Caveat Emptor

December 13, 2011

The old adage is still as appropriate today as it’s ever been. Twice this past week we’ve run across situations where this saying perfectly summed up the situation. In both cases the dreaded “G” word (guarantee) was mentioned. The first instance was a prospective client telling us that she was considering a “Guaranteed 8% Annuity”. The second case happened when I was out to lunch with my wife. The waiter sat us in a booth next to a middle-aged couple who was sitting opposite a younger gentleman in his mid to late 30’s. My back was to the couple, so the gentleman’s voice carried over them and spilled into our booth. The first thing I heard was, “it guarantees 5%; where else are you going to get a guaranteed 5% in this market?” He went on to highlight other benefits of the product, all positive of course.

 

In one case, we determined that the product being pitched had a “teaser” rate the first year, and then dropped to a very low rate for the remainder of the contract (we assume something similar was true in the other instance as well). When averaged out, the return was closer to 2 1/2% annually. We weren’t privy to all the discussions of either sales presentation, but our prospect was under the assumption that she would receive an 8% annual return. In the days of a 2%, 10-year treasury yield, you have to remember the old adage, “If it sounds too good to be true, it probably is!” Unfortunately, the couple’s free lunch might cost them more than they thought.

 

 

 

 

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