is a better place to put your money. For example from 1966 to 1996 you really needed to be taking out about only 3.4% per year (pegged to inflation). However even when reduced to 3.4% (pegged to inflation) you were much better off than if you had dumped money into an immediate annuity. To better understand why, please watch this video.

 

“I specialize in working with safe money”

 

This is like saying "I'm an insurance product salesman". There should be no special skill set that an adviser learns in order to help a conservative senior citizen invest in bond and stock index funds versus to help a younger aggressive investor invest in bond and stock index funds. The approach should be the same for all investors: 1) Determine what level of risk is appropriate for the investor, 2) invest in low cost index funds and then 3) percentage rebalance as needed. One's appetite for risk is essentially reflected in stock/bond allocation ratio. For anyone to say that they "specialize" in helping investors who have less risk, is much ado about nothing. But it probably works well to gain people's trust. Risk is essentially managed through bond/stock diversification, which all advisors learn about in their studies.

 

The risk that annuity salesmen generally don't care about or are quick to look past: The danger that you might need to get your money back!

 

A truly unbiased advisor who is disinterested in earning back-door commissions will understand the importance of liquidity. An investor might need to get their money back for any number of reasons: wife, child, or grandchild has an expensive medical emergency that is not fully covered by Blue Cross, expensive legal issues, etc, etc. There are litereally hundreds of unexpected reasons why someone might need to get their money back, and there is NO WAY TO PREDICT whether you might need to get your money back. But once you annuitize (enter the distribution phase of) an index annuity, your money is generally gone for good. Lack of liquidity is one of many reasons to avoid annuities. Index funds on the other hand are 100% liquid. Sell at any time, for any reason and without penalty. Perhaps annuity salesmen should say "I specialize in creating illiquid money".

 

Back door commissions = Conflict of interest

 

If you need help, the qualification that matters is whether an adviser is a fee-only fiduciary who works on a one-time or one-task basis. There are also "light-advice" companies such as Vanguard which only charge 0.03% per year as an asset management fees. An even better choice is to find a so-called robo-advisor, many of which are free.

 

Shell game: "10% up front bonus"

 

Again, insurance companies are not playing Santa Claus. Nothing is free with index annuities. There are many strings attached to any signing bonus. The insurance company usually compensates for the bonus by having lower cap rates. And the bigger the up-front bonus, the longer the surrender period and higher the surrender charge. Many (most) up-front bonuses will vest over time, meaning that you may not get the full bonus if you withdraw funds early. With some index annuities, the bonus may only apply to your protected income value -- not your actual account value (surrender value).

 

An apples to oranges slight of hand:

"You can get market like returns without market risk"

 

The operative word in this sentence is "returns". This is an ambiguous word that can mean several very different things. Unfortunately most consumers don't know one from the other. When Mr. Insurance Salesman talks about "return", the average consumer is imagining how that "return" compares with returns on the stock market. For example in the year 2009 the S&P 500 index provided a total ROI (including price change and dividends) of 26.46% and the total bond market index provided a total ROI (including price change and interest) of 5.93% for the same year.

 

And whether an investment is or is not allowed to compound year after year will determine if you are speaking about "Geometric Average" return on investment (compounding) or "Arithmetic Average" return on investment (not compounding). For example a $100 compounding investment that grows by 10% for 5 years grows to $161.05 -- not $150.00.

 

When withdrawals are taken out of an investment each year, it becomes very difficult to calculate the actual return on investment of that investment. This is one of the reasons that the vast majority of consumers who have index annuities have no clue as to how well their annuity is really doing. It's easy to look up charts showing stock and bond returns on investment. It's not easy to comprehend the efficiency of an index annuity. Unfortunately most consumers are solely focused on what they are told by salesmen who use ambiguous terms.

 

So when insurance salesmen talk about "return", they are usually merely referring to "income payment rate" or an "income base" that is or will eventually become the basis for determining income payment rate during the "distribution phase". Not return on investment! The way to evaluate and compare the performance of an investment product to other investments is to calculate the return on investment (ROI) after you cash out or your heirs inherit what's left (if any).

 

Here's a way of looking at it. Imagine talking about a stock that pays a 7% dividend without talking about the fact that the share price of that stock is declining in value. It's not fair to say that you are getting a "7% return" because in reality your return on investment is less than 7%. After 25 years of paying 7% dividends, if the value of that stock declines to zero then your actual annualized return on investment is only 3% -- Not 7%. This is how most annuities work in the distribution phase. The goal of the insurance company is to reduce the death benefit value (for your heirs) down to zero by the time you reach your life expectancy. Even if you live to be 150 it is mathematically impossible to earn anywhere close to 7%.

 

How most index annuities work:

ZERO growth once you start the income spigot!

 

Imagine if once you retired, the stock and bond markets got frozen in time. You would be pretty upset if your money stopped growing! Well guess what... Once you elect to annuitize the contract (AKA enter the "distribution phase") the way most annuities work is that the growth of your money stops! Yet the insurance company continues to invest the money that you gave them, as they earn slow, consistent returns by investing heavily in bonds.

 

So how much annualized return on investment do index annuities in general really provide?

 

According to Chris Wang, moving forward in today's low interest rate environment with all index annuities you can expect returns on investment of only about 1 - 3% and this appears to be the "accumulation phase" that he's talking about. Those are paltry returns that will erode you savings! Click here to test out for yourself how much as little as 2% in lost returns will erode your savings after 10, 25 or even 50 years. This is the danger of bearing too little risk, wohich annuity salesmen don't like to talk about. Earning CD-like returns is going to send you to the poor house! And remember that according to William Reichenstein, "Even with interest rates near record lows, CDs may still do better than indexed annuities". Article

 

Calculating your annualized return on investment (ROI) during the "distribution phase" will depend on how long you live. If you live to your life expectancy then yours and your heir's ROI during the the distribution phase is zero. If the annuity works like an immediate annuity "single life with cash refund policy" then yours and your heir's ROI is also zero during the the distribution phase. If you live longer than your life expectancy your heirs typically get nothing. From your perspective, your distribution phase ROI will gradually rise the longer you live, but even if you live to be 100 your ROI is going to be very low. Please visit the immediate annuity page to understand how the math works. Scroll down to where it says "Immediate Annuity return on investment if he lives to be...." and see how in this hypothetical example a 100 year old only realized a 3.4% ROI and heirs get no inheritance.

 

Also during the "distribution phase" it is typical with most index annuities that you get fixed income payments that do not adjust for inflation (and the cost of living). Eventually inflation can make what was initially a 6 1/2% payment rate seem like 1 1/2% if you live long enough, hence the analogy that annuitizing a contract is "like deciding that taking a vacation at age 65 is more important than having food and shelter at age 85".

 

While some index annuities may adjust for inflation, the insurance company will typically compensate for this by lowering the payment rate and / or putting caps on amount of upward adjustment for inflation.

 

Two University professors (Yale and UCLA) discovered that investors would b better off in a simple portfolio of U.S. Treasury bonds and large cap stocks a whopping 97% of the time! Other studies have suggested that when someone buys an annuity this typically results in a wealth transfer of as much as 15% to 20% from the investor to the insurance companies and sales agents. SOURCE

 

And according to economic consultant Craig J. McCann, "Some 99% of the time, indexed annuities under perform a simple portfolio that’s 60% in zero-coupon Treasuries and 40% in a low-cost S&P 500 index fund."

 

According to fee-only financial adviser Michael Zhuang, who sold 6 index annuity contracts from 2006 to 2010, all of them lagged the S&P 500 index by a huge margin. One contract actually lost money, despite the fact that index annuities are advertised as "can't lose" products. Two index annuity contracts were purchased right before the market crash and still lagged the S&P 500 index by a large margin!

 

The article is dated July 4, 2014 and Mr. Zhuang says that a new client of his "recently" provided him with these contracts for analysis. So for the sake of estimating an annualized return using a compounding ROI calculator we will assume that April 1, 2014 was the closing contract value date. As you can see, none of the contracts returned more than 2.2% per year.

 
Purchase date

Annuity

Annualized ROI

Annuity

Total Return

S&P Total Return Duration
7/25/2005 1.4% 16.2% 90.2% 8.6 years
3/28/2006 2.1% 18.8% 78.1% 8 years
5/15/2007 1.6% 11.8% 49.9% 6.8 years
9/26/2007 2.2% 15.9% 48.8% 6.5 years
5/12/2009 1.7% 8.9% 138.9% 4.8 years
6/04/2010 -2.4% -9.2% 92.7% 3.8 years

 

Notice that one annuity contract actually dropped 9.2% in value. Index annuities are advertised as being products that can "never never drop below zero".

 

Slight of hand: "Income you can never outlive"

 

The operative word that insurance salesmen always leave out is "adequate". They never say "adequate income you can never outlive". Once you understand how immediate annuities work, you start to understand why they leave out this word. Once you enter the "distribution phase" with an index annuity, that's when the insurance company really comes out the winner.

 

Too good to be true: "Don’t you wish you had an account that can double every 10 years?"

 

First of all, your account would have to grow and compound at 7.2 percent per year for 10 years in order to double. Immediately you have to ask yourself how on earth is this possible? Because remember that insurance companies invest heavily in bonds (94.33% according to William Reichenstein). And 10-year treasuries have only returned 5.16% from 2006 to 2015. 3-month T-bills have only returned 1.16%. In other words the insurance company would be losing money if they were actually paying out a 7.2% return on investment. These returns are too good to be true!

 

For confirmation of this, according to CBS News there is no annuity product that can double in 10 years and then you can cash out. So what on earth could Mr. Ortiz be talking about?

 

Here's how the catches generally work. For starters, in order to realize these gains you have to permanently convert that "accumulation value" or "roll-up rate" into an annuity that pays a lifetime income -- Also known as "annuitizing" the contract. So right there you have lost your liquidity. Kiss your money goodbye! If you convert at age 65, you'll receive annual income payments of typically about five percent or more of the accumulation value. But those are just income payments which may stay the same. And what has happened to your principal after you die? If your principal stopped growing during the distribution phase then your heirs could be left with zero inheritance. Hidden fees such as guaranteed income riders also can speed up the erosion of your principal (or death benefit value).

 

Catch number 2 is that the way most annuities work, once you enter the "distribution phase" your accumulation value stops growing. That's a great deal for the insurance company and a terrible deal for you the annuitant.

 

Catch number 3 is that those distribution phase payments may stay the same. If so, they don't keep pace with inflation. To truly understand how accepting high fixed payments for life is a bad thing please visit the immediate annuity page. It's like deciding that taking a vacation at age 65 is more important than having food and shelter at age 85. Even if an annuity provides distribution phase payments that increase with inflation, typically they simply lower the payment rate and there are caps. Remember that insurance companies are not playing Santa Claus. They never have and never will. Whatever the case, it is typical that an index fund portfolio that is heavy in bonds will eventually surpass paying out what an annuity pays. Remember in the chart above, during the worst of times your money grew from $100,000 to $114,871.12 even while taking out increasing 4% payments that went from $4,000 in 2000 to $5,687.96 in 2015. And remember that once you get to a 20 year investing time horizon you can safely take out 5.1% to 5.5% if you wish, so say the experts.

 

Catch number 4 is that depending on the terms of the annuity contract, your beneficiaries typically get zero return on investment during the distribution phase regardless of how long you live. If you live up to your life expectancy, the insurance company simply gave you back your money while your money did not grow and your heirs get nothing. If you die sooner, your heirs may or may not get paid what's left of the accumulation value, but would still earn a zero return on investment from the time that you started the distribution phase. If you live longer, the insurance company continues to pay you, but even if you live to be 100, your return on investment will be very low. For a better understanding of this please visit the immediate annuity page and scroll down to where it says "Immediate Annuity return on investment if he lives to be...."

 

So Mr. Ortiz must be talking about "income base" -- Not cash surrender value. There's a big difference between the two. Unfortunately most consumers may be confused into thinking that Mr. Ortiz' mystery product is like a portfolio of stock and bonds whereby the price you see is the price you get. Apples to oranges.

 

"You will not be charged a fee by me"

 

But will you be indirectly charged? There's more than one way for insurance companies to essentially "bill" you. Yes, index annuities and immediate annuities have no "management fees" and you may not pay Mr. Advisor a fee. So how does Mr. Advisor and the insurance company stay in business? Insurance companies simply get your money by having things like lower performance caps, lower participation rates, expensive "guaranteed income rider" fees, zero growth of your "income base" during the distribution phase, etc. Then Mr. Advisor may get paid behind the scenes. In this case saying "you will not be charged a fee by me" is a shell game!

 

Furthermore going to the "free" advisors is actually a bad thing! If you go to an advisor who doesn't directly charge you anything, then at some point Mr. Advisor must make money in order to stay in business. They make their money by executing transactions. And those transactions must pay backdoor commissions, otherwise the advisor makes no money. Advisors generally don't work for charity! Instead, in order to make money, they must sell you expensive financial products like annuities -- rather than super low-cost index funds, which pay no commissions to advisors.

 

Conclusion:

 

If you need one-on-one money help, do not pick an adviser simply because they sound nice and friendly. They all are! Pick someone because they agree in writing to working for you as a fee-ONLY fiduciary and they will do so on a one-time or one-task basis. This legally eliminates the potential for conflict of interest that is back-door commissions than an advisor may earn. Bob Brinker has said that with the fee-based variety of advisers (in general), by default you can never really know for sure if they are making investment recommendations because it's good for you or good for them.

 

Once they help you come up with a personalized "game plan", all you do essentially is percentage rebalance your portfolio of index funds as needed. A third grader can do that. Once you realize this, you understand that there is no need for a costly "asset manager" to constantly manage your money. If you insist on having constant attention then consider Vanguard which only charges 0.3% per year.

 

There are also low cost "robo-advisors", many of which are free. Blackrock has a portfolio builder. Vanguard also has a portfolio creation tool. Never lose sight of the fact that investing can be as simple as owning 2 index funds -- a total bond market index fund and a total stock market index fund.

 

If for some strange reason you absolutely insist on dumping money into an annuity then we actually recommend Vanguard's variable annuity. It's "low cost" only compared to other variable annuities and to other types of annuities including index annuities. Costs are low because Vanguard does not pay commissions to any advisor. This keeps costs much much lower. Vanguard also has no surrender penalties. That's huge! Within this Vanguard annuity you can invest in stock and bond index funds. Make no mistake. Variable annuities are crap financial products. It's just that Vanguard's variable annuity is the least offensive of the bunch (especially "retail" variable annuities and index annuities). The easiest way to identify a "retail" annuity is by whether it has a surrender period. Remember Bob Brinker's advice to never buy an annuity with a surrender penalty.

 

Always speak to a fee-only fiduciary advisor before making any financial decisions.

 

Our reviews of other infomercials that run on KABC:

Review of Ken Moraif Money Matters market timing infomercials

Review of Doug Andrew Missed Fortune IUL insurance infomercials

Review of Power Trading Radio Online Trading Academy infomercials

Review of Rich Uncles non-traded REIT infomercials

 

Our other reviews:

Debunking Tony Robbins and index annuities

 

Go Back to Index Annuities

 

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