The ethics of selling investments
By Jeffrey Reeves MA
The idea that most Americans should be investing is such a shibboleth. It is time for insurance and financial advisors to begin demonstrating the untruth of that idea.
A disorganized conspiracy
America is prone to adopt ideas that are popularized by the advertising and indoctrination of behemoths (big business, big unions and big government), regardless of the intrinsic value of the idea itself. The idea that average Americans should be investing is a disorganized conspiracy. Its premise lacks intrinsic value.
That doesn't mean Americans are all lemmings and sheep. Even those on the inside of a disorganized conspiracy, such as the one that is damaging Americans' personal economies today, are unaware of the untruth that supports the manufactured myth. That lack of awareness gradually creates a shibboleth -- an oft-repeated idea that the public, as well as the purveyors, come to perceive as truth, just because it is so often repeated by so many.
The idea that most Americans should be investing is such a shibboleth. It is time for insurance and financial advisors to begin demonstrating the untruth of that idea. It is time to challenge the ethics of selling investments to our friends, neighbors and clients.
The argument against investing begins with a clear understanding. What most Americans believe to be an investment is really a speculation (i.e., a gamble). Benjamin Graham said it best when he stated, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
Mutual funds and 401(k)s
Does anyone believe that buying a mutual fund promises safety of principal? Is a 60 percent loss of value an adequate return? Mutual funds -- and their counterparts inside 401(k)s and equivalent tax qualified plans -- are inscrutable, defy analysis and do not promise "safety of principal and an adequate return."
In other words, they are speculative; they are gambles. Their only promise is that they promise nothing at all.
Well, that's not entirely true. It's especially untrue for tax-qualified retirement plans, which promise future taxation at a potentially much higher rate than the deduction rate available when contributions are made.
But what about the matching from the company? Doesn't that free money make up for the losses?
It does, but only to the extent that the tax rates do not increase between now and the time your clients begin taking income from their retirement accounts.
If your clients follow the conventional wisdom and contribute the maximum to their retirement accounts, the employer portion represents a minimal amount of the total in the account. If clients choose to contribute only as much as qualifies for the employer match, they will still be taxed on the entire amount. If that amount happens to be 50 percent of what it was last year, your clients end up paying tax at a potentially higher rate on significantly less money.
From a different perspective, the amount of tax deductions your client receives currently constitutes a lien against your client's future earnings. However, unlike the lien on a property, the contributions to a tax-qualified plan do not diminish your client's liability. Additional contributions increase it. If tax rates also increase, your client is faced with the negative effect of compound interest.
There are a few myths that the behemoths promote as part of the foundation to the shibboleth that all Americans should be investing. One of the most pernicious of these myths is the idea that a family only needs enough ready cash to cover 3 to 6 months of income or living expense.
The reason this myth was born was to free up more of your clients money for investing. Ready cash of 3 to 6 years of income or living expense is much more reasonable, and is entirely achievable when investing is not a part of the picture.
But what about the rate of return? Can't your clients expect a greater rate of return from investments than they can from savings? No. That's another myth.
Recent studies demonstrate that money in safe bonds that reflect savings returns perform as well as investments throughout the long term. This is significant because the insurance companies that we represent tend to rely on the "prudent man rule," and low risk uses of your client's money.
In fact, one study that compared the returns in a whole life policy to those of the Dow Jones Industrial throughout the past 10 years. The whole life policy outperformed the DJIA by almost 130 percent.
A third myth, implied in the previous discussion and designed to tempt your clients to gamble their money, is that investing is for the long-term. However, individual investors do not produce the same results that the behemoths have promoted and advertised to induce Americans to invest -- or gamble -- their money in the markets.
The behemoths speak only of averages. They focus your client's attention on the top of the mountain and fail to recognize the chasm that looms immediately ahead. You know that's true today more than ever.
The purpose of this article is to raise the question: Is it ethical to sell investments -- especially tax qualified retirement plans -- to Americans that have auto loans, credit card debt, mortgages, lines of credit and only a few months in cash reserves?
Consider how many Americans today are raiding their retirement accounts to keep up with debt payments or deal with other of life's surprises during what is going to be a very long and painful recovery.
Consider the recent revelations about the greed for your client's money on Dull Street (formerly Wall Street) and in the halls of government by the Dolts in DC (all 535 in Congress and the 43,000+ lobbyists that feed them).
Can we afford to be silent about the conditions that have led so many of our clients to or over the brink of financial ruin?
Is it time to recommend your clients' withdraw from tax-qualified plans and put their money into cash value life insurance where they and they alone have control?