If It Looks Too Good To Be True…

February 10, 2012

Have you ever seen one of the infomercials about a workout routine, a diet program, or a piece of exercise equipment and said to yourself “that just looks too good to be true”?  Well…so did this guy!  In a video that has become an internet sensation, Furious Pete shows how he made a remarkable physical transformation (you have to check out the video to see just how amazing the transformation is) and took both before and after photos in only 5 hours as proof. Proof?  Yep!  Proof that his transformation was not completely legitimate. Nor was it the product of hard work, diet, or exercise. 

So, as you’re watching the next fitness infomercial (don’t tell me you don’t stop and watch at least a few minutes of the Zumba  or Total Gym ads), be careful about exactly how much you let the before & after photos impact your decision to purchase.  (Full disclosure:  I have rehabbed from several knee reconstructions on a physical therapy version of the Total Gym and have one in my house.  But, you’re not gonna see before and after photos of me on this blog!  You can thank me for that in the comments section.)

When I saw that video, I was reminded of a conversation with someone recently.  He was retiring shortly and his 401(k) was by far the single largest asset he owned.  It was going to be his primary source of income during retirement, along with Social Security.  And, he had a major decision to make regarding his 401(k).  Should he keep his money in the company plan?  Should he roll it to a bank or mutual fund company and make his own decisions?  Should he hire a financial advisor or a financial planner?

He likes to research prior to making a major purchase, and he viewed finding the eventual home for his 401(k) money as one of the most major purchases in his life.  I agreed with him.  The trouble was that his research led to an affliction he dubbed “paralysis through analysis.”  He had so much information that he couldn’t reach a conclusion without worrying that he would regret it later and feel like he could have made a better decision.  When he sat down across the desk from me, I saw a man who was completely frustrated and confused.

One of my initial questions, after understanding his situation, was “are you leaning in any particular direction right now?”  I thought it was a pretty innocuous question but his answer revealed a lot.  One of his neighbors, who happens to be a financial advisor, told him about a product that would guarantee a return of 7% per year.  He had lost an enormous amount of money (on paper!) in the 2008 market downturn, and had just recovered and was back up to his 2007 level of assets.  It took him 4 years worth of contributions plus growth just to get back to where he was.  And, to him, 7% guaranteed sounded really attractive!  Guess what?  To me a 7% guarantee sounds really attractive too. Unfortunately, a real true 7% guarantee may not actually exist.  It sounds too good to be true.

He had filled out the application for this product and brought it to the meeting along with his notebook.  When we started to look closely at what the product actually was, it was not exactly the product his neighbor had described to him.  In order to get a 7% guarantee, he had to lock himself into a lifetime income stream that was guaranteed for only 20 years.  It was possible that in year 21 that he would run out of money if the underlying investment performance was not sufficient.  At 65, the potential to run out of money at age 85 seemed a little scary.  The product that was pitched as a 7% guarantee was much closer to a 4-5% guarantee, but only if no money is withdrawn.  Wait, wasn’t one of his goals to use this money as a primary source of income during retirement?  You betcha!  So, his purpose for the funds was in direct opposition to the structure of this product.  As we peeled back layers of fees and charges and details about this product, he began to realize that it was indeed too good to be true.

We talked through his goals, his ability to withstand downturns in the market, and his investment experience, along with what to look for when hiring a financial planner / financial advisor.   He decided not to transfer his money into that product, and he still has some research to do before making a final decision.  But, he now understands his potential options a bit better.  He also understands that in the financial world, just as in the infomercial world, when something sounds too good to be true it just might be…