To talk about client B, now this one—I mean, look at the headline here. We—this is why your life sometimes is better than even fiction because don't buy your financial products from the insurance agent that's hanging out at the Chick-fil-A. This is the scenario: this person had a happy ending to a degree because we were able to fix this. We had this client who had, um, another windfall client. Meaning, these are clients just like in clone A. Client B came into a large sum of money from an inheritance. A person had passed away, and they were coming into a large sum of money. Um, and they didn't know who to talk to initially. So they were going to, they had a morning routine where they were going to a Chick-fil-A-type restaurant. Um, and this Chick-fil-A, every morning while they were there ordering their Chick-fil-A, there was this nice gentleman that was also at the church just hanging out, and he'd start up a conversation. I remember her saying he was so nice. Well, this individual convincingly found out she had a windfall, convinced her to buy two very large, talking about just under seven figures, just under a million dollars worth of Equity indexed annuities, yes. And these things sounded great to her because, realized, she's an older person, she comes into this money not having a lot of background in personal finance. And the first thing that he highlighted was, "You can't lose it." Sounds good if you're somebody who's coming into a large sum of money. You don't know how money works, so you're like, "Man, what could go wrong?" But why don't you describe what is actually in the brochure on some of these insurance-based products?
Yeah, so she was a little uneducated in the financial realm, so she had a bit of fear that, I think the salesman was able to play into because this is essentially what he told her. He said, "Alright, I've got a solution for you. You have this big windfall, you want it to grow, but you don't want to lose it. So, I have this thing, this solution, this idea where you make money when the market goes up. So, you can invest these dollars, you can actually have them working for you into the future. But when the market goes down, you don't lose any money." Well, for someone who doesn't know these products, for someone not fair, that sounds like a win-win. That sounds like an absolute best-case scenario, best-of-all-worlds solution. However, what the reality is and what the brochure said aren't exactly the same thing because there were some things that the salesman did not tell her. If he did tell her, it was buried in fine print in the disclosure of the paperwork.
Well, and I think that's because, look, everybody knows, because I have to make sure I give the disclaimer. These products are designed, there's probably a small, select group of people that work. But I can tell you for certainty that the suitability for this client did not pass the test. Because the first thing that they did, yes, it's true that you could not lose money unless you pulled the money out faster than you're allowed to. Now here's a big problem for this person. This person had debt, yep, they had some debt they wanted to pay off. Well, the insurance agent did not share that, "Hey, you're not going to have access because there's actually a 15-year surrender period on these products that we're putting in that lock you up. That's how we can give you guaranteed performance because we
The insurance agent did not share that, "Hey, you're not going to have access because there's actually a 15-year surrender period on these products that we're putting in that lock you up. That's how we can give you guaranteed performance because we're going to control your behavior for the first 10 to 15 years." He didn't disclose or have a full conversation because she had things she was planning to pay off immediately with this money. But she did communicate to him, "Hey, there are some bills that I've got to pay. I need this in order to provide for my lifestyle. I need this to end up paying my bills." So he did notice and note to her that, "Hey, distributions are allowed. You can actually pull money out of this now." He did not mention the 15-year surrender period, and he did not mention also that the withdrawals that she was actually able to pull out are limited, no more than 10% of what the annuity's value was. So what that means is if she did have a desire to go pay off her mortgage or to satisfy someone much better to take some big distribution, that would actually have been a disallowed distribution that would have triggered the surrender. That would have been incredibly costly. So her behavior was somewhat controlled over the first 15 years of this policy, even above and beyond what she would have wanted to do with those dollars.
This next one kind of cracks me up because I still have the echo of, "He's such a nice man." Well, here's part of the rest of the story. This thing had a monster commission on it. This person was going to make well over $60,000 to $70,000 of the first-year commission. Well, I found out she came to me, explained somebody because she just had this gut feeling that something wasn't right. That someone in the community had recommended, "Hey, come talk to Brian." And once I talked to her and found out she had some debts to pay down, I was like, "Oh boy, this policy is not this doesn't pass the suitability test." Well, good news, a lot of these insurance products actually have what's called an unwrapped period, where you can actually reach out to the home office if it's within a certain number of days. You can unwind these policies like they didn't exist. The corporate office was more than accommodating once I explained that, "Hey, this person has an immediate need for some of these proceeds." And other things, they were very easy to help us unwind. But I'm the one that had to take the phone calls from this insurance agent, and he all of a sudden was not a nice man. Because you can imagine when this all went down, if you had somebody who was already spending that $60,000 to $70,000 commission, I'm sure he was jumping backflips to spend that money. And when it now gets pulled away because he got a hold of the client, got a hold of a financial advisor who walked through the actual needs of the client, um, it changed his demeanor on everything.
The other thing, now this did not come into play because we were actually able to unwind it, but the other thing that you should know about these types of annuity products is that there are high fees and high operating expenses. So not only is there a large commission on the front end and these lock up here to control your behavior, but they're pretty expensive. Some fixed annuities can have fees and expenses as low as like 0.3 percent, but variable annuities, it's not uncommon to see them with annual operating expenses of like 2 to 3 percent per year. So they become very, very costly over the long term.
The question might be asked, "Okay, well this guy seemed trustworthy. I'm sure he was a financial advisor or financial professional. What are some things that I could do to protect myself? How do I make sure that I don't fall into the same client trap that this client almost fell into?" Well, the first thing is to kind of know what you're buying. Yep, I mean if this thing, if the financial product seems more complicated than you can understand, be careful. Because I feel like there are so many products that are sold through fear as well as complexity, and it doesn't have to be so overwhelming that you need to have your head spun into buying some complex product that has all this fine print, all these restrictions, and you end up not knowing up from down.
Now, this is a perfect but we tell folks, "Hey, when we explain something to you, to our clients, and we have a financial strategy that we're recommending, if you couldn't go to a local grocery store and explain the strategy to the person standing behind you in line, we probably have not done a good enough job of educating you on what that strategy is, why it makes sense." So know what you're buying, know what you're doing with your dollars, understand why that specific product or that specific strategy makes sense for your situation. And if you can't get your head wrapped around it, start back at the beginning, go through it again. Start back at the beginning, go through it again. Start back at the beginning, go through it again. Because at the end of the day, you want to make sure you know where your dollars are going and you know what your dollars are doing.
In addition to that, you want to make sure you understand who the person you're working with is. If someone is giving you guidance or giving you advice or selling you a product, you should immediately ask yourself the question, "Okay, who is this person? Why should I trust them? Where does their validity come from? And should they even, in fact, be someone I'm taking advice from?" Well, in this case specifically, it didn't even pass the suitability standard. But I'll take it a step further and say that we are fiduciaries. And if you don't know what the term fiduciary means, it means you have to put your clients' interests ahead of your interests as the advisor. And that's an important thing, I think. And that's not something because there are different standards in the financial space. We wanted to come up with a solution because I hate just poking holes without actually giving somebody actionable advice. So if you go to moneyguy.com resources, completely free, we have the eight questions to ask anybody who's trying to sell you a financial product. I think you'll be better served, you'll be on a much more stable ground, and you won't get ripped off or potentially ripped off like this client was.
The last thing you can do to protect yourself, and you guys are already doing this, is to have a general understanding of how the financial world works. I mean, you are listening to or watching a financial podcast, so you're already educating yourself. But just let those Spidey senses go up if something sounds too good to be true, then perhaps it is. There is no such thing as a free lunch out there in the financial world. So understand what you're getting and once you get it, understand what you're getting yourself into. Make sure that you continue to educate yourself to protect yourself from folks who may be selling something that doesn't have your best interest at heart.
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