Whenever an investment idea tugs at your heartstrings as much as your pursestrings, be careful.
It’s not that warm, fuzzy emotions always make for terrible decisions, but most investment moves should be made with your head rather than your heart.
For proof, look closely at the Retirement InCome for Everyone (RIC-E) Trust, a new product created by Edelman Financial Services of Fairfax, Va.
If you have not heard about this new product yet, stay tuned. Many people may say it sounds like a can’t-miss gift idea.
For a very small segment of the population, it may be.
But it’s clearly a good deal for the man who created it, Ric Edelman (yes, Ric E., like the name of the trust), who is a financial planner, radio and television talk-show host, syndicated columnist, author of two books and the head of one of America Online’s bigger financial advice areas.
Essentially, the RIC-E trust is given as a gift to children or grandchildren to fund their retirement. The money (as little as $5,000) is invested in a SunAmerica variable annuity, where it remains until the recipient reaches at least age 59 1/2.
Assuming a 10 percent rate of return, a $5,000 gift made to a newborn today would exceed $2.4 million when the child hits age 65, not a bad supplement to Social Security. In today’s dollars–65 years of 3 percent annual inflation eats into even a million-dollar nest egg–that would have the buying power of about $360,000.
It’s all about the beauty of compounding. Set the money aside for when the kid gets to college, for example, and your $5,000 gift grows to about $30,000 when the kid enters school. Not bad, but no $2.4 mil.
Best of all, the money grows tax-deferred, with gains taxed only when the recipient finally starts pulling the cash out.
At this point, provided you want to someday pass on at least some money to your progeny, you’re sold.
And therein lies the problem. It’s a great sales pitch, but does it really accomplish what you want, the way you want to, or does it merely make you think there is a need that this product alone can fulfill?
Let’s put this trust to the sniff test. With any new investment product, that boils down to four basic questions:
– How much does it cost me?
– Who’s making money off this, and how are they getting it?
– What are the alternatives?
– Do I really need this?
The cost of establishing a RIC-E Trust is $300, which should cover the legal fees involved in establishing the trust.
Edelman’s firm supplies a voucher good for $150 in legal fees from any lawyer in Edelman’s network of attorneys. That amount may or may not cover the cost of establishing the trust.
If you want to establish a second trust, it’s another $300. Want to add to a RIC-E trust again next year? It’ll cost you another setup fee (although Edelman says the firm is working to fix that problem, so that additional deposits would be allowed without the need to establish new trusts).
The SunAmerica annuity product includes a bunch of mutual funds. You pay the expense ratios of those funds plus a 1.52 percent fee that is split between SunAmerica and your financial adviser (or Edelman’s firm, if you come to this investment decision without the aid of an adviser).
That’s a bit above average for variable annuity costs, although Edelman said he didn’t think 0.12 above average was “that big a deal.” (Bzzzt. Wrong answer: Think compounding over 65 years. Those few percentage points cost you about $30,000 if the annuity grows at 10 percent annually for that long.)
Of the $300 fee, Edelman’s firm gets that, then gives half to the lawyer. But Edelman may get that money back from the lawyers, in exchange for the fee he is likely to charge them for joining his network. He acknowledges that the trust is so new–just a few hundred sold–that all of the details of the lawyer network have not yet been worked out.
But considering that lawyers who are interested in the product pay a $750 fee to sign up (lawyers who are referred to Edelman by a participating financial adviser don’t pay the fee . . . yet), it’s clear that Edelman could make as much or more from the lawyer network as he does from selling trusts.
There are some simple alternatives for this trust, most notably American Century’s 20th Century Giftrust fund and Royce Gift Shares, two mutual funds in which opening an investment account essentially establishes a trust fund.
Money typically must stay in the funds for 10 years or until the recipient reaches age 18, whichever is longer, but officials at both companies noted that an investor could sign into their account documents that the monies must stay in place for a longer stretch of time, including the number of years it takes for your loved one to hit age 65.
The fund accounts can be opened for much less money than the RIC-E trust, and have lower overall operating expenses (although the Royce fund’s annual $50 trustee fee actually could be worse than paying 1.52 percent on the annuity).
The funds don’t have the tax-deferred advantage, but another alternative does, namely the Roth IRA. If the recipient is not a newborn, but rather a child who earns some income from a job, an adult could open a Roth account for the kid.
That money grows tax-free for life, although the recipient does have the ability to remove the principal without penalty before he hits retirement age. And there are no setup charges or trust fees, and the investor has the freedom to pick any fund, including thousands of low-cost options.
For any adult looking to do serious estate planning–the kind that makes sure Uncle Sam doesn’t cash in when you go–a RIC-E trust is frivolous and costly. As part of the broader estate plan, a consumer could establish any number of trusts and provisions.
“Anyone looking at their big picture will not want this,” notes Jeff Kanaly of Kanaly Trust Co. in Houston. “It looks at only part of the picture, and there are plenty of ways to look at everything and move the dollars in a way to create a tax savings for the estate.”
Which brings the discussion to the question of whether anyone really needs this vehicle anyway. That depends on how people feel about passing money to future generations, and when they want their progeny to get that money.
There are cases to be made in all directions on that one, but it boils down to a personal choice.
But assuming that you want to give money in a way that can do the most good, flexibility may be an issue. The RIC-E trust locks up the money for decades. If your child becomes disabled in the interim and needs the money to pay for living expenses, he would be out of luck. There are other ways of giving money as a gift that leave both the giver and the recipient more options.
When it comes to new-fangled investment vehicles like the RIC-E Trust, which Edelman himself quickly acknowledges really works for only a small slice of the populace, the trick is to realize that what brings any new product to light in today’s financial world is marketing.
If it sounds great and tugs at your heart, examine it with a skeptical eye. Most new investment ideas don’t look so good when examined under harsh light.
BY THE BOOKS: LEARNING ABOUT ON-LINE INVESTING
These days, the Internet provides one of the best tools for the small- to medium-size investor who wants to take a hands-on role in investment decisions. Several Web sites now offer a variety of avenues for investors to participate directly in the purchase of equities and management of their stock portfolio.
For those curious about electronic investing, there are several good books that explain how to go about on-line investing, and what options and opportunities lie out there in cyberspace.
Here are a few titles:
– “The Online Investor,” by Ted Allrich (St. Martin’s Griffin Press, 1997, $15.95)–Good book that provides information on how to buy and sell stocks on-line, and screening strategies that help in evaluating stocks.
– “The Worth Guide to Electronic Investing,” by Jim Jurak (HarperBusiness, 1996, $17.50)–This thorough edition contains an evaluation of more than 100 different investing programs, and discusses electronic mutual fund investing.
– “The Individual Investor’s Guide to Computerized Investing” (14th edition, American Association of Individual Investors, 1998, $24.95)–Provides stock analysis information and portfolio management tips, as well as explaining the benefits of on-line investing.
– “J.K. Lasser’s Invest Online: Do it Yourself and Keep More of What You Earn,” by Laura Maery Gold and Don Post (MacMillian Publishing, 1997, $15.95)–Tips on how to navigate financial Web sites, and how to place stock orders and set up accounts on-line.
– “Cyber Investing,” by David L. Brown and Kassandra Bentley (Wiley & Sons Publishing, 1997, $26.95)–Focuses on how to use your computer to link to the world of Wall Street, and how to target investment opportunities.
Knight-Ridder/Tribune.
