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Insurance agent’s financial advice comes without backing


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Dear Mr. Berko:

My father passed away in October, and we inherited his home, which we plan to sell for about $138,000. We also received certificates of deposit worth $160,000 that mature in June. So we have about $300,000 to invest. We talked to our agent with Principal Insurance, who does a good job providing us with health, life, homeowners and auto insurance. He also handles our Independent Retirement Accounts ($71,000) and our joint account ($98,000). None have done well in the past five years, and we’re down 46 percent since 2003, which is about the same as the market. We trust this man. But now that we have all this money, maybe we trust him too much. He has advised us to invest $75,000 in each of two Principal mutual funds: Principal Equity Income Fund and Principal West Coast Equity Fund. He suggests we invest the remainder in a variable annuity. One thing that bothers us is that he says the Principal Equity Income Fund is the “best equity income fund” and that the Principal West Coast Equity is the “best multi-cap core fund,” as measured by “numerous benchmarks” including a firm called Lipper. To prove his claim, he showed us an advertisement in The Wall Street Journal saying that Principal has the “best” funds. This money is important to us, so would you please help us and tell us what to do?

S.B., Oklahoma City

Dear S.B.:

I doubt you’d ask a podiatrist for a haircut, or a plumber to put braces on your grandchildren. So why would you ask an insurance agent to give you investment advice? I think you should counsel with a registered investment adviser, a professional with 15 to 20 years of experience whose sole goal is to help you make the best possible investment choices for your future. If you need help finding a professional, send an e-mail to me and I will send you a couple of names.

Meanwhile, that Wall Street Journal advertisement is disingenuous. The performance of Principal’s Equity Income Fund doesn’t butter my bagel. Its one-year return is minus 37.9 percent, the three-year return is minus 8.5 percent, and the five-year return is 0.09 percent. Not too good, that! And the performance of Principal’s West Coast Equity Fund certainly doesn’t light my stogie. Its one-year return is minus 37.2 percent, its three-year return is minus 8.7 percent, and its five-year return is minus 1.38 percent. Not good that, either! And for this performance your insurance agent earns a 5.5 percent commission, or $8,250, certainly a good opportunity for him and certainly not a good opportunity for you.

But, believe it or not, they really are the “best.” Please know that the first rule of Madison Avenue is “Nothing is what it seems.” This is called the “Rule of Parity.” Products such as mouthwashes, movies, triple-A bonds, automobiles, annuities, margarines and even mutual funds, plus a long list of other products, are called “parity products.” This means that other products in their category are basically identical.

Most mouthwashes are made the same way with basically the same formula. Most mutual funds in a specific category have similar portfolio issues and are managed by advisers with similar performance records. So, as far as our laws are concerned, all mouthwashes are equal, all margarines are equal and all mutual funds in the same category are equal. So not only are all parity products good products; they are also the best products.

Therefore, retailers can legally claim that their gasolines, their automobiles or their mutual funds are the best products without any need to prove their claims. But if a retailer were to claim that his mutual fund or laundry soap was “better” than another product, he would be required to prove it because “better” is a claim of superiority, and only one product can be “better” than all others.

It’s all pure persiflage, palaver and doubletalk, but that’s how advertising agencies and politicians become successful. In advertising vernacular, “better” means “best.” However, “best” just means “equal to.” Clever, yes?

Meanwhile, I can’t advise you on that annuity, because you have not identified the issuer or the conditions in the contract. But you should know that Fidelity, Vanguard, Ameritas and others offer no-load variable annuities (you’ll save a huge commission cost) if you really must own one. And in almost all instances, a fee-for-service portfolio adviser would recommend a no-load variable for you.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.

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