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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
So you have to kind of ask yourself, oh, are the insurance agents really that greedy with these upfront commissions or the mutual fund business? It's pretty much the same thing around a 5% commission when you sell it, except the insurance company doesn't take it out of your principal, but the mutual fund company well. Or you could do around 1% commission on the back end. And I'm not making an argument for insurance companies. Annuities aren't gonna make you rich.
Mike:Welcome to How to Retire On Time, the show that answers your retirement questions. We're here to move past the oversimplified advice that you've heard a 100 times and said we're gonna get into the nitty gritty because the truth is there's no such thing as a perfect investment product or strategy. Heck, there's no such thing as a riskless retirement. That's why it's so important to put together a retirement plan, one that's right for you, that's designed to last longer than you. That's why we do this show.
Mike:Text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. Are there other high commissioned products out there like annuities that I should stay away from?
Mike:Oh, the irony of this question. So insurance products get a bad rap because they're high commission products. Oh, watch out for those high commission products. Oh, scandal, the how how dare they? Let's go through some investments or products and really talk about the investment options here.
Mike:Okay.
David:Okay.
Mike:So and this is going to be very transparent because people ought to know. I don't see any reason why people shouldn't know how other people get paid. Fair enough. That's, you know, power to transparency. Yeah.
Mike:So if you buy an annuity, they're going to receive anywhere probably in the ballpark of five to 7% upfront commission. And there might be some back end negotiated overrides It just to sweeten the deal. There's nothing wrong with that. Okay. Many times it's not a fee to you.
Mike:Like if you buy a fixed indexed annuity that they the insurance company is going to pay them a back end fee, but it doesn't come out of your actual money. Okay. Because the insurance company knows they're going to have some money in there. There are surrender penalties. And so if you take it out there, they'll make, they're made whole again.
Mike:But at the end of the day, they're saying, thank you for giving us the business. The insurance agent really is brokering these deals. They're not a broker dealer. They're not an investment advisor. They're an insurance agent, but that's kind of the role is to match these things up.
Mike:Be careful of the fees within these different products. So for variable annuities, there are these aren't commissions, but they're just variable annuities tend to have higher fees. MYGAs or fixed annuities. So like a CD from insurance company tend to have lower fees. They might be like a 2% or a 1% kickback.
Mike:It's very, very low. Fixed index annuities about five to 7% or so. But that's just how they get paid. Now, there are ways that insurance agents can get paid out that are a little bit different. And I'm telling you this as a preface for everything else I'm going to tell you.
Mike:Okay. So you could take a one time lump sum commission and you're done. Okay. You could do like a 1% for the life of the contract. Like there's different ways you could structure the payout from the insurance company.
Mike:Okay.
David:This is what the agent chooses when they're Yeah.
Mike:You choose how you want to get paid out. Okay. And so some agents will do the 1% because they want a residual, they want an income stream and however they want to get paid. It's fine. It's as long as it's being disclosed, people don't tend to have an issue with it.
Mike:The problem though, is we have distorted, oh, well, don't buy an annuity because the person selling you is going get a high end commission, but the securities people don't. That is not true at all. So let's talk about some alternative investments. These are investments where, you're not going to get it from your basic strip mall advisory practice, you know, big names where they give you the typical portfolio. This is the more advanced stuff.
Mike:You have to be an accredited investor. So meet a certain, suitability threshold of assets and income and so on to qualify for these types of investments. But you've got things like privately traded REITs. Now look, a privately traded REIT, if you do your research might be better than a publicly traded REIT. Okay.
Mike:Because it's illiquid. So they have more capital going to the investment side of it than a lot of cash on hand in case you redeem it like a publicly traded REIT would have to deal with. So a privately traded REIT, not bad, but they're going to receive a five plus commission typically on the back end as well. Okay. Not the end of the world.
Mike:You can't get it unless you go through an advisor, but they're going get paid. So you've got, you got other ones. Okay. Let's go, let's go down the list. You've got other alternatives like private equity or hedge fund access.
Mike:So people say, oh, I want private equity. That's what the rich invest in. Not necessarily. Okay. Some very wealthy people stay only in the public markets, but you could, but there may be a back end commission around five plus percent as well.
Mike:6% who depending on the offering or access to a hedge fund because it's like a finder's fee. So it's kind of a similar situation here. Go, I mean, you buy a real estate, buy some real estate, but the agent's going to get a commission to help you negotiate and find the real estate. That's not an investment advisor because, but you get the idea here, right? Delaware statutory trusts.
Mike:So if you want to sell your real estate and you want to go into a DST to defer the taxes, you don't pay taxes on the sale of your property to a ten thirty one exchange. Someone's going to get it back in commission. Think it's typically around 5.6 percent or so. Now these aren't hard commission numbers like they can change. Oil and gas partnerships, partnerships.
Mike:So you go down these lists of these alternative investments and many times around a five or higher commission rate that someone's going to get paid. Now, what's interesting, by the way, quick caveat is you have to have a series seven license typically to get it back in commission for this. I don't have a series seven license. So you might say, well, Mike, can you offer these things? Well, I guess I can.
Mike:But like if you do a DST, for example, I can't accept the commission. So instead of me receiving the commission, it gets rolled up into the client's money. So they put X number into the DST. Then they get a little like that extra roll up or kickback or bonus because I can't accept it.
David:And that's by design on your part?
Mike:I don't like conflicts of interest anytime I can avoid it. I'm trying to get rid of conflicts of interests. Okay. That's just, that's just it. I sleep better at night just charging.
Mike:This is how much time it takes to do the job. Are you willing to pay my hourly rate to get it done? So if you, if you have more complicated situation, you're going to take more of my time. It's going to cost more. But if it's simple, then it costs less.
Mike:Yeah, I don't I don't want to be pushing a product for the commission. I want to do what is right for people. That's why we go off this flat fee schedule or this hourly rate schedule, whatever is right for the person based on the work. I think that's the most ethical way to do this. All right.
Mike:Now let's talk about the one that most people don't realize.
David:Okay.
Mike:Mutual funds. Yeah. It is very ironic that the securities industry is out there saying don't buy annuities because of their high commissions when many companies I'm trying to keep this very light.
David:Okay.
Mike:We'll say, oh, you want a portfolio? Great. We're going to put you into these funds, these mutual funds, whether you realize they're a mutual fund or ETF or not. That's a totally different topic. But they're to put you in mutual fund and the agent gets around a four and a half to five and a half up to FINRA regulates up to 8% upfront commission.
Mike:And guess what? It comes out of your money. Oh. You put a 100,000 in there as a 5% commission. You just paid 5% and you have to and then now you're investing in the mutual fund.
David:All because the advisor put you in that fund.
Mike:That's how they get paid. And then, I mean, this is a bit grim, but like you might think, well, why don't they keep talking to me? I've got my mutual funds in there. That's not really how the business works for these types of advisors.
David:Sure.
Mike:Not all advisors. Let's not do blanket statements here. All advisors are set up differently, but the ones that might ignore you might be because they already got paid and maybe they are looking just for new business to get them into a good portfolio. And that's kind of it. Some mutual funds, these are like C share mutual funds.
Mike:There might not be an upfront commission, but it's like a 1% or so, one and a half percent back end commissions that you're paying and it may not be disclosed. So you have to kind of ask yourself, oh, are the insurance agents really that greedy with these upfront commissions or the mutual fund business? It's pretty much the same thing around a 5% commission when you sell it, except the insurance doesn't take it out of your principal, but the mutual fund company well, or you could do around 1% commission on the back end. And I'm not making an argument for insurance companies. Annuities aren't going to make you rich.
Mike:Mutual funds have a higher chance of growing your wealth, have a higher chance of capital appreciation to happen. You know, they're they're built for growth. Yeah. So please don't say, well, you know, I'm going to go this because it's a more ethical fee structure. No, it's not.
Mike:They're different. They're apples and oranges. You've got hammers, you've got saws, you've got other tools. Mhmm. I'm not a contractor.
Mike:Mhmm. But the irony of the situation, how we want to hate a group of people is really interesting. Really interesting. Sure. And then if I just what was the question again?
David:Yeah. So the question is, are there other high commission products out there like annuities that I should stay away from?
Mike:So I want to get rid of high commission just for a second.
David:Okay.
Mike:The question is not about greed. It's not about products. Really, the question should be what is the right investment or product for me, for this part of my portfolio to achieve a certain goal or purpose? Here's what I mean. If you want to be prepared for a market crash that could last five years, okay, you don't want lifetime income.
Mike:You just want enough protection for about five years. So if the markets go down, you can sail through it. Yeah, you've got some options. You could do a five year CD ladder that just continues to roll. Now you've got reinvestment risk, but that's one way to do it.
Mike:Or you could do something like a fixed index annuity with a five year period, certain clause. Not all of them do this, but some of them can. I only know about three to five companies that actually offer this, but to where it's growing at a better rate than a CD should, it's based on higher caps than with the S and P 500 than like a fixed rate from a CD company or a bank. But then whenever the markets do crash, just call the insurance company and say, Hey, five years income and it's not a fixed rate and it goes for five years. You sail through that market crash.
David:And there's no reinvestment risk with that because it's contractual. It's contracted here. It's all spelled out. This is it for five years. You get this.
Mike:Yeah. Yeah. So what's the better tool? Now for some people, the CD ladder is the better tool. For other people, it's going to be the fixed index duty for that five year.
Mike:We call it bear market protocol or protection. Okay. Which one's right for you? Let's get rid of this. Oh, well, one pays a commission, the other one does that.
Mike:Whatever. I don't care which one is right for you. And can we articulate that? Some people don't want that upside potential, but no downside risks. It's not guaranteed growth.
Mike:Some people want the structure of a CD ladder because they know exactly the fixed rate they're going to get or the bond. They know exactly what they're going to get from a suitability standpoint emotionally. That's better for them. But for other people, don't they even know this other option exists. And there's so many different ways that you could solve for that.
Mike:So you don't go to a heart surgeon and say, hey, perform heart surgery on me, but please don't use those tools or those medications. I don't want to crank up the bill or whatever it is. It's like, please save my life. Right. In finance, it's not about how do you get the adviser paid the least and how do you pay the least in fees?
Mike:It's net of fee. Forget about commissions, forget about what is the best thing for you. That is the conversation that needs to be had. Now, one thing I caution people against is there's many right ways to go. Are you exploring all of the various different ways?
Mike:So for example, when people want protection, usually it's okay, well, here's CDs and treasuries for protection and kind of the security side of things. Here are bond funds, which you can get back in commissions for and all that, whatever, but that's kind of less risk. And then you have the insurance people selling annuities, but very few people are talking about buffered ETFs, structured notes, structured notes. They do have a back end commission sometimes, but not all the time. So are you having that expansive conversation and are you understanding the tools available to you and the benefits and detriments associated with them or not?
Mike:That is what gets my goat. It's not about avoiding high commission products. Yes. Because I would personally rather pay the 5.6 or whatever commission it is to sell real estate property, defer taxes, maintain my cash flow and use a DST, then paying 20 to 30% in taxes because they didn't want someone to make a 5% commission. Right.
Mike:Do you see how sometimes we kind of misalign this? Oh, I don't want to be taken advantage of. Yeah. If you can have an open conversation with someone, if they're openly transparent about everything, it's a very fun conversation because now you're really exploring your options, your potential.
David:Yeah. So it sounds like we maybe we shouldn't be trying to avoid things. This list of all these opportunities here, you shouldn't avoid them just to avoid the fee or the commission, but just do what is right for you and speak openly.
Mike:Yeah. Trust is so deteriorated that we just assume the worst in people now. And that's really unfortunate. Yeah. All right.
Mike:So, I mean, it's that's the tough part about all this. Find someone that you can have a conversation with where you can build trust and respect that will spend as much time as you need and really explore these options for you. Just say, here's this idea. And if they here's the, here's the secret. If they openly explain the detriments and there's often more detriments that they're talking about than benefits explaining any product, any investment, any strategy, they're probably being transparent and honest with you.
Mike:If this is the only way and it's the best way and and don't ask me more questions, that's the that's the red flag to watch out for. Recording. That's all the time we've got for today's show. If you enjoyed the show, consider telling a friend, leaving a rating, and most importantly, that you are subscribed to it so that you don't miss a thing. For more resources, including a copy of my book, on demand courses, and so much more, just go to www.retireontime.com.
Mike:If you want help putting your retirement plan together, go to retireontime.com and click the button that says get started. But seriously, from all of us here at Kedrick Wealth, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next episode.