Like I do every Sunday, I was reading the NY Times business section. As I scanned the paper looking to see which articles I wanted to read, an ad caught my attention.
There, staring at me, were the words “Guaranteed Income”. It caught my attention because when I saw the word “guaranteed” I fully expected it to be an ad from some second rate company and I was curious how any financial company could get away with even using the word in an ad, let alone using it as part of the headline. To say I was unpleasantly surprised when it turned out that the ad was from Fidelity Investments would be an understatement. How and why in the world would one of the largest financial organizations in the world try to pass off any investment as guaranteed ? Particulalry in the era of the Madoffs and Stanfords ?
Tell me where you think the following came from, a Madoff, Stanford or Fidelity website ?
“Guaranteed income for life: When you take your first withdrawal, you are guaranteed a yearly minimum withdrawal amount for life, based on your original investment. If the market is up and your annuity contract has reached a new high point on your contract anniversary, your guaranteed income increases (up to age 85).4 If your contract value goes down due to poor market conditions, your income stream will not go down. In other words, your income is protected from market risk—it may only go up, but will not go down.”
No investment vehicle is 100pct guaranteed, not even US Treasuries. It’s misleading to even suggest any could be. But what the ad said from there is what made the ad disturbing. The ad of course had a qualifier. Do you see that little 4 in the text above ? It takes you to the qualifier …. “Guarantees are subject to the claims-paying ability of the issuing insurance company.”
So in the space of a relatively small ad, and repeated on their website, Fidelity was claiming that they could offer an investment that was guaranteed, UNLESS they resold you an annuity product from a company that couldn’t pay their obligations. In other words, Fidelity isn’t smart enough to pick which companies will stay in business and they refuse to underwrite that risk of non payment themselves. In spite of this, they want to sell to unsuspecting individuals who trust the Fidelity name, annuity products that they are promoting as “guaranteed”.
That’s disturbing. Fidelity, to quote Mark Jackson, “you are better than that”. No financial company should be able to promote ANY investment as guaranteed. To have a company the size and reputation of Fidelity take this approach to selling their products is and will continue to be disturbing and it should be stopped.
I’m glad many of your readers are better informed about these common investments than you are. Isn’t every guarantee only as good as the issuing entity? Upon who else would it rely? Unfortunately a lot of the economic mess we are in is due to the naïveté and idiocy of people who don’t understand things as simple as this.
Comment by Linda -
What is even more troublesome is Fidelity is showing all the signs of a ?? solid company that is slowly but very likely about to start spinning off and spliting up. Don’t take my word look at the signs.
Fidelity refuses to disclose if any the sucessor for the company even thought the chairman is getting way up in age. . Fidelity has had a brain drain at the core of the business for well over two or three years. Fidelity took a much bigger hit in mutual fund losses that most mutual funds and now they are promishing almost anything to get your business. I do not think they can guarantee much right now.
Comment by Wm P. Deans Sr -
Great find Mark, and I completely agree. Unfortunately (as someone else pointed out) these types of ads for annuity products are alarmingly common. The practice of using “misleading wording” is supposed to be dealt with swiftly, but apparently it isn’t. I left Prudential Financial for virtually the same reason; I wasn’t willing to misrepresent a product simply to make a sale. It’s not just annuities that are being misrepresented though. I’ve discovered that a huge amount of people (Baby Boomers and older) have old Whole Life life insurance policies which have little or no value. They were sold much like annuities are sold today, and these people were promised a “stream of income” after “x” years. I’m sure I don’t need to tell you that it simply can’t happen. The problem is, these poor people had no idea that they couldn’t rely on that phantom income until I called…20 some-odd years later! Sad times.
Comment by Jay -
adding to beenthere’s comment: after scaring people and using the word ‘guarantee’ (with all the fine print caveats), the biggest and scammiest parts are the VERY large commissions paid to those who SELL these annuities.
My advice (which i took 2 years ago when a wells fargo ‘broker’ sold my 87 year old parents a huge annuity with…guess who? AIG! yikes) is, if your elderly parents are sold this junk, BREAK THE TRADE. it’s is legal and FREE because ethically they are not allowed to sell annuities to the elderly. Precisely because of what Mr. Mark has pegged…..that ‘lil ol’ word GUARENTEED…(not)
It does take time to get your elders money back, but if you go up the financial food-chain to the ‘superist’ of supervisors … they will honor your request if done politely and truthfully. GOOD LUCK!
Comment by sue -
Today Fidelity Investments pulled the product above off of their web site and no longer will offer the product to clients throughout the country. Looks like your blog has some real power.
Now Fidelity needs to address the question of “guidance” to clients. What does that mean actually? It means that the reps there have to make “suitable” recommendations to their customers. The problem is these suitability regulations don’t entail as much disclosure of possible conflicts of interest AND they don’t obligate putting client interest first.
Watch out this is the tip of the iceberg at the firm!
Comment by Bill Hayes -
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A mutual fund company placing a misleading ad? Yeah, there’s a surprise! Authenticity won’t matter. Investors will continue to pour trillions into the stuff. Actually, I’m just waiting until the markets get bearish enough that the fund companies will do like the hedge companies and suddenly put in all kinds of kickers to halt redemptions.
By the way, addressing two other poster comments: S&P is hardly reliable for assessing financial strength as we’ve learned over the last few months. As for having some kind of regulator like Canada does for ads, the Canadian one is useless. Actually, mutual fund dealers here get away with far more murder than their American counterparts. The “historical returns” charts of any and all of their funds verges on downright fraud.
Comment by Jeff -
A guarantee is as good as the person (or company) who gives it. Fidelity is putting their name behind it. That’s all a guarantee is.
Comment by investorwalk -
This is disturbing? You know how many times I called and asked to talk to Chuck to no avail?
He is never there!!
🙂
Comment by vestopia -
Mark,
You have hit on something I have recognized for a long time: some companies can get away with anything…until they can’t.
It should be illegal to say guaranteed in an ad…even if you use an asterisk, regardless of what that asterisk says.
It is impossible. Yes, that means CANNOT HAPPEN! Nothing, NOTHING is 100% safe in any market. On top of that they say it can go up?! HA HA HA!
This is the just like the subprime mess. How many morons have come up to me and bitched that they were always told home prices never decline. There have already been annuities in the UK that have been unable to meet their obligations.
Comment by bill ross -
Hi Mark,
I’m a FA for one of the big names and hear this type of ad (false guarantees) on the radio all the time. It makes me cringe because compliance would never, ever let us get away with these types of claims in advertising.
Like you, I’m VERY surprised that Fidelity went down this road. Here’s to hoping that they stay classy.
Thanks for your blog,
TG
P.S. I see even more market and economic turmoil coming. I’m getting out of the FA world and going back to good ‘ole American business ownership.
Comment by tg -
Hey Mark, After what has happened in the last six months I find ads like that amusing myself. If anyone is gulible enough to believe in a “guarentee” from ANY financial institution they must have been in a coma. I got an amusing piece of mail today, it was from Wamu, thats right, Washington Mutual, for long term LIFE INSURANCE. This is one time I think I may just be around longer then them. I couldnt help but to laugh and trashed it. It is a shameful truth but until people have their faith restored in these sort of business’s its going to be a long road to financial recovery for all if at all. Thanks for the thoughts.
Comment by Frankie from Lawnside -
Mark,
I am very concerned about the overall direction this country is headed. International regulatory banking powers? Not only will the government own our banks, the Federal Reserve’s powers will expand, and a select few can play socialist currency monopoly. I don’t think America’s sense of life will die that easily when they see the true repercussions, if they haven’t seen it yet, but this is absurd. There is no reason we should let people who no sense of right or wrong get away with it. The ex Czech president, you, and Ron Paul are about the only people I don’t have to worry about. Thank you for being one of those people.
Comment by Clayton -
(1)Nothing new. JUST ABOUT EVERY MAJOR FIRM MAKES THE SAME OFFER. Annuity distributions are taxed as regular income, unlike common stock investments which are taxed at 15% today.
(2) An annuity can have considerably higher fees.
(3) If the same investments are being made going into the same funds/stocks what’s the point of buying an annuity with higher fees and lower payouts after taxes?
Comment by Sterling -
Desperate times – desperate measures.
Comment by photohand -
How very true. Much like calling a watch ‘water-proof’. Nothing is ‘guaranteed’, ‘proof’, ‘risk-free’ or ‘absolute’. I suppose they can call these investments “Madoff Resistant”, but at some point in the future, even U.S. Treasuries will be worthless. It is only a matter of time.
Comment by David Burrows -
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What I find to be disturbing is these continued ads by DollarSavingsDirect with enticing rates, only to see them drop precipitously almost DAILY. I did a post on this a few weeks back when I signed up for a 4% rate and I’ve been keeping a tally of rate drops every few days. They’re down to 2.5% and dropping. How do you slap ads all over the internet with a “high yield savings” teaser rate and then immediately drop the rates to such a ridiculous degree???
Also, watch out for some of the non-FDIC insured high yield ads out there. They’re possibly other Stanford-type ploys. They promise 7% plus per year to be paid out only upon maturity, but they’re not FDIC insured. hmmm.
Comment by Darwin's Finance -
First off – don’t shoot the messenger for what he is about to tell you. I don’t sell these products, but I do consult insurance companies on how to manage the risks on them. I want to offer some insight to clear up several misconceptions about annuity guarantees.
1. Fidelity is the new kid on the block, but they aren’t the only ones selling these products. There’s about 20 insurance companies that sell the same type of annuities with “guaranteed living benefits” and they’ve been on the market for over 10 years.
2. Nobody likes fine print – by virtue, its only purpose is to state a point that would take away from the marketing spin while covering the company’s ass. For these products, the fine print basically says – we’ll pay out this guarantee as long as we are a solvent company. In one sense this isn’t so different from owning a coupon that entitles the bearer to a free small fries at McDonalds. If McDonalds goes out of business, big surprise, you’re not getting your fries. You might argue that McDonalds isn’t explicitly guaranteeing a floor on investment returns, and your retirement fund is worth a bit more than the 89 cents it costs for the fries (at least it used to be) – fair points. That is why insurers have to spend a ton of money on risk management and there are a lot more rules and regulations they have to follow than McD’s. Full disclosure: I worked the fry station at McDonald’s in high school.
3. Any insurance company that sells these guarantees likely has a sophisticated risk management program in place. Part of managing the risk is though hedging (not to be confused with hedge funds). This basically boils down to the insurer owning investments that pay off when their policyholders’ investments lose value. Therefore, the insurer takes the money they made from hedging and transfer it to their policyholders to fund the guarantees that they promised. This process is not about making revenue, but solely to have the money available to pay out their guarantees. Does this work? Well, it’s not perfect down to the last cent, but several studies have shown that it does work quite well, even in really bad markets.
4. On top of managing the risk through hedging and holding the money they are currently on the hook for, insurers need to hold extra “just in case” money on the side called capital. Rating agencies like AM Best, S&P, Fitch, etc are in the business of assessing the financial strength of insurance companies. They look at the amount of risk in the products that insurers sell and determine the amount of capital required to get a certain rating. The riskier the product, the more “just in case” money they need to hold. While these rating agencies themselves cannot guarantee that they’ll never make a mistake, they are the experts at this service. Therefore, anyone who is in the market for purchasing these products, should make sure they are going though a company that the rating agencies view as financially strong (there actually are some companies out there that sell these guarantees and have AAA ratings). In the case of Fidelity, the company that backs the guarantee in every state but NY is Fidelity Investments Life Insurance Company.
In summary, can an insurer guarantee that they will make good on their promises to pay policyholders no matter what – well no – Mark has a point. But then again as Mark points out, neither can US treasuries. However, with the sophisticated risk management processes in place along with regulatory oversight, capital requirements, and external audits, the highly rated insurers are well positioned to pay out their annuity guarantee promises in the future (albeit, there may be some mergers and acquisitions in the industry along the way).
Comment by Ryan Hinchey -
What a smart guy! this is the best ad you have ever done.
Comment by wang -
Much depends on if you believe in the Fidelity name and if the company will go bankrupt or not. Problem is, with all of the recent financial firms stock prices dropping drastically, I can understand your concern Mark. What’s to say that the same won’t happen to Fidelity? So I agree with you, nothing is guaranteed and its a shame that FINRA and the SEC allows them to advertise their guarantees likes its okay, because, hey, after all, it is Fidelity right?
Comment by Scott in Dallas -
Mark, I place this somewhere between the “buy and hold” advice we all heard from everyone in the financial industry for the past 25 years and (to which Cary R alluded above) the Social Security scam. All three rank between 9.7 and 10 on the insidiousness scale.
Comment by BoscoH -
Essentially, Mark, guarnatees are the purpose of insurance companies. In fact, the guarnatees on variable annunites has saved my clients from the devastation of the current deep bear market.
There is a cost to the consumer for the guarantee, but personally, I believe that it is well worth it. But a caution is in order: the guarantees are backed by the company itself. Should be company bankrupt, then only the underlying investments (known as subaccounts) would remain.
Comment by Weldon McKinney -
The Magnuson-Moss Warranty Act, 15 U.S.C. 2301, regulates advertised guarantees. The Federal Trade Commission, the federal agency with enforcement responsibility, publishes
guidelines to help businesses comply with this Act. One rule published by this commission is 16CFR239.3b:
“An advertisement that mentions a “Satisfaction Guarantee” or a similar representation should disclose, with such clarity and prominence as will be noticed and understood by prospective purchasers, any material limitations or conditions that apply to the “Satisfaction Guarantee” or similar representation.”
Comment by jim -
Um, is it just me, or does the word “guaranteed” not mean “absolutely certain to happen, no matter if nuclear war erupts and life on Earth dies out”?
A guarantee is a promise made by a guarantor. These investments are guaranteed by Fidelity and/or by a life insurance company. You have to factor that in in deciding the level of value and risk in the guarantee.
I’ve got a ton of respect for Mr. Cuban, but it’s remarkable he’s made it this far in life and business without understanding what “guarantee” means. Next up: the shocking discovery that a product warranty does you no good if the manufacturer goes out of business.
Comment by Brooks -
It’s disgusting how misleading these financial companies are. What a scam.
Comment by keldrin -
The word guaranteed is used in just about every service in America. Mostly because people “think” they’re protected. It’s all about the fine print.
Comment by Scott Plocharczyk -
Mark,
How about starting your own Investment Start-up Website around you brilliant stimulus idea and you name. Basically, take what you’ve done on your blog and devote it to an entire site. I have a number of different web developers I work with who could provide you with a remarkable product. The only thing left to do would be marketing, but I can see you’ve already made significant head way there.
For similar sites, I’m thinking of what Bang Ventures did with YouBetheVC.com. Let me know what you think. I can easily do this for you with a little funding. (email: chris@mycorporateblogger.com)
Chris
Comment by Chris -
In basic principle I agree with you, Mark. Nothing is guaranteed completely. However, I do own a variable annuity and it has saved me a lot of money. That, to me, is the bottom line. I am unable to surrender it without any fees until 2011, but I thank god every day I invested A PORTION of my money there (If I were to surrender it the fees would be a meager 3% or so….). My broker suggested I didnt do it to avoid the 2% fee, but because I did, I have avoided the 55% downturn in the market completely. My account is up 6% over the last year or so. Can any of these genius traders account for a 6% gain in their own portfolio? I look at this as insuring a PORTION of my net worth. My investing goal is only to beat inflation, that’s it. This helps me do just that. As far as company accountability, my advisor told me that the company I own this through has $1.27 for every dollar they owe… Who knows if this is true, but that’s what I’m told..
Also, although they are not guaranteed no payments have ever seized to have been made to the best of my knowledge…..
Comment by William -
Good spotting.
Mutual funds are (generally speaking) lousy investors but great marketers, hence their popularity over the past 20-30 years.
This ad may be dishonest, but it is clever.
People in the current distressing market environment are looking for the safety of ‘guarantees’, even if these ‘guarantees’ are footnoted with copious legalspeak.
Comment by 8020 Financial -
Mark,
Thanks for the heads up on this. Fidelity controls my 401k and they will be getting a word from me on their customer care line.
Thanks!
Comment by Alan Christensen -
they must be ashamed of this…
Comment by WinBlackjack -
The current crisis has proven one thing. There are only 3 guarantees. There is no investment product that has a guarantee.
Comment by Chris Dowell -
…could have come from a Social Security brochure…
Comment by Cary R -
Yes, the Fidelity ad is disturbing. But even more disturbing is the continued existence of a broad swath of advertising that we pretty much know has always been deceptive. Ads for get-rich-quick schemes, “medical” supplements with bogus claims and the like. Yet TV networks and advertising agencies accept these companies’ ad dollars happily. Is it time–especially during a recession that will make the weak-minded and the gullible ever more vulnerable–for a regulatory body along the lines of what exists in Canada and the UK to vet the content of ads for accuracy and integrity? See more on the topic here:
http://adwarrior.wordpress.com/2009/03/08/why-do-we-put-up-with-scam-ads/
Comment by scottj1898 -
Assets under management in their mutual funds were down nearly 25% in 2008. In Q1 ’09, I’m sure their AUM is down at least another 7 to 10 percent. I thought there were FTC truth-in-advertising standards that apply to advertisers. With the condition of financial institutions today, it’s like saying “Pay me $5 today and I guarantee you a payment of $10,000 next week.”*
*Payment will only be made if I win the lottery with your proceeds.
Comment by Michael -
One big defect of an annuity is that there’s usually no inflation adjustment, and the CPI is less than true inflation.
You can buy a $50k/year annuity, but that’s going to be lousy when inflation is 10%-30% or more per year.
Comment by FSK -
I, for one, applaud Fidelity for finally showing their true colors. Truth is they’re not better than that. Was Bear better than that? Is Citi better than that? Merrill? B of A? They’ve proven to be fly-by-night sham companies that take unreasonable risks with our economy then hide the paperwork until they ultimately collapse under the weight of all their stupid decisions. Then they cry to the government, take our money and start the cycle again. There is no disclosure, there is no transparency, there are no consequences (to them). They treat America like a bunch of suckers and we’re more than happy to play the role. Here AIG, how about another $30 billion so you can off pay the speculators who screwed our economy in the first place. Enjoy!
We want them to be better than that, but they’re not.
Comment by Steve R -
Annuities are inflation traps. With all of the money pushed into the system, inflation is just down the road. The people buying will be trapped in their 5% world while the world inflates at a double digit pace. It’s a False security by having that guaranteed payment.
Comment by Todd -
It is important that understand how these “Guaranteed Return” annuities work. (I am not a big fan of annuities, and like the “guaranteed” variety even less). An annuity is an insurance product that invests your money in a mutual fund, or some other investment vehicle. They charge you annually for this priviledge. If you go the “guaranteed return” annuity, the insurance company will tack on an additional percentage charge per year. Basically, the guaranteed return is an additional insurance product, insuring against market losses like we saw this year. When I looked (several years ago), I think the expense for getting the guarantee was nearly 2% per year, and the guaranteed return was less than 6% annually.
Let’s say the annuity was invested in the S&P500. If the average annual return is 8.8%, then the annuity will earn less than 6.8% annually (after all fees are taken into account). The annuity might make up some ground in bad years, but overall the person that pays the for the Guaranteed Return will lose money compared to the market in general.
It is like any other investment. Do your research and understand your options. Understand both the returns and expenses of a potential investment. And understand that the guy selling the investment is trying to make money off of you.
Comment by Bob -
I looked this up. As exactly as stated on there web site.
Canada Life-
Payout Annuities. “Payout annuties are income products that pay you a guaranteed regular income for a fixed term or the rest of your life.
Payout annuity income payments consist of a blend of interest and principal based on:
* Your current age / gender
* Current interest rates
* Length of time of payments guarenteed
* amount of money used to purchase the annuity
* Type of annuity
We used this company for quite some time some years back. No problems ever with there product or services. Skip to today.
Companies are folding and flopping harder than “Shaq” was caught flopping for the Phoenix Suns.
Yes, I agree, the use of the term or word “guaranteed” can be to comforting a term in todays economic uncertainty. What was uncovered in the blog “A disturbing Fidelity Ad” is commendable.
I stand corrected. Nothing is guaranteed. Not even annuities. Not if the insurance firm runs into hardship. Ours did not. But another may. So always, buyer beware and read the fine print as Mr. Cuban did so well!
Comment by p. f. b. -
Annuities are sold to “old folks” (or, those fast approaching that category) and they sound REALLY GOOD…
The “fine print” is one thing, the basic product is another. Nearly all financial Advisors recommend NEVER putting too much into an Annuity — an Annuity only becomes valuable if you live past your life expectancy (which, for some reason, everyone wants to do?). Of course, FIDELITY et al want you to put as much as possible into their programs (because they make a whopping fortune off of it)…
What they don’t tell you, is that an Annuity is no different than drawing down money from a Savings Account (except it’s uninsured). Your original deposit gets depleted over time, vis a vis your monthly income from the Annuity.
That is, unless you live PAST your life expectancy, still, your “gross deposit” is gone; while you get your monthly pittance…
But, given you have a 50% chance of ending up in a skilled nursing facility (over 85yrs = 50% Alzheimer’s), where you’ll need to spend down your assets (deplete your gross Annuity) then assign your remaining monthly Annuity payout to the nursing home so you can get Medicaid, it’s all ONE BIG RUSE.
But, it’s only one of the problems of the world, and probably not the largest…
At this time, I don’t see one smart retirement investment structure available for anyone…
Comment by beenthere -
Oh please…give me a break. Insurance companies have been advertising “guaranteed income for life” for years…long before the Madoff/Stanford era. And the “guarantees are subject to the claims-paying ability of the issuing insurance company” footnote is not only common, it’s a LEGAL OBLIGATION. New York Life, one of the largest, if not THE largest insurance company in the world has the same quote on their forms. Anytime an insurance company quotes ANY interest rate, it’s required that they note that
From MC> And it was wrong all those years and continues to be wrong today
.
Comment by Drew -
Mark,
Nice catch on the Fidelity ad. In my mind it underscores two things: First the willingness of companies to advertise to the lowest common denominator (i.e. fear in this case) and second the utter financial stupidity of the average American (people are clearly asking for it otherwise they wouldn’t market to it). ING raised billions in the 2000-2003 market malaise and it wouldn’t surprise me one bit to see Fidelity to do the same – albeit at a consequence to their clients.
Happy Trails,
Mike
Comment by Mike -
Annuities with Guaranteed Benefits are very common. Fidelity is promoting their own product underwritten by Fidelity Investments Life Insurance Company. These guarantees are the very issue that is crushing the stock of many publicly traded life insurance companies that sell these products, i.e. Hartford.
Comment by Andy Meehan -
If this economy and people like Madoff haven’t proven anything else to us, they have proven that nothing is guaranteed when it comes to the stock market, banks or any other type of investment broker. Shame on them.
Comment by Shayla Grace -