Thinking about risk is often difficult. Small persistent risks often take a backseat to catastrophic risks that are easier to conceptualize. Skiing is a good place to understand the differences in risk perception. Hopping on a steep double black diamond slope your first day out could end your fun very quickly. But if you’re headed down a gradual slope lined by trees, the journey may be smooth but one mistake is all it takes to ruin your trip. The point is that the trees along the trail present a persistent risk to any skier not paying attention.
Where you put your money is similar in its scope of possibilities. It was reported yesterday that the Iraqi/Syrian insurgent force known as ISIL has been raiding Iraqi banks as they drive towards Baghdad. Obviously Iraqi banks are the double black diamond of fiduciary institutions. A more sinister persistent risk is annuities. If you listen to the salesmen that pitch annuities to unsuspecting investors, the financial products are a trip down the bunny slope. But there are multiple risks that are harder to see.
Giant fees and the risk that your money won’t be there if the company you purchase an annuity from goes under are the greatest risks to retirees. Fees can be over 3% per year for variable annuities. You could pay administrative fees, riders for guaranteed returns, mortality expense fees, and more. What happens if you decide you don’t want an annuity any longer? Surrender fees. You could be forced to spend thousands of dollars to breakup with your annuity provider. All those fees total up to more than you would pay nearly any registered investment advisor.
Those fees represent persistent risk to your portfolio. They are the trees on the slope and every year they suck away some of the compounding potential from your nest egg. It may not be as dramatic as having your savings stolen by marauding Sunni insurgents, but overpaying for advice can turn a comfortable retirement into a daily struggle, or even force you to keep working through your retirement altogether.