December 1, 2008
The proposed rule is ridiculous. It is simply a way for Wall Street to try to further monopolize the options Americans have to invest their hard earned dollars. I can't tell you how many seniors in particular who I've met with have been DEVASTATED with respect to their retirement savings by owning mutual funds as the sole option provided them. The fact of the matter is that MOST people DO NOT get the service on their accounts that they're paying annual fees for. Consequently, they are left to drift in whatever direction the market is headed for at any given time.
Even when they DO get some attention on their account, typical money managers virtually NEVER suggest their clients even sit on the sideline in money market accounts during turmoil. It's one thing if you're 20, 30, 40, maybe 50 and affirmatively decide to ride it out. Truth is that the vast majority of even these investors don't get proactive advice from their advisors. Typically, the investor has to call the advisor and that's not the way it should work. If you're retired and you lose 20%, 30% or more in a given year, it might take YEARS to recover which seniors don't have.
Having said all that, it is also a fact that Wall Street's typical "pie" that shows the various slices of how an investor is allocated, is SUPPOSED to illustrate some sort of DIVERSIFICATION. That so- called diversification is supposed to keep investors from losing large chunks of money in rapid fashion. As we've all seen many times, it doesn't work. Of course, the traditional model of diversification that Wall Street promotes often also keeps people from MAKING money very effectively.
The oldest model for risk management is called the Investment Pyramid and has, at it's base or foundation (that which supports everything above it) guaranteed, safe investments. As you move higher on the Investment Pyramid, you allocated fewer of your recourses as the risk increases. It is the model that the wealthiest Americans most commonly use. They do not have ALL of their money in the volatile environment of the stock market. They are not going to have the basis of their wealth exposed to that and of course, the imperfect application of human intelligence trying to foretell the future about where the best place to have money might be and when it might be best to have it there. And that's assuming someone is actually performing the service they are paid to do. The average investor typically gets left to his own devices while money managers focus on their most prestigious and large account clients. That's where their income is most concentratedly focused since money under management is the most common rule determining the manager's attention.
Taking fixed indexed annuities and putting them into the hands of Wall Street is preposterous. They should be a part of an overall strategy along with securities for a large segment of the population. For others, particularly those close to or already in retirement, their emphasis should begin to de-emphasize securities, not eliminate them. That's prudent money management. If you factor in the debacle of the markets in the years 2000-2002, most Americans lost HALF of their account value. Now, after having had some recovery, typically they're down 20-30% six years after the last meltdown. How would YOU like to try to plan your retirement, in which your livelihood and income is based on your accumulated savings? How would you begin to plan your 20, 30 or more years of retirement when your savings is going up and down like the proverbial roller coaster? And when you're taking income from such accounts and you sustain losses, it makes it even more difficult to keep from losing principal because the tendency is to move to more aggressive instruments to keep income the same or higher because of inflation and/or health related issues which in turn exposes that money to more risk. Retirement is supposed to be sustainable on 4-6% rate of return. If you factor in fees on securities, you're typically having to earn 6-8%.
Bottom line is that Wall Street doesn't like having competition for American's investment dollars and wants to make it essentially a monopoly. This while we can all see the results of the various brain trusts that have managed the American investment dollar to date, not to mention the greed and out and out theft, graft, misleading practices and lack of disclosure despite the regulations currently in place. WHO DO YOU KNOW HAS EVER READ, MUCH LESS UNDERSTOOD A PROSPECTUS?
Good sales practices are, of course, essential but the fact of the matter is that people have only two choices to position money to grow. They either put it at risk or they make commitments of time. Vitally important as a third element is the subject of liquidity. So long as someone has sufficient liquidity, some people can make a choice NOT to have all their money at risk. Some people don't like the markets. Some people love the markets. For people who don't like the markets, indexed annuities give them a chance to have money grow without sliding backwards. For those who love the market, they are also a good strategy because they are a hedge against losses but money managers don't offer them because they don't make annual fees from them. Their investment advice is couched in their own income considerations. Period. Having an alternative investment AND AN ALTERNATIVE SOURCE AND PERSPECTIVE for the individual investor is critical.
Richard T. Cornfield