Do You Need a Cinnabon™?

The summer travel season is upon us and this means an increase in traffic at your local airport.  As you stroll through the terminal it’s impossible to miss the awesome aroma of a Cinnabon™.   Cinnabon’s™ smell amazing and look incredible and it takes enormous will power to walk past their kiosk.   What’s the downside to indulging in one of these famous pastries?   According to Cinnabon’s™ nutritional guide the classic roll has 880 calories and a couple of their rolls have more than 1,000![1]   Eating a couple of Cinnabon’s™ may taste good in the moment but will leave you with a heavy dose of guilt once consumed.

The financial marketplace is full of products that look good on the surface but have a hidden underbelly.  These products are complicated and expensive with numerous bells and whistles designed to hook the unexpecting investor.  Here are few of these products you’d be wise to pass on the way to your financial destination.

Viatical Settlements.  This program is a bet on death.  An investor will purchase the life insurance policy from an individual who’s terminally ill.  The investor will pay the owner of the policy a discounted value of their accumulated cash value.   The investor will then make payments on the life insurance policy to the insurance company and when the owner of the policy passes away the life insurance proceeds are paid to the investor.   The return on these investments is unknown because the life of the insured can’t be calculated.  If the insured dies quickly, the investor will enjoy a high rate of return.  If the insured lives a long life, the investor will suffer a low rate of return.   In addition, the beneficiaries of the insured might not know the policy has been sold and this will deny them a claim to the proceeds.  This is a morbid investment strategy with few beneficiaries.

Structured Notes.  A structured note allows the investor to participate in the stock market with a few caveats.    The notes typically have a maturity of five years and may offer a fixed rate between 5% and 7%.  For example, you decide to buy a note on the Standard & Poor’s 500 index with a five-year maturity.  The note will give you downside protection if the market drops and cap your upside in a rising market.    If the stock market generated a return of 10% you forfeit the upside.  If the market should fall for five years, you’ll get your fixed rate on the note.[2]  Structured notes are complex and can be expensive.[3]

Leveraged Exchange Traded Funds (ETF’s).   Using leverage to sweeten your return may work in a rising market but will leave a sick feeling in your stomach when the market turns south.   An ETF can use 2X, 3X, or 4X leverage.   For example, if the stock market is down 2%, a 3X leveraged ETF will be down 9%!

Annuities.  Annuities may serve a purpose for individuals who need a guaranteed stream of income; however, most investors should look elsewhere to generate growth and income.   Annuities have high fees especially if they’re pumped up with riders.  It’s not uncommon for annuity fees to soar above 3%.   To add, your income and gains from an annuity are taxed as ordinary income.   Historically the stock market has returned 10% and inflation has averaged 3%.   After subtracting inflation, fees and taxes, your 10% return will drop to 1.2%!

Reverse Mortgages.  Americans have used their homes as ATM machines for years and this is one of the attractions to obtaining a reverse mortgage.  A monthly income stream from your bank sounds compelling but there are downsides.    If you obtain a reverse mortgage, your beneficiaries might have to sell the home when the owner dies.  If the family can’t pay off the reverse mortgage one the homeowner dies, then the home most be sold to cover the note.  Interest on the note is non-deductible and the rate is variable which will be a problem if interest rates rise.[4]

As you travel to your financial destination pay close attention to the small print because several products have compelling brochures, websites and advertising to entice individuals to buy the flavor of the month.   If it sounds too good to be true, it probably is!

Be sober-minded; be watchful. Your adversary the devil prowls around like a roaring lion, seeking someone to devour.  ~ 1 Peter 5:8.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

July 6, 2017

 

 

[1] https://www.cinnabon.com/-/media/cinnabon/nutrition/CinnabonNutritionalGuide120216.pdf

[2] https://www.sec.gov/oiea/investor-alerts-bulletins/ib_structurednotes.html

[3] https://www.sec.gov/news/press/2011/2011-118.htm

[4] https://money.usnews.com/money/personal-finance/banking-credit/articles/2017-06-16/6-drawbacks-of-reverse-mortgages, By Maryalene LaPonsie, Contributor | June 16, 2017, at 11:37 a.m.

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