Smarter Bear Newsletter October 2024
For clients and friends of Smarter Bear
Financial firms are looking for new sources of fee income.
Very low-cost index mutual funds and Exchange Traded Funds (ETFs) have become so popular, which reduces fee revenue, that financial firms are introducing new products to generate income. The old playbook for generating more fee revenue was Actively Managed Mutual Funds and ETFs. While Actively Managed funds are still available - despite significantly higher fees - the vast majority underperform the passively managed index funds. The new products include:
Separately Managed Accounts (SMAs)
Structured Notes
Interval Funds
Custom Indexing
Buffer or Defined Outcome ETFs
Business Development Companies (BDCs)
Variable and Index Annuities
They all promise better performance or limited/no risk of loss with upside market participation. Some of these products might be appropriate for certain investor circumstances. Our best advice is to be sure to understand both the upside and downside as well as expenses, and liquidity restrictions in what are often complex investment vehicles. The only certain thing is that the financial firms will make more money when you invest.
Legal protection for annuity buyers is at risk.
The Labor Department issued new consumer protection rules for annuity buyers. As we have written in previous newsletters, Annuities are surging in popularity - $215B were sold in the first six months of 2024. Insurance agencies and companies are fighting the new rules as they protect consumers against misleading claims and excessive charges.
The more complex the annuity, the more likely the fees will be excessive. Fixed Index Annuities are increasingly popular for their protection against loss but carry a baked-in commission ranging from 8-15%. It is a good deal for the "financial advisor"/agent and the insurance company and not for the buyer. Smarter Bear is a fee-only fiduciary and doesn't sell annuities. We analyze annuities that clients have been sold before becoming clients and, when indicated by client circumstances, sometimes recommend that clients purchase straightforward, no-commission, low-fee fixed annuities from highly rated companies.
The new consumer protection rules are likely to be overturned. Our recommendation on annuities remains the same: Seek expert advice from someone not making money on the annuity sale before buying.
Something good for free.
Smarter Bear offers early career folks a free, no obligation conversation about their financial life and decisions they are making. This could be valuable for you, or someone you know. We have already done several of these conversations and the feedback we are getting is very positive. Checkout our launchpad program here.
Smarter Bear is always available for a free consultation to answer questions and discuss whether our services can help address your needs. You can reach us at smarterbear.net. We also offer no-cost second opinions for DIYers or people working with another investment or financial advisor.
We write our own newsletter, so we know these topics well. Many advisors and firms employ marketing departments, generative AI, or third-party content services to produce their newsletters.
If you know others who would like to be added to our list, feel free to add them at https://smarterbear.substack.com. We aim to write short, helpful, and easy-to-read items on financial topics of interest. We welcome any suggestions for topics to cover in future newsletters.
None of the above is intended as a substitute for tax or legal advice. Your personal situation will determine what's best for you, and we recommend you consult an appropriate professional advisor.