Questions to Ask When Shopping for Financial Products
An example of enduring value in the Tetons
Have you ever read an annuity prospectus? I have and it is not fun. A prospectus is a thick legal document filled with fine print, which you won’t find in glossy sales brochures, where you learn about the inner workings of complicated financial products like variable annuities. A family member once asked me about an existing annuity he was sold some time ago, and it wasn’t long before I was wading through terms like “Income Credit Base” and “Protected Income Payment Percentage”. As a financial planner and lawyer, I got through it, but it did make me wonder whether most folks understand, I mean really understand, the financial products they trust with their life savings.
Most personal finance concepts are simple. Many financial products, such as insurance policies, annuities and some investments, are not. When we get the idea to shop for a particular product, perhaps spurred by a family member’s recommendation or something we read online, we are faced with a blizzard of options, often with names as foreign as another language. On top of this, many are sold aggressively, with an emphasis on unique benefits and little discussion of drawbacks, such as risk and cost.
This is an environment in which costly bad decisions are easy to make, even by very smart people. With the disciplined approach outlined below you can avoid that outcome and make smart choices.
To be a smart shopper for financial products:
be skeptically curious when faced with complexity
relentlessly seek value
ask questions
Be Skeptically Curious When Faced With Complexity
I am instinctively skeptical of complexity. In my career as a lawyer, I often saw complicated terms used to mask a bad business deal and hide muddled thinking. Complexity does not mean a product is sophisticated or special. But it also does not mean a product is bad. Be wary when faced with complexity but don’t be afraid of it. Good tools exist to address real needs, such as such as insurance, secure income and growth. When confronted with complexity, be skeptically curious. This means asking questions and discounting the sales pitch, while remaining open to learning about something new, even if it might not be right for you. The questions below will help with this process.
Relentlessly Seek Value
Be relentless in the pursuit of value. Value does not mean the cheapest; rather it is the product that best meets your needs in a cost-effective manner. For each product category, a range of options exist, and some are clearly better than others, though the best choices may not be the most heavily advertised or the easiest to buy. Always keep your eye on the ball and do not be led astray by pressure or flourishes. Only by being an inquisitive and thoughtful shopper can you get the most from your hard-earned dollars.
Questions to Ask
Each time you are considering a financial product like an insurance policy, annuity or mutual fund, ask yourself the questions listed below and write down the answers. If you can’t answer each question in language you and any significant other understand, you should not trade your money for the product until you can. Getting answers may involve some boring reading, uncomfortable discussion or even paying someone without a “dog in the hunt” (as we used to say in Louisiana) to help you (if the dollars at stake justify that), but it will be worth it in the long run.
Question 1: Do I understand how this product will help me meet my goals?
Look past the sales pitch and hone in on exactly how the product helps meet a goal you have. Here is an example of an answer for a term life insurance policy (which is fairly simple): “This policy will provide money for my family to live on for ten years if I die.” If you can’t articulate how the product meets a need, why go any further?
Question 2: Do I understand the downside?
The negative aspects usually aren’t covered in the sales presentation. But every product, even the best ones, has them. You need a balanced view in order to compare options and make a good decision. Examples include:
restrictions on accessing money (like withdrawal penalties or surrender charges)
terms that can unexpectedly change at the company’s discretion (like premiums and rates)
confusing future calculations that, even if you understand, may be difficult for other family members to grasp if you are no longer in the picture
List them out as bullet points. Ask the sales representative whether they agree or disagree. If they respond in a balanced and thoughtful manner, that is a good sign. If they respond defensively or with jargon you don’t understand, walk away.
Question 3: Do I understand how much this will cost me?
Although this could be a downside, it is worthy of its own inquiry. Cost can be the difference between a poor decision and a good one. Like most goods you shop for, you need to be able to compare prices in order to make an informed buying decision. Unfortunately, financial products are notorious for having costs, fees and charges that are difficult, and sometimes impossible, to discern.
If the product has a prospectus or contract, that document will contain the most detail about fees, but it can be hard to interpret unless you spend your days studying these things. In an email, ask the seller for a summary of all fees and expenses well before you are asked to make a purchase decision. They should provide a standard company document, not an email response. If, after discussing your questions with the representative, you do not understand anything in that summary, proceed with caution.
Further complicating the picture is that the differences in products across companies can make an apples-to-apples comparison of costs difficult. In order to compare costs, you must understand the different benefits and drawbacks of each product (see Questions 1 and 2). A good independent agent can be a resource, but even they may be incentivized to prefer particular products over others.
Question 4: How does this compare to alternatives?
Alternatives exist for every financial product. A good rule of thumb is to never make a purchase decision until you have considered similar products from at least three different sources, using the questions above to outline pros and cons. Again, a good agent can help, but they don’t replace the only person who has only your interest in mind: you.
When answering this question, it can be useful to compare the product against the alternative of investing its cost in a simple, low-cost diversified investment, like a stock or bond index fund. This will give you a good baseline scenario to help determine whether the product’s benefits are sufficiently more attractive than this easy-to-implement alternative (and they may very well be). Of course, if you decide to pass on a product based on this reasoning, you must implement the alternative in order for it to be meaningful!
The Bottom Line
We don’t like to admit when we don’t understand something. That’s human nature. Not understanding is normal in a complex world of financial products that we can’t see or feel, but instead are defined only by words and numbers wrapped in glossy marketing hype.
When your financial future is at stake, you can’t afford to make decisions without knowing the whole story. Be curious, ask questions and use logic. Trust your judgment and recognize the pitch for what it is. Aim for a good decision, not the perfect one, and go forward with the confidence that you have increased the odds of long-term success.