The Investment Scientist

Do You Have These Horrible Investments in Your Portfolio?

Posted on: April 22, 2015

Recently I have a new client. As part of the onboarding process, I examined her old portfolio and found something I don’t recognize:

Cusip Symbol Description Return
25190A104 N/A Deutsche Bk AG London BRH Ret Opt Secs Lkd Ishare MSCI Mexico Capped -21.15%
25190A203 N/A Deutsche Bk AG London BRH Ret Opt Secs Lkd Ishare Euro STOXX 50 Idx -26.60%
90273L815 N/A USB AG London BRH Notes Five 15 -22.30%

What they have in common is they don’t have a symbol, meaning they are not publicly traded securities, they have weird descriptions and they all lost a lot of money.

I called Fidelity (my custodian firm) to find out what they are and how I can get rid of them. I was told they are structured products created by the bank(s) to shove into their clients’ accounts. (The managing “advisor” works for UBS.)

That rang a bell. My very first job was a financial engineer for a French bank – Societe Generale. My job was to create structured products that have appealing features but the bank can make a lot of profits. Now I finally see them in action from the client side and I am not proud.

But these structured products are not nearly as bad as an Allianz annuity a client of mine bought from an insurance agent “friend.” They bought the annuity eleven years ago for $150k, and over the year, they saw it steadily increases in value to $189k. They needed the money so they called to cash out and was shocked to discover there is a $62k surrender charge. In other words, they will be able to get $127k back. I subsequently called Allianz on their behalf to find out  when the surrender charge will end and was told there will be no end! In other words, there will always be a huge surrender charge.

So what is heck does that value $189k mean when every time you want to take out the value you have to pay a hefty ⅓ surrender charge? Alas, Allianz explains the client can annuitize and take the amount out over ten years (or twenty years,) during which no interest will be accrued. So they will take your principal or they will take your interest, either way they screw you.

1 Response to "Do You Have These Horrible Investments in Your Portfolio?"

My back of the envelope calc showed the Allianz annuity went up about 2.3% per year, whereas the stock market (Dow Index) went up about 18% per year in the same time frame. This is even with the big recession in 2008-9! So the annuity company is raking in the money, but the investor is getting a pittance, and then getting robbed again by surrender charges. As far as I can tell, the only thing annuities “protect” you from is making money. Am I figuring that correctly? (Not the details, which are rough, but the general idea.)

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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