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We've previously written about the insurance sales scams called "Be Your Own Bank" and "Infinite Banking". But, the recent lies produced by the salesmen hawking a similar concept under the name "Circle of Wealth" go beyond what we've seen before.
A "calculator" sent by the promoter of the scheme to insurance salesmen that he's trying to convince to use his system compares the performance of an Indexed Universal Life (IUL) policy to a hypothetical S&P 500 index fund. Of course, the comparison is made over a very short time period that includes the 2008 stock market meltdown. We once heard an insurance salesman claim that "if you take away the good years, the stock market really hasn't done very well." Brilliant! Here's a great example of that type of thinking.
Beyond this, the "analysis" makes the following assumptions for the mythical S&P 500 index fund used in the comparison:
- Adds a 5.64% sales charge
- Adds a 1.5% "management fee"
- Assumes 100% annual turnover
- Assumes that all capital gains distributions are short-term and taxed at 28%
The truth is that anyone can purchase the Vanguard 500 Index without any sales charge and the annual expense ratio is 0.17% (less than that for share classes with larger minimum investments). According to Morningstar, it has a 4% annual turnover ratio. Since the fund invests in the S&P 500 index and companies very rarely spend a year or less as part of the index, most of the distributions are taxed at the advantageous long-term capital gains rate (currently a maximum of 15% - maybe going to 20% next year).
Mutual funds typically use a variety of active management techniques - stock picking, market timing and/or tactical asset allocation (overweighting the asset class or sector that they expect to perform best in the future) in an attempt to increase performance, reduce risk, or both. In contrast, strategic asset allocation simply maintains a fixed target weight for the asset classes represented in the portfolio. This is often described as a "buy and hold" investment philosophy and, according to much of the financial press and the salesmen pushing active management, it's outdated - "buy and hold is dead".
