A Fraudulent Investment
By Eliseo "Jojo" Prisno, CRPC, MS
Chartered Retirement Planning Counselor
In a recent meeting with a client of ours for a quarterly review, the client shared to us that a Filipino insurance agent cum tax preparer from Chicago offered her an "investment alternative" that will consistently get her good returns enough to pay off the cost of money from the source of funds that she will be investing and on top it, a considerable return to grow the borrowed principal further. Quite an interesting proposition since the client was suggested to borrow from her life insurance policy cash value as her investment money (she was sold a policy a few years back by the same agent). When this client asked for details how the investment works or will there be a 1099 annual report for its dividend income, account statements, etc.; the answer was simply; no, there is nothing to worry since the agent will take full responsibility and there will be no 1099 or statement of income since it is an "alternative investment."The only detail given was the money must be issued to the agent's company and the agent will take it from there. Of course the agent offered to take care of the loan payments to make sure the client's life insurance policy will not be in jeopardy.
All these, my dear readers, are RED FLAGS in investing. No matter how well known to you the person making this kind of proposal, he could be your son or a close friend, as an investor it is your duty to make sure that what you're getting into is totally legitimate and not a scam. There are thousands of naïve investors; naïve because they do not educate themselves about the basics in investing and worse do not even do the basic due diligence like asking for a third party perspective or asking other investment professionals. I'm glad our client shared this to us and asked for my opinion. I'm writing this article not just to share my thoughts but to warn everyone that this "alternative investment" proposal is a scam.
Red flag no. 1
Taking out the cash value from a life insurance policy and investing it somewhere else is a red flag. If the very same agent (the one that sold you the policy) advises you to take the money out and invest it in something else, the investment could be legitimate like another insurance product i.e. an annuity, the agent is simply churning your savings for his commission income. Always remember every product sold to you by an agent, they will always make money. The most common practice of insurance agents is luring their annuity investors' penalty free withdrawals (normally 10% of the original investment after a year) and use the yearly cash flow to buy a life insurance policy using the death benefit as the "ultimate" value of the investment. This type of approach will only work if you have other liquid investments like stocks and bonds enough to give you income while you are still alive and kicking. A death benefit value will only benefit your estate but not your income needs. DO NOT FALL INTO THIS TRAP --your insurance agent is churning your savings. A legitimate approach is using the cash flow by investing in other asset class like variable annuities (with mutual funds as separate accounts) to hedge in the market. Note that fixed annuities do not create any stock market windfall however take into account the risk you are facing. The first risk is exposure of principal to market volatility and the second risk is the cost of money or interest (borrowing the cash value of your policy is not free, the insurer will charge you interest or getting the surrender free cash from your annuity will lose the chance to earn the interest from the annuity provider) vs. potential returns. If the return is less than the interest you're in a double whammy. If you do this hedge, make sure you are working with investment professionals who are licensed to handle securities investments.
Red flag no. 2
"Considerable returns" is a red flag. What is a considerable return, 10%, 20% 30%? Note that S&P 500 Index for the past 25 years has delivered an average of 11% return year on year. Anything double this is fantastic however if it's consistently 25% every year for 5 years, this is an outright red flag, even the oracle of Omaha, Mr. Warren Buffet, considered the most successful investor in the world, cannot deliver this. If the returns quoted are double the S&P 500, always scrutinize and verify the details of the investment. Likely you could be entering a Ponzi scheme.
Red flag no. 3
"Custodianship" is a red flag. You will handle the money? If the agent offers to handle the money himself and he is not a qualified custodian (qualified custodians are institutions like banks, brokerage houses and insurance companies) say sayonara to your money. Custodians are responsible to issue statements of your investment at the very least once a year. Likewise if there are tax matters i.e. taxable dividend income, capital gains, etc. it is their fiduciary responsibility to report to the IRS and inform the client. A "no-statement" investment and "no tax consequence" placement (especially on after tax monies) is a ghost investment. Always be afraid of ghosts.
Always be smart with your money and beware of this insurance agent cum tax preparer. Remember Bernie Madoff!
About the writer: Eliseo Jojo Prisno is a Chartered Retirement Planning Counselor and for over a decade has managed the wealth of select families and business owners. He founded P/E Capital Investments in 2010 and is the current Managing Director and Senior Investment Advisor of the firm. Mr. Prisno also manages a Fund of Funds Portfolio with Ameritas and runs an All Equity Growth and Income Portfolio in Separate Accounts via E-Trade Financial. If you have questions or desire a complimentary analysis of your retirement readiness, call toll free to 1-888-929-2825 or visit our page on facebook or our website: www.PEcapitalinvestments.com.