I’m not quite sure why this has been the hardest column for me to write. Over the last two weeks I’ve become a serial procrastinator. I’ve started writing this a dozen times or so, in my head at least, but I couldn’t really make progress even though I already had the subject pinned down. But here goes.
A failure to exercise reasonable care is defined as negligent. Worse, some bad advice is so bad it can only be described as gross negligence. What is gross negligence, you ask? Think of it as negligence all hopped up on Mountain Dewwwww.
Here’s an example: An attorney — oops, let’s use a profession less likely to sue me, say, um, a secretary — is having lunch with a friend. This secretary works for a financial firm, which we’ll call Ramsonite Delusions, LLC. (Any likeness to real people or companies is completely incidental, I promise!)
At lunch, the secretary and her friend have the following conversation:
Friend: “Hey, do you know anything about annuities? I’ve got a 401(k) from a previous employer and an annuity salesperson is recommending I buy a variable annuity.”
Secretary: “Yah, there are two types of annuities. One sucks 100 percent of the time, and the other sucks only some of the time. The one that sucks 100 percent of the time is called a fixed annuity. It basically offers CD rates with a bunch of penalties to pull out.
A variable annuity is different. It invests your money in mutual funds. You can name a beneficiary. It’s a good estate tool. They’ll guarantee at least the original deposit if held for a period of time, or if you die. And they’ll offer a principal guarantee and an interest rate floor. They’ll guarantee four or five percent for your interest rate floor. The floor should be lower than the return from the mutual funds. The people trying to sell these don’t have a securities license. They only have an insurance license.
But you’re too young. These are for people in their late sixties or seventies who are worried about their money. The bad part is you pay double fees and are really handcuffed.”
In this conversation, the secretary isn’t grossly negligent, because there’s no reasonable standard of expertise that we can apply to advice given by a friend who is NOT licensed and who has no financial advisory experience other than water cooler talks at Ramsonite Delusions, LLC (which, again, is 100 percent hypothetical).
But what happens when we no longer make this a hypothetical conversation? What happens when the friend isn’t a friend, but rather a person calling into a nationally syndicated radio show? A show whose host refers to himself as America’s most trusted source for financial advice? What happens when I tell you this is only part of what Dave told his listeners on November 4th, 2015?
I’ll tell you what happens: First, Ramsey advocates have to wipe away the tears, like a football fan watching his team lose while attempting a punt for the last play of a game. Second, you’ll ask: “What else could he have possibly said?”
Allow me to paraphrase for you: Our friend Mr. Ramsey also said, “Go find yourself a good mutual fund broker. If you don’t have one, go to my website and you can find an ELP. They’ll give you advice that’s consistent with what you hear from me here.
You reply: “But that doesn’t sound too bad.”
That’s like my wife telling me to be thankful the game was close. Seriously, it doesn’t sound too bad?? Dave is telling his listeners: “You’ll get advice consistent with what you hear from me here.” Translation: You’ll get advice from someone who doesn’t understand guaranteed minimum income benefits, not to mention fees, Roth IRAs, bonds, life insurance, investment advisors, compounding interest and fixed annuities.
Dave’s advice to this caller was grossly negligent. There’s a level of expertise that these callers have reason to expect coming from “America’s most trusted source for financial advice,” and it’s a standard Dave is not living up to. Some of his bad advice will cause financial loss. How many people listening heard that variable annuities guarantee at least 4–5 percent returns, and thought, “I’m good with that.”
To unveil the inaccuracies of this conversation, we’ll list five “facts” Dave spouts, and identify whether they are true or false. I like to call this game F.A.R.T.s. It’s my own personal acronym for Fact/Fiction According to Ramsey and Team.
Now, let’s dive into Dave’s best F.A.R.T.s from his annuity conversation on November 4th.
F.A.R.T. No. 1: “Variable annuities have a guarantee of principal and an interest rate floor.”
Fact or fiction? Fiction. Variable annuities do not have an interest rate floor. Dave is mistakenly confusing an interest rate floor with a guaranteed minimum income benefit or a guaranteed lifetime withdrawal benefit. To be fair, this is an understandable mistake considering that HE IS NOT LICENSED TO PROVIDE INVESTMENT ADVICE (YET KNOWINGLY DOES SO). Also, there are additional fees for these riders. They are not free, and oftentimes they can become prohibitively expensive.
Dave says, “Use one of my ELPs and you’ll get a consistent message.” I sure hope a licensed representative would know the difference between an income benefit and actual interest. To be clear for all non-insurance and financial professionals reading this: Guaranteed income benefits DO NOT guarantee a 4–5 percent annual interest rate. The 4–5 percent is applied to a fictitious value used simply as an accounting figure to be multiplied by a withdrawal factor at the election of income withdrawals.