Author: A.T.

“I read a column you wrote years ago as I was entering a career in insurance and mutual fund sales. It was an article explaining why using an annuity in an IRA should be considered ‘financial malpractice.’ I agreed then and I agree now. Hardly a day passes without my encountering a poor soul who has been duped into sharing their wealth with a NEEDLESS middleman. I have lost the article. Could you please revisit the subject?” — Steve Reynolds

OK. A variable annuity is an investment product sold by insurance companies (or their agents). You give them $100,000, say, and it is invested as it would be in stock-market mutual funds, except that more of your money is siphoned off in fees and its harder to get your money back out. The annuity grows without taxes until withdrawal, but then withdrawals are taxed as ordinary income.

For those few of you who may have missed it . . .

Annuity Insanity

September 4, 1996

I’ve never been too enthusiastic about annuities, for reasons I’ve detailed from time to time. They’re heavily promoted (because the sales commissions are high), but that doesn’t make them a good investment. Once you get sucked into an annuity it’s not so easy to get out or even switch managers. And you have annual administration fees and a “life insurance component” that cuts into your return.

Yes, they grow tax deferred, like a giant nondeductible IRA. But why not buy municipal bonds, which are not just tax-deferred but tax-free? Or why not buy growth stocks outside the shelter of a variable annuity? Tax on their appreciation will not only be deferred until you sell them but, very likely, subject to a favorable capital gains tax rate. (Within an annuity, any capital gains advantage is ultimately lost — the gains are fully taxable as ordinary income when withdrawn.)

So I’ve been pretty down on annuities forever — not that this seems to have thwarted in any detectable degree the army of sales folk who sells tens of billions of dollars worth every year.

But what’s really appalling is the large percentage of annuities sold to people for their retirement plans. Their IRA rollovers and Keogh Plans and so on.

This is nuts. Those funds are already tax-deferred. Why on earth would you accept the sales and administration costs of an annuity product — the only real justification for which is the tax deferral aspect — when your funds are already sheltered from tax?

If you are one of the thousands of investors making this mistake — quit it! If a financial advisor put tax-deferred annuities into your tax-deferred retirement account, I’d consider not just switching advisors but even inquiring as to possible “remedies.” You’ve been the victim of something that either is, or appears to me to verge on, professional malpractice.

(Educators with TIAA annuities: don’t be alarmed — they are a better deal.)

Full disclosure: I own a little piece of this. It’s called OneCore.com. And, no, it’s not public. But it might be of interest to those of you who run small businesses, or even if you don’t (you don’t? it’s 1999.com, for heaven’s sake — get with it!). OneCore might be helpful if you have a one-day-a-week housekeeper and find the “payroll” aspects so daunting that, by not filing the proper forms and paying the nanny tax, you are jeopardizing your otherwise very real shot at becoming a Supreme Court justice.

(The household-employee aspect of this may be a little premature. But when I suggested it to OneCore, they thought it might be possible. In the meantime, Charles and I have an accountant working two days a week to tend to the requirements of employing our housekeeper one day a week. Or so it feels, anyway.)

As Business Week On-Line described it last week, “OneCore is a middleman: It bundles the small-business financial services of a number of companies into a single package accessible on one Web site. … [Its] basic service — which all customers must take for a fee of $25 per month — is an interest-bearing checking or sweep account, called the Core Account, administered by mutual-fund company Scudder Financial Services Inc. Aside from that, services are a la carte. Other offerings include payroll processing by Computer Resources Inc., bill payment through CheckFree Corp., 401(k) administration by Bankers Systems Inc., merchant card services from Michigan National Bank, and equipment-leasing loans from BankVest Inc. All transactions are handled online, and clients can download transaction information into their accounting programs. The system is compatible with a number of software packages, including Quicken and Quickbooks.”

Interest on business checking accounts. I like it.

OneCore is the creature of Barry Star, whom I first met when he was at Fidelity Investments. Company lore has it that OneCore was born when Barry was charged 85 cents to deposit a $100,000 check in his — non-interest-bearing — business checking account. (Even the youngest companies need their lore.)

OneCore is just staring out, but already it has clients like Clint Clemons, a photographer whom Business Week Online’s Jeremy Quittner describes this way: “His office is in Rhode Island, his bookkeeper is in New Hampshire, his production facility is in Los Angeles, and his agents are in New York and Italy. He travels about 150,000 miles annually. He has used OneCore since the spring of 1999 to pay bills and handle his payroll. The online access to his business accounts is indispensable . . . ‘It allows me to have personal control of the signing of checks, checking the performance on the accounts, and approving all the money that gets spent out of the company,’ [Clemons says].”

I haven’t tried OneCore yet myself, so cannot vouch for it. But if you’re tired of doing the pizza parlor payroll by pencil, check it out: OneCore.com.

Do you read Barron’s? Alan Abelson, whom I profiled as “The Smartest Man on Wall Street” in 1973, and who probably still is, had a column about a month ago that mentioned something about Japan. Alan has been bullish on Japan, as have been some other smart folks I know, and noted that $100 billion in Japanese 6% and 7% postal savings bonds come due next year. (In Japan, much of the prodigious saving people do is down at the post office.) Are the Japanese really going to roll them over into bonds that now yield practically nothing, Alan wonders? Or will some of them try their hand at the Japanese market? One more reason Alan is betting on Japan.

Then again, I was reading somewhere else that Confucianism prizes obedience before almost anything else, which is why, according to this, the Japanese — even more than the Chinese, for some reason — are slow to revamp their existing institutions, as some of its Asian neighbors have been. This writer was doubtful Japan would make the needed changes.

Someone else told me the rebound in Korea and Thailand had been so swift, the pain so relatively fleeting, he was afraid they had not really “gotten it,” and would largely revert to their bad old ways.

As usual, the world is too complex to scope out with any certainty. But Asia is not going away. And it would be foolish to assume that the Asian economies will never be able to figure out how to compete in the global marketplace. It wasn’t so long ago we actually thought they had won the competition.

Meanwhile, here is Chapter 14 of Fire & Ice. (You already have Chapters 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, and 13.) It’s called, “Women Are Liars and Cheats,” and suggests that beneath that crude exterior, Charles had a somewhat crude interior. But was basically just a lump of insecurities like everyone else. Or well, maybe a bigger lump.

Have a good weekend!

Monday: A New Website for Small Businesses

Through someone named Dean (thanks, Dean), I discovered google.com. This is one smart search engine. Check it out.

Dean had read of my Sony Swim-Man plight and decided to find me some underwater pool speakers. He typed “underwater speakers” in the search field and clicked Google’s I’m Feeling Lucky button. Five seconds later . . . well, you try it. Pretty amazing.

Meanwhile, Wayne Arczynski had a different solution to keep me swimming. He noted that I have this tiny waterproof radio, but that its signal is drowned out as I crash down the 40-foot length of the pool (forty-three thousand laps to the mile). And he wrote:

“You’re half way there! You just need to set up your own radio station. No, really! You can buy a little FM transmitter and hook it up to your stereo or cassette player and listen to it while you swim. I bet Radio Shack will sell you one for under fifty bucks. (Or you can probably buy an FM transmitter here on the web for half that price. On second thought, Radio Shack will show you how to plug it in to your CD player or stereo. More money but less cost [although I hear your time is going for a dollar a year now, so you will have to decide which is cheaper.]).

“Anyway, you can buy these little transmitters, tune them to a station that is not in use, tune your radio to the same station and voila, you’re on the air. This is basically how wireless microphones work. (Before you buy your FM transmitter, make sure it is legal. There are limits to how much power you can transmit on FM. I would think anything you can buy at Radio Shack would be OK.)”

Is this a great country or what? I’m not actually going to do this. But it’s great to know that I could. Forget Radio Free Europe. We’ve freed Europe. This is Radio Free Style.

In our continuing book-shopping saga, add to your favorites bestbookbuys.com, which searches — among several others — a Canadian outfit specializing in remaindered books, bookcloseouts.com. I was horrified to find the $24.95 hardcover of My Vast Fortune there for $4.79 (versus $16.10 at Amazon). Thanks to Barry Basden for pointing this out.

But in response to my notions that the Internet will make price competition acute — great for consumers, tough on vendor profits — Joshua Rasiel makes a different point:

“I predict this ‘price-bot’ craze will never happen, and if it does, it’ll self-destruct. Has everyone forgotten about value? Let’s look at regular commerce: If I go to K-mart instead of an upper-class store, 9 times out of ten, I can get the exact same album, shirt, or whatever, at a discount. Everyone knows that. Not everyone cares to get something the cheapest way they can, because they know that You Get What You Pay For. And that doesn’t always mean ‘expensive is good,’ but it does mean that if you care, quality is worth paying for.

“Take gasoline. Same exact product everywhere. Does the cheapo Fill ‘n’ Fly (real name; a chain in NJ) force Exxon under? of course not, because we all know that Exxon offers more in the way of service and reliability. they have more to lose if you end up with sugar in your tank, and aside from that, they’re cleaner, and they have slurpies.

“People pay for value. If an internet company wants to stay afloat and not slash prices to the bone, they ought to be remembering that.”

Well, I agree and disagree. It costs a fortune to build a chain of physical stores, to staff it and keep it clean, etc. And imagine the cost of hiring sales clerks who are all polite, knowledgeable and college-trained. And the cost of putting these stores in appealing neighborhoods. Yes, all this adds to the shopping experience. But the cost of doing the same on the Net is almost negligible. A few talented people can make it look and feel cheerful, polite and alert all the time — with no wait at the check out, no problem parking, no fear of the other patrons (or of being seen entering the store). At the back-end, FedEx delivery (or UPS or USPS) is the same whether you get it from the high priced site or the cheap one.

So, yes, sites will have to be reliable and meet certain standards to win and keep customers. But the barriers to this kind of entry are not terribly high. And the $150 bottle of pills, prescribed by your doctor, is really no better than the identical prescription filled for $97 on the Internet. Identical products have the same value regardless of what you paid for them. People will pay up for brand names and labels. But I doubt there will be much cachet in being able to show off an Amazon box versus the box of some competitor. Once the books come, I throw out the box.

“I got curious about an ad in the LA Times for an ‘investment opportunity.’ It guaranteed 11.9% annual yield for a three-year period. Which seemed interesting as it beats present bond returns. And one might not be able to guarantee that in the stock market either. 🙂 I called, and they said they’d send a prospectus. They said it was good for IRA’s or plain investment. They said it was like a CD, but NOT insured. They said in ten years of business, they had never failed to return an investor’s principle. I believe they said it was a corporate investment note. Now. Is this a good thing? Or a stupid thing to do. Do you know of this kind of thing? Is it legit or not, and how risky?” — Tom Whitaker

Could be vaguely safe or VERY risky. It depends on what stands behind the guarantee. No one borrows at 11.9% who could borrow at 7%, and strong corporations borrow at 7%, not 11.9%. So the banks or commercial paper market have turned them down (or they’re idiots, which is not a strong recommendation, either). I would steer clear unless you knew this deal inside out, and could explain convincingly why it ISN’T too good to be true.

#

Thanks for clicking here, as many of you have, to go to PlanetRx and get three free products of your choice. (There’s $3.95 shipping.) As you know, if enough people click here, I might actually be one of four Grand Prize Winners who get 25,000 frequent flier miles. In the meantime, I’ve gotten a lot of free itchy-spray, toothpaste, and contact-lens solution. Thanks!

“My humble question to you is….. How the hell do I get out of debt?… I am in my early 30’s and have finally launched a decent sales career, and will be watching my income grow. I have doubled my salary in the last 2 consecutive years….however, the debt steel wall is killing me! I have clipped the cards and doubled-to-tripled payments. This may be a stupid question, but I’m a desperate person right now, is there any (legal) way to kill this disease at a quicker rate?” — Anne-Marie

Well, it’s conceivable that one of the credit cards might agree to a lower rate if you threaten to pay it off and cancel it. (Bluff.) And there’s the option of taking a home equity loan at a lower, tax-deductible rate, to pay off your cards — risky if you then start running up debts again.

I wish there were some kind of “Get Out of Debt Free” card I could deal you.

But it does sound as if you’re now on the right track. You’re not racking up new debt; you’re paying off your outstanding balances faster. To get out of debt faster still, you’d need to go back to living more as you were two years ago, on half your present income, using the additional savings for debt repayment. (Of course, the reason you got into so much debt is doubtless that, a couple of years ago, you were living ABOVE your means, so reverting to that lifestyle might not save as much as it otherwise might have.) The worry is that, in sales, you could have a couple of bad years. All the more reason to live frugally, pay off the debt, and build reserves. Good for you for recognizing the importance of this and taking the steps to solve the problem. Keep it up. You’ll get there.

For those who take their laptops to the pool, I’ve just turned on Chapter 13 of Fire & Ice. (You already have Chapters 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11 and 12.) It’s about the Quiz Show scandals of the late 1950’s. (What would they think when they found out wrestling was rigged, too?) But it’s also about the relationship between Charles Revson and his younger brother Martin.

Ouch.

For those who would rather go in the water, you may recall my quest for the Sony Swim-man — a Walkman you could wear swimming laps. Never found one. But now (no thanks to the Internet; with just a good old-fashioned quarter-page ad in the New York Times Sunday Magazine) I am the proud owner of three Swimmers Choice underwater radios. They won’t play tapes, but I can listen to FM radio lap after boring lap. I have three because you got a third one free if you bought two. I only needed one, but . . . well, you know.

They run $34.95 apiece. I knew the sound wouldn’t be as good as from that famous Bose “Wave Radio” you see advertised everyplace for $350. But I’d like to see how well the Bose Wave Radio would do in a real wave.

(Three hundred fifty dollars for a radio? I got mine cheap, from a writer who had gotten it directly from Bose to “review.” He had decided not to spring for the wholesale price to keep it, so — expecting Mahler himself to jumping out of the thing for that price, even wholesale — I bought it instead. And I must sheepishly report that, to my tin ear, my $12 Sony Dream Machine clock radio sounds very nearly as good.)

Anyway, this little yellow Swimmers Choice with its little black earplugs works really well, under the circumstances . . . when you’re on dry land. Under water, or even just stroking your way through it, you do hear occasional patches of sound, sometimes faint, sometimes blaring, but they are more or less drowned out by the sound of your swimming.

In case your pool is located in the shadow of a 50,000-watt radio antenna (or the FM equivalent thereof), and in case you swim very, very quietly, you may want to call 800-839-5002 to order your own. But I wouldn’t rush to buy three.

Robert Doucette: “Although I also admire Amazon.com, I have stopped buying from them in favor of a site called positively-you.com. I love the site for many reasons. It was run from the spare bedroom of a college professor in Iowa who started it because he loves books. They were profitable from the first day (their fixed costs are about $150/mo). And, best of all, you can donate 10% of your purchase price to any charity you want. Why would you buy books from anyone else?”

Well, perhaps because others charge less?

Barry Basden: “Go to http://www.bestbookbuys.com and look up a title. You may find a delivered price even cheaper than the booksamillion club price.”

The title I tried this on showed booksamillion.com as the cheapest of the bunch — $10.97 delivered (46% off the price of a paperback), vs. $14.35 at Amazon.

Ralphe Wiggins saved even more: “Bestbookbuys.com compares prices at about a dozen different sites. I recently bought a book that was priced at $107 at every site but Borders, where it was $69! Of the three technical books that I bought, there was a different best-price site for each.”

Tom Mathies: “As a guy interested in saving a buck and as a computer science professor, I like to follow how online shopping is evolving. I agree that competition makes it difficult for an online store to earn a profit.”

If it’s books you’re after, Tom suggests http://www.acses.com. But forget books. Try deal-finder.com, flamingoworld.com, and http://www.albany.net/~tiacat/Refunding/Offer.html. All three list deals and coupon codes on a variety of items, the modern-day electronic equivalent of 40 cents off on a can of coffee. Only you need never leave your chair, and you typically save $5 or more.

Thanks, Tom.

Debra Pappler: “I live overseas (Tokyo) and want to invest in some kind of environmentally friendly / sustainable future mutual fund, the kind you see ads for in UTNE Reader and the like. I’ve gotten the prospectuses from couple of places but I wasn’t happy with their fees. Do you have any recommendations? I hope that making money and being good to the environment aren’t mutually exclusive.”

My own feeling is that this is sort of like recycling in a community where the garbage is later just all thrown together. It makes you feel good, and you WANT to help … but recycling (in such a circumstance) really doesn’t.

That is, I’d invest for best results (which usually means finding an index fund or two with really low annual expenses); then give some of those results to worthy environmental causes.

That said, you could do worse than to check out http://www.citizensfunds.com/ . At least in recent years, socially responsible investing has been a good strategy for high performance, because the most forward-looking companies, socially, tend also to be forward-looking in other respects as well.

Viva la France. Happy birthday, Duncan.