Anytime you are compensated for a service or receive any payment, conflict of interests exist. Jason Zweig, writing in the Wall Street Journal, pointed out that noble scribes like him cannot get around conflicts of interest either.
Commissions, for instance, are often used as a whipping boy, but in some cases commissions are perfect. With American Funds, Class A shares, the charge declines as assets build and over time could end up with lower costs. Insurance products have commissions and are essential to a comprehensive financial plan. Here’s a real life example. In the 1980s and 1990s, the mantra “Buy term, invest the rest” became popular. After all, whole life cash values grew at a pedestrian rate compared to the booming stock market.
However, what goes up, comes down. The dot.com bubble burst followed by the great recession led to low stock market returns for a decade. Behavioral finances kicks in; it's our reptilian brain, we cannot help it. In your 30s and 40s retirement was in the distant future. A stock market slump scare like the 25 percent one-day drop in October 1987 perhaps didn’t worry you. We did not have a 24-hour news channels breathlessly reporting nor did we have instant data access via the internet. Jump to the new century, and a new paradigm exists plus we are older, closer to retirement, and more sensitive to financial disarray.
If you panic-sold in 2008, buying term insurance and investing the rest was a lousy strategy but great marketing by asset managers who sometimes take great pride in avoiding commission based products. Some older cash-value life insurance policies and annuity contracts have guaranteed rates up to 4 percent, long after the commission was paid. For middle-income Americans, having a mortgage-free home and a whole-life policy can provide financial security for a family. Buy term, invest the rest requires discipline, lots of it, but the strategy has conflicts of interests, too.
Avoid United’s Black Eye
Social media buzzed when smartphone videos surfaced showing a paying passenger forcibly ejected from an overbooked United flight. United's ham-fisted handling of the situation provides lessons perhaps the company (and investors) can learn and avoid in the future. United Airlines’ parent, United Continental Holdings, Inc., dropped 5 percent in one trading day showing the danger of owning individual stocks versus a mutual fund or exchange-traded fund. United forced the passenger from the plane so a crew could get to a destination. The in-transit crew was at an airport, and quite likely there are private planes available. United will end up spending significantly more money on the settlement than the cost of hiring a private pilot. What looks good in the short-term can cost money and reduce returns in the long-term.
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.