Q. My wife and I are in our early sixties and have multiple retirement accounts. One IRA through Wells Fargo Advisors is worth about $215,000. This investment is in a managed fund that Wells Fargo administers. We are not well versed in the particulars of investing and would like to get an independent party to review all of our current investments as to performance, fees, etc. We are willing to pay for this service and, at the same time, not be hustled or asked to move our investments. We have been with the same broker (his father first) and trust him, but we would like an independent review. Can you offer suggestions as to who or what companies we can turn to for this service? —J.P., Nashville, TN
A. Getting a dis-interested, professional opinion in investment matters isn't easy. Most participants have an interest of some kind in getting your business on an ongoing basis rather than as a one-time consultation. Your best bet is to visit the National Association of Personal Financial Advisors website and inquire about a NAPFA advisor in your zip code. The website is at www.napfa.org and the association is of fee-only planners. Fee-only, however, does not mean one-time consultation only and most advisors are seeking annual, repeat fee business. This isn't a sin. It's a way to pay the light bill.
You might also consider taking a slow, do-it-yourself approach. You could do this by visiting the Morningstar website, printing reports on the funds owned, and seeing how they compare to other funds in their category. Since Morningstar has a standardized set of measures and ranks all funds in a consistent, standardized way, you will quickly see if the choices have performed well relative to other funds, have reasonable expenses compared to others, and rank well when risk is considered as well as return. The same exercise will put you in a better position to understand what a consultant is talking about when you go for a one-time session.
You don't have to become an investment professional to have useful knowledge. But a basic knowledge of the lingo will do a lot for you.
Q. A friend of mine has been telling me about the advantages of indexed annuities. They sound too good to be true. I’ve also read that it may still be possible to actually lose money (not just get a lower return). Can you explain that? Also, how does the insurance company make money? I don't get it. —K.S., by email
A. Fixed index annuities sound a lot better than they are because most of us have selective hearing. We hear what we want to hear. And sales people are trained to provide it. What we want to hear is this: "Yes, I've got a risk-free but stock market-like return for you!"
The most common way people lose money in these contracts is the cost of getting out of the contract once it has been entered. You can find yourself eligible for only 90 percent (or so) of your original investment— after losing your index based credited interest. Many elderly people only discovered this when they wanted out.
What investors need to understand is that insurance companies are like banks. They are investment intermediaries. This means they take our money and invest, hoping to make money on fees or by earning a higher return than they have promised to us. If you invest in a variable annuity, the way the insurance company will make money is clear and explicit. They collect an insurance fee. They may make additional money on the expense ratios charged for the investment funds offered.
How the insurance company makes money in a fixed index annuity contract is a deeply buried secret because it is built into the crediting formula used to calculate your return. The marketing and sales incentives are large enough to make these contracts very popular with sales agents. If reader mail (and personal mail) is any indication, efforts to sell fixed index annuities dominate all other types of annuities.
Also important, the insurance company may change the crediting formula after you have purchased the annuity, so future returns may be entirely unrelated to anything you are expecting. I think the technical phrase for this is "buying a pig in a poke."