MONEY MATTERS Listening to the AARP

In addition to professionals you may hear on the radio or TV, there is also the AARP. While this organization is not a financial brokerage or anything of the kind, there is considerable financial advice and direction that can be found in the pages of their publications. A couple of questions come to mind, the first, "Is this for the benefit of its membership or for the organization?", and the second "Is the advice or information worth following?"

Last month several of my clients had pointed out an article on page 39 of the magazine that they wanted me to go over with them. The brief article was entitled "Buying Variable Annuities". The long and the short of the article was to keep your investments simple and that variable annuities have higher expenses than mutual funds and thus they should be avoided. The second fact was supported by a chart showing the growth of $10,000 assuming three different levels of expenses and
thus the line with the lowest expense had the highest value.

While this article was not attributed to any particular author, the two paragraph article grossly misrepresented many facts and clearly directs their membership away from a very valuable investment tool when used properly. This week I will address some of the short comings of this article while responding to the second question by discussing an AARP ad and endorsed product as part II.

The premise is that variable annuities have higher expenses than mutual funds and thus should be avoided. That is like saying a Cadillac or Rolls Royce is a waste of money because they cost more than a Volkswagen Rabbit. There are many reasons the two cars I mention cost more than a Rabbit. For one, the Cadillac and Rolls have more ‘features’ than the Rabbit. This is true of the variable annuity when compared to the mutual fund. Variable annuities have many additional features that you can purchase thus adding to the expense of the contract that may provide benefits that cannot be found in other investments. It is up to you to determine if the added feature is worth the cost. From my experience with
retirees, most of the features can be worth their cost.

The article also states the average variable annuity under performs the average mutual fund regardless of the timeframe considered. No basis of how this was determined was given which leads me to question its soundness as a basis of fact.
For all I know they calculated the average return by averaging the performance of every investment option available within each variable annuity contract. This would naturally produce a low average return because it assumes the use of many conservative investment options within the contract even though the typical investor may not be using those conservative choices at all. It does not appear they were comparing the large cap growth sub-account within the contract to a large cap growth mutual fund. Had this been done, the results would have shown that many of the sub-accounts perform equal to and sometimes better than the mutual fund counter parts.

It is clear, while AARP may tout its service to retirees, sometimes the information they provide clearly misrepresents the facts and may not be worth following at all. Next week I will respond to the second question by discussing one of the ‘endorsed’ products by the AARP.

In the mean time, if you do not enter retirement with millions in the bank then investment performance will matter. Find an independent CFP with broad product understanding, and a working knowledge of the tax system, that actively manages your investments. With this relationship you should be able to meet your goals as well as sleep at night despite the actions
of the markets.

HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, SIPC.