From Taxis to Variable Annuities

My wife was named after the Hawaiian goddess of fire, Pele. Fortunately for me, only two things make Pele boil: when a driver cuts her off on the open road, and when she gets hoodwinked during a holiday.

Pele and I aren’t naive travellers. We’ve each ventured to roughly 30 different countries. But every time we visit a third world country for the first time we get hosed by somebody, usually on the first or second day.

Last week, we visited Sri Lanka. Shaped like an extracted tooth, it’s an island south-east of India, sharing many of India’s customs and beliefs. The beaches are picture-perfect, the mountain tea plantations are stunning, the temples are awe-inspiring, and the people are both wonderful and opportunistic. Many western travellers are walking ATMs, of course, and there’s no shortage of Sri Lankan entrepreneurs willing to separate you from your money. Over-charging tourists is a national past-time.

Entering a Tuk Tuk (a three wheeled taxi) driven by a man named Abhishek, Pele and I headed for a beach area a few kilometres south of Colombo, the capital city. We watched the taxi meter like a couple of day traders, but it didn’t matter. When the taxi stopped, the price jumped 80% with the press of a button. This wasn’t our first time in a Sri Lankan taxi, so we knew we were getting taken for a ride. Unfortunately, I handed Abhishek a bill that could cover the “extra” fare. I expected change, but it didn’t come.

For the record, I’m no hero. I’m afraid of needles, roller coasters and dentists. But that day, I saved Abhishek from my fiery American wife.

“Don’t people realize,” fumed Pele, a full hour later, “that when they rip off tourists, they won’t get as many visitors coming back to their country?” I wasn’t so sure. If most tourists don’t know when they’re getting ripped off, they won’t have anything negative to report to friends and family.

The fabulous private school in Singapore, United World College, serves as a similar example. With more than 3000 students, the school is stacked with smart teachers—but unlike public school educators, they won’t be receiving pensions. Unfortunately, nearly all of them are wrapped up in Abhishek’s taxi, paying investment costs on variable annuities that run 3-4 percent per year.

These products are sold indiscriminately to every teacher the local salesperson can collar, regardless of age, risk tolerance or their understanding of the products. And the teachers (who don’t fully understand what they’re buying) don’t complain. The administration recently brought me in for damage control, to speak to their teachers about low cost investing. The variable annuity purchases are heart-breaking.

U.S. based investors aren’t immune to these heavily marketed investments either, as variable annuity sales increased 28 percent in 2011.

If inflation runs 3 percent, and variable annuity investment costs run another 3.5 percent, then most of these products will fail to make an after inflation dime, unless the stock market rises by 6.5 percent or more. The insured component usually promises the investor the sum of their total deposits, without any adjustment for inflation, but only if the investor sticks with the plan for many years. Jumping out of the vehicle early can be painfully expensive, as the investor gets pounded with gargantuan redemption fees.

I understand that not all variable annuities are created equally. Those sold by Vanguard and TIAA Cref offer substantially lower costs, but the runaway sales success of the more expensive products baffle me. However, there’s light in the murky tunnel.

According to The Wall Street Journal’s Leslie Scism, a salesperson was recently ordered 90 days of jail time on a felony-theft conviction for selling a variable annuity to an 83 year old woman who was showing signs of dementia. The insurance rep didn’t really steal from the client; he just sold her a variable annuity, charging her the usual fees. But this warranted incarceration and it may cause more investors to take note of their investment products.

I can’t find a similar circumstance where someone was jailed for selling a balanced index fund or a government bond index.

If our Sri Lankan driver, Abhishek, could become a variable annuity salesman, he’d probably ditch the Tuk Tuk in a heartbeat. After all, he already possesses part of the required skill set.