Anybody get the email from Key Financial?

Feb 11, 2008

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  1. sman
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    sman Guru

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    Did anybody get an email from Key Financial on Friday titled:

    30% Par Rates and Fuzzy Math


    If so, do yourself a favor and don't quote the numbers they use. They are misleading at best and could get you in hot water. For example, they do a comparison between an investment in the S&P 500 and a hypothetical index annuity. Problem is, they don't include the reinvestment of dividends in their comparison and thus incorrectly state what the real return would have been in the S&P 500.

    In addition, they use the beginning of the worst bear market in history for their comparison. That's a sure way to make your advice sound good. But that's not indicative of what markets have done historically. I believe if you are going to show how a hypothetical index annuity would have done in the worst bear market, you should also show a bull market.

    They also imply that an investment in the DJIA from Feb. 1966 to August of 1982 would have resulted in a loss of 22%. Nothing could be further from the truth. In fact, an investment in the DJIA (if there were such an investment) from 02/01/1966 through August 31, 1982 would have yielded an average return of 4.24%. That's a big difference from a 22% loss.

    They just showed the difference in point change of the DJIA and lead you to believe that because the DJIA was 22% lower after that 16 year period that an investment would have done the same thing. Not so. Therein lies the power of reinvesting dividends.

    I see this type of misleading from the index annuity crowd. They bend and twist numbers to get the sell. Why not show all options and let the client decide instead of using fear to get the sell? And let me state that I sell index annuities occasionally. I just don't believe they are a fit for everyone.

    I guess my point here is to make sure you don't just take an FMO's "research" as truth. Ultimately it's you that may have to face the regulator.
     
    sman, Feb 11, 2008
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  2. Crabcake Johnny
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    Crabcake Johnny Guru

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    When I was being courted to sell EIA's the "manager" told me that 9 out of every 10 stock investors ends up losing money. I asked him to email me his source. 2 years later - still waiting for the email.
     
  3. sman
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    sman Guru

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    I don't know about those numbers. However, DALBAR has done many studies on this and the last one I saw showed that from 1985-2004, the average mutual fund investor achieved a 3.7% return while the S&P 500 achieved a return of 11.9%. The biggest reason for the discrepancy is investor behavior. The average investor buys and sells at the wrong spectrum of the investment cycle. They will usually jump in at or near the top or buy the "hot" fund and they jump out when the market corrects, thereby solidifying their losses.
     
    sman, Feb 11, 2008
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  4. djs
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    djs Super Moderator Moderator

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    I've heard this many times. While usually pointed at either stock or mutual fund investing (i.e., someone is selling something else), the phenomonen is true with virtually every investment type. The point of this number is that most people need a good money manager, not necessarily a different investment vehicle.

    Dan

    P.S. It would be interesting to see how someone came up with this number. I don't dispute its validity, just seems a bit opportunistic.
     
    djs, Feb 11, 2008
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  5. sman
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    sman Guru

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    I'm sure DALBAR can provide you with that information. I think the name of the report is:

    Quantitative Analysis of Investor Behavior

    If you just google "dalbar study" you can find some brief information from different years. But I don't think you'll find the full report without paying for it. Here's a copy of a synopsis on their website for market timers that was released in April of 2004:

    DALBAR Study Shows Market Timers Lose Their Money

    (Boston, MA – April 1, 2004) It is widely believed that rapid fire trading produces huge profits for traders at the expense of the average investor. But the latest DALBAR study shows that market timers actually lose money instead of making healthy profits.

    Examining the flows into and out of mutual funds for the last 20 years, the DALBAR study of investor behavior found that market timers in stock mutual funds lost 3.29% per year on average. Over a period when the S&P grew by 12.98%, the average investor earned only 3.51%.

    This finding challenges the actions of regulators and the mutual fund industry to curb market timing. The victim of market timing is not the average investor, but the investor that tries this technique. The average investor actually benefits from the losses of market timers.

    “This finding is consistent with the well known behavior of investors to brag about their gains, but remain silent about losses” said Lou Harvey, DALBAR President. “The occasional money makers create the illusion that all timers are winners all the time. The fact is that most timers lose money most often and this data now confirms it.”

    The full analysis is available by contacting DALBAR at 617-723-6400 or at [email protected]
    DALBAR, Inc., the nation’s leading financial-services market research firm, is committed to raising the standards of excellence in the financial-services industry. With offices in both the US and Canada, DALBAR develops standards for, and provides research, ratings, and rankings of intangible factors to the mutual fund, broker/dealer, discount brokerage, life insurance, and banking industries. They include investor behavior, customer satisfaction, service quality, communications, Internet services, and financial-professional ratings.
    ###
    For information contact:
    Tara Runnals
    DALBAR, Inc.
    617-723-6400
    [email protected]

    They have another titled, "Market Chasing Mutual Fund Investors Earn Less than Inflation".

    Again, not sure what they are using to derive their numbers, but DALBAR is a respected organization and they aren't likely putting out incorrect or inaccurate information.
     
    sman, Feb 11, 2008
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  6. Crabcake Johnny
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    Crabcake Johnny Guru

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    The problem with pulling stats is the market and investments are so broad you can search for and find any stat to suit your purpose.

    This is why the best research is called "double blind." The subject doesn't know they're being tested - the person giving the test doesn't know what the study is for. Then you get true results.

    So an example would be hiring someone to research market returns but don't tell them why. Then present those results to a client without the client knowing the goal of the presentation:

    What IS the better overall investment:
    mutual funds
    perm life
    EIA's
    etc...

    When you have an agenda the results will always match what you set out to find.
     
  7. sman
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    sman Guru

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    Yep. That's exactly what people do when they use the years 2000-2002 in their index annuity vs. the S&P 500 scenario. Of course, I don't know many people who invest solely in the S&P 500 when investing in the markets. I have clients that lost very little money in those years due to broad diversification. I never see someone comparing an index annuity to the years of the mid to late 90's. I wonder why?

    For the CD investor, an index annuity might be a great alternative. It gives them the safety they seek and opportunity for a better return. But to compare an index annuity to an equity investment isn't comparing apples to apples. And using numbers like the ones Key Financial sent out in the email is borderline criminal in my view.
     
    sman, Feb 11, 2008
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  8. Mr. Bill
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    Mr. Bill Guru

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    Also remember that EIAs don't include the dividends, which have accounted for about 4.5% of the returns of stocks (9.5%) since 1900, according to John Bogle...

    "They just showed the difference in point change of the DJIA and lead you to believe that because the DJIA was 22% lower after that 16 year period that an investment would have done the same thing. Not so. Therein lies the power of reinvesting dividends."

    Interesting post!
     
    Mr. Bill, Feb 11, 2008
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  9. James
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    James Guru

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    Are you suggesting that the Dalbar Study is really a flawed study to help sell annuities?:no:
     
    James, Feb 12, 2008
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  10. Crabcake Johnny
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    Crabcake Johnny Guru

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    I believe that study only addresses people who try to time the market.
     
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