Avoid Wall Street's Word Games

Words matter.  At least that’s what I have always thought.  However, Wall Street plays word games that would make any politician proud.  The Wall Street product pushers and their minions play with the language so well that it’s virtually impossible for mere mortals to understand what they are being sold.  

I was recently talking with someone who worked for a successful annuity sales firm. However, none of the employees– from the representatives to the CEO to the back office help – were allowed to call them what they were: annuities. Annuities have a bad reputation as products whose primary purpose is generating sales commissions.  In one case a customer asked if he was being pitched an annuity to which the sales rep responded: “No….we wouldn’t do that to you.”  Instead, he called the annuity an “Equity Indexed Account.”  

The financial industry plays word games to keep you from understanding the true nature of what you’re buying.  It’s difficult to cut through the jargon and select the right investments. Rather than trying to comprehend what you are being sold it’s easier to follow these five simple rules to help you avoid a major financial mistake:

1 - It takes more than a sentence to explain.

The more complex the product, the more money brokers, sales representatives, and the firms make.  That’s a guarantee. Check out long-short mutual funds, structured investments, equity index annuities. The creators of these products have made them so complex that often the salesperson doesn’t fully understand them and is unable to explain them.  Plus, these complicated vehicles have tended to underperform a buy and hold strategy.

2 - The commissions and fees are high.

For years, a mentor and friend of mine has declared, “It’s not how much you make that counts, it’s how much you keep.”  There’s a pretty high correlation between higher fees and lower returns.  You do not need a Nobel prize in math to realize that high-expense products must outperform similar lower cost investments to stay even.  Further, Wall Street has a well-established track record of charging more for trendy, “exciting” products.

3 - It sounds fresh and trendsetting.

Who can forget internet mutual funds, non-traded real estate investment trusts, and the more recent hot product: “liquid alternatives.”  It’s OK to be trendy when it comes to your clothing, hairstyle, or even favorite restaurants, but not with your retirement investments.  By the time you’ve heard of something it’s usually too late - the “easy” money has been made.  Catchy labels or the latest financial fashions are terrific for marketing purposes, but should be avoided by serious long-term investors.

4 - A stockbroker or insurance agent is selling it.  

Brokers may claim to be your fiduciary, but most wear two hats: one as a broker – only required to offer “suitable” investments, the other as an adviser – who must act in your best interests. Good luck figuring out which hat they’re wearing at any given moment. Usually, when someone is selling you a high-commission, high-fee product they are not putting your interests ahead of theirs. Someone selling a variable or indexed annuity is rarely, if ever, acting as your fiduciary. Ask your financial advice giver, “Are you always required to act in my interests?” Then, ask for it in writing.

5 - It promises high returns with low risk.

There is no wealth without risk, period.  Like you, I hear the litany of advertisements, including the ubiquitous tax lien commercials, the get rich quick real estate flipping TV infomercials (yes, they are back), and insurance products that promise the returns of the stock market without the risk of loss.  I hate to play your mom here but I will: if it sounds too good to be true it is! You attain retirement wealth by taking measured and appropriate risks.

Sadly, in the world of investing, there are many half-truths, inaccuracies, and word games.  Much of the language and jargon is meant to be hard to understand. Instead of trying to figure out all the tricky nuances used by Wall Street’s marketers and wordsmiths, try to avoid the products and pitches designed to move your money into their pockets.

Tom CockComment