As Seen on TV: Financial Products You Should Avoid – Ty J. Young
Good financial products are bought, not sold. We are continuing our series of articles analyzing some of the most aggressively sold financial products – those which are advertised on television. This is the second installment in our series. The first installment, on Lear Capital, can be found here.
An ideal retirement product should provide steady, secure income and upside participation in the stock market. That’s why advertisements that promise performance that will be “up with the market and never down, forwards with your money and never backwards” are so tempting. That’s exactly what Ty J. Young claims in his advertisements that are frequently aired in the Boston area, where I live. I’ll explain why investors should be extremely wary of the products his firm sells.
In fairness to Mr. Young, he is one many firms that make such claims. This article is not about his firm specifically. One of our readers alerted me to Phil Cannella, who pitches his "crash-proof retirement" in the Philadelphia market. Young and Cannella’s firms are insurance-marketing organizations (IMOs), independent companies that market products from a roster of insurance companies.
But this article is not about IMOs either. It is about the specific product Young, Cannella and other IMOs are selling – a fixed-index annuity (FIA), also known as an equity-indexed annuity (EIA).
I will explain why the FIAs sold by Young’s firm are a poor investment, and how their complexity positions them to exploit uninformed customers.
How an FIA works
The concept behind an FIA is simple: the investor gets a portion of the upside returns from the stock market, along with downside protection against market losses. This is a laudable design goal. It’s the implementation in specific products that is lacking.
I spoke with a representative, whose title is “advisor,” at Mr. Young’s firm and asked him to describe his firm’s most popular product. This turns out to be an FIA offered by American Equity Investment Life, an Iowa-based insurance company, called the “Bonus Gold Index 1-07.”
I was told that this product offers a number of “crediting methods” from which the investor can choose. The most popular is monthly point-to-point crediting, where the investor gets 60% to 80% of the upside in the market (the S&P 500 without dividends) each month (the “participation rate”), subject to a cap of 2% per month. At the end of the year, the value of the annuity increases by the cumulative value of those monthly amounts, subject to the provision that the minimum annual return is zero (i.e., it never loses money).
I was told that the participation rate varies depending on how long the investor is willing to lock in his or her money. You can lock in your money for six to 16 years, after which you can withdraw 10% per year of the accumulated value without incurring penalties (“surrender charges”). Those penalties are steep; they start at approximately 20% in year one and scale down to zero if you own the product for 17 years or more.