It’s a puzzlement

I just received an email from a financial institution that has been trying to recruit us to utilize its funds and services with my clients and prospects. In the email, it says:

“In today’s market environment, investors continue to pursue consistent, tax-advantaged income strategies that have the potential to offer attractive levels of income. (Omitted)’s strategies are uncovering discounted fixed income assets among closed end funds, and are implementing hedges to mitigate the risks of rising interest rates. Actively managed portfolios of these closed-end funds seek to offer investors the income, liquidity and lower risk opportunities they seek.”

Say what?

It all sounds complicated, sophisticated and vaguely good, doesn’t it? And I am sure many of my peers are going to jump on the call, all looking for a way to deliver some kind of stable income for their clients. Some of them are even going to join and start promoting the program.

But what does it really mean to you, the client?

Well, that can be found in the disclosure statement in very fine print at the bottom or the email – which I am sure they hope you don’t read. Here is that passage:

“There is no guarantee the Fund will achieve its investment objective. An investment in the (redacted) Income Fund is subject to risk, including the possible loss of principal amount invested and including, but not limited to, the following risks, which are more fully described in the prospectus: Management and Strategy Risk, General Market Risk, Closed-End Funds (CEFs) Risk, Fixed Income Securities Risk, Interest Rate Risk, Tax Risk, Leverage Risk, High Yield (“Junk”) Bond Risk, Liquidity Risk, ETF Risk, Derivatives Risk, Short Sales Risk, Futures Risk, Options Risk, Swaps Risk, ETN Risk and Non-Diversification Risk. The Fund is newly organized with limited operating history. Diversification and asset allocation do not guarantee a profit, nor do they eliminate the risk of loss of principal.”

Look at all of the risk in this strategy – and that doesn’t even cover all of the risk that is outlined in the prospectus (that’s what that “not limited to” reference means). Who in their right mind would do something like this?

To reiterate:

The email specifically states this is designed to provide “consistent, tax-advantaged income strategies that have the potential to offer attractive levels of income.” And yet it employs strategies that “do not guarantee a profit, nor do they eliminate the risk of loss of principal.”

I’m confused. When I think of income, I think of a dependable and predictable flow of income that will never let me down, as long as my wife or I are alive.

I have spoken before about “hybrid” annuities and how they can fit this bill. A hybrid annuity is simply a fixed index annuity that keeps your money safe and provides potential upside in the market without exposing you to downside. That’s the FIA.

What makes it a hybrid annuity is the income rider that is normally added for a fee of around 1 percent, but that guarantees you and your spouse lifetime income without giving up access to your money.

In other words, when you are gone, if there is still money in the account, it goes to the beneficiaries. So, upside with no downside; safe, dependable lifetime income you can’t outlive; and the return of any balance to your heirs on death. What in the world is wrong with that?

Simple: It doesn’t fit the narrative. We have been trained to think there are no such things as guarantees in the investment world, and that there is no such thing as reward without risk.

This has been pounded into us for the past 40 years as 80 million investors poured trillions of dollars into Wall Street. Every time the market goes down, we are told to hold on; every time it goes back up, we are told they told us so. During all of this, we have largely been treading water while Wall Street got rich.

If you don’t believe me, consider this: According to the Government Accountability Office, 55- to 64-year-olds have an average of $104,000, and those 65-74 have $148,000 in savings. That translates to $310-$640 per month in retirement income.

Yet, people won’t consider other options – and when they do, they are very leery. Let me say that again: People have more confidence in risky market investments that have been proven over and over again to be a losing strategy for providing income than in products specifically designed for the job that provide rock-solid guarantees – up to twice the income or more of market-based assets – and have never failed to deliver what they promise in the history of the products.

Why? It fits the narrative they’ve bought into, which Wall Street promotes. We see this a lot in finance, religion and politics. It’s called confirmation bias.

Essentially, what it means is people listen to points of view that fit their narrative and discard those that don’t. And it’s not subtle, because the normal course is to not attack the argument based on facts – the norm is to attack the source.

People who hear our message will often not even hear the argument for another approach. Rather, they will dismiss us, with a great deal of encouragement from Wall Street, as “greedy annuity sales people” or “insurance con artists” – when the reality is we believe in safety and guarantees and do everything we can to promote it to our clients.

A perfect example of this was a full-page ad I recently saw from a well-known annuity basher that warned, “Don’t fall into the guarantee trap.” Two things you should know about this man: He owns a huge stake in the second-largest annuity company by sales in the U.S., and this “I Hate Annuities” campaign is reported to have netted him close to $2 billion.

Makes you wonder, doesn’t it?

“Free Money Guy” Stephen Kelley can be heard, along with his co-host Mark Perkins, on the Free Money Radio Hour on Tuesday and Wednesday at 9 a.m. on 1590 WSMN, Saturday at 7 a.m. on 610 WGIR and Sunday at noon on 980 WCAP. In addition, Kelley is heard weekly on the nationally syndicated “America Tonight” with Kate Delaney and is author of several books, his latest being “Tell Me When You’re Going to Die and I’ll Show You How Well You Can Afford to Live.” His financial planning practice, Safety First Financial Planners, is at 33 Main St. in Nashua. He can be reached at 881-8811.