Worried About the Markets? Maybe you should(n’t) try alternatives – part 2.

Jim Lorenzen, CFP®, AIF®

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession.  It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post.  Another alternative investment is deferred annuities.

People love guarantees.  Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople.   And, there’s some truth to that.  Guaranteed income or withdrawal riders and equity indexed annuities do tend to have high costs.  Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever.   I have other issues.  The first is, does an annuity make sense at all?  – Any annuity.   There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices.  They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue:  the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb?  Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies.  Options can work, but they also carry additional costs and risk.

Talk to your advisor –  maybe one with recognized credentials and willing to take fiduciary status might be a good idea – to see what your plan should be.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.