A few weeks ago, a longtime friend and client asked for an appointment with me. When he arrived, I noticed his wife seemed uptight while he looked embarrassed and sheepish. This surprised me, as both are usually very upbeat and happy people. Soon I learned what was troubling them.
Apparently, a relative had introduced them to someone who was promoting an investment. Although this person was not an investment advisor, he had been successful in putting together several deals that made a lot of money.
The person described the complicated, but seemingly foolproof and guaranteed investment to my client and his wife. He presented them with documentation, which looked official albeit somewhat complicated.
He promised minimal risk to the capital, but over the three years they were to commit their funds, the clients were promised they’d double their initial investment. Each installment of principal and interest was to be repaid to them on a quarterly basis.
This person had also asked my clients not to show the presentation to any advisors because “there just wasn’t enough to go around” and he didn’t want to be hounded about finding more of this limited investment opportunity.
So, my clients committed to investing $200,000. Unfortunately, they got this money from a home equity line of credit. Originally, they had planned to use the money to renovate their home, and we had determined a methodology to pay back the loan over a period of time.
Well, after paying the first two installments, it came to light that the investment was a sham. The person left town, leaving his investors without a cent and little recourse. My clients now have to repay the loan and forgo renovations.
Sadly, such a series of events is not unusual. People suffer from greed and gullibility, and unfortunately the world is filled with unscrupulous individuals who pray on the emotions of those who trust them. Most investments are complicated and should be scrutinized by professionals before investors set down their hard-earned money. But some people think they can analyze the investments themselves and make a determination without the benefit of proper investment counsel. Others are concerned with fees charged by advisors and some might be fearful of this enduring truth: If an investment looks too good to be true, it probably is.
The insurance industry, with its myriad of products and assumptions, differs littlefrom the investments industry. Although insurance products can be broken down to interest, mortality and expenses, there are many complicating tax and planning ramifications to most insurance-based plans and solutions.
Terms and features such as convertibility, adjusted cost basis, capital dividend accounts, cash and account values have to be explained. The consumer has to be aware the words “paid up” might mean something different in a guaranteed whole life plan, as compared to a universal life contract, based on interest assumptions.
Given all of this, consumers need assistance from an advisor or a professional insurance consultant—someone with the knowledge, experience and training to provide a product and plan recommendations based on an analysis of the client’s situation and goals. More importantly, they someone who’s regulated and has taken the time to get educated and earn service-specific designations.
This is the best way consumers can protect themselves—engaging a trusted advisor just as they would a doctor, dentist or lawyer. It’s definitely worth the effort. I’m sure my clients see the light now.