Wall Street creates financial products for one reason, to make Wall Street money. As investors we need to be aware that this is a common occurrence. We need to be smart about where we invest our money. Financial products that are sold with a commission attached usually come with a catch. I see this all the time. Annuities are the biggest culprit. The sales pitch sounds too good to pass up. You cannot lose is the pitch. However, there is always something in the fine print that outlines the negatives. The positives are in big bold lettering, and they are incredibly attractive to the eye. I am here to warn you that the driver to sell these products is a big fat upfront commission to your advisor, and the advisor preys on the clients’ fear of losing money. The brochure does not disclose the compensation to the advisor. It absolutely should disclose the compensation your advisor receives for selling you this product. It should also outline all the internal fees associated with the product. The worst feature that comes with most annuities sold by advisors is the surrender charge.

The surrender charge can last any number of years. I have seen annuities that come with a 15-year surrender charge period and up to a 15 percent surrender charge to go along with it. The surrender charge period is the period the annuity product will charge you to sell the product. Think about it. The advisor gets paid upfront when the product is sold to you. Then, months or years later when you figure out it is a bad deal for you, the insurance company penalizes you with a surrender charge to sell it. If the product is so great, why penalize the client for selling it? If the product is as good as the sales pitch, then the client should want to own the product for many years. The commission the advisor receives is usually correlated to the surrender charge. If you purchase an annuity with a 7-year surrender period, it normally begins with a 7 percent surrender charge and drops over the 7-year period until it finally reaches zero.

All annuities come with a cost. Do not let anyone tell you differently. This is an inherent flaw in most of these products. The expense of owning an annuity can be mind numbing. If you are paying the insurance company 4 percent per year, you are missing out on that return on your investment. I know the promises made by the insurance company sound great, but they come with a cost that will eat up your overall return.

My advice to you is to do your homework. Research not only the product, but also the advisor selling it. Work with a Fiduciary and you will not be subject to a sales pitch with a potentially high commission product being sold to you. Fiduciaries work on fees based on assets under management. They do not get paid commission to sell products to clients. Fiduciaries build portfolios to meet client needs. There is zero incentive to sell products with lucrative commissions behind them.