Advisor Blog

We've been informing people about the problems with life settlements for years and now that the Wall Street Journal has exposed the same issues, it seems that attorneys and regulators have started to pay attention.  In fact, one of the largest players in the business has recently made major changes in its sales pitch - advertising drastically lower returns. 

We've known for years that the returns being touted by the unregulated salesmen that push life settlements were completely unrealistic.  Now, it seems that the truth is finally being told.  Beyond that, the SEC is examining the unrealistic life expectancies being used to calculate the returns.  It's about time.

Read the recent Wall Street Journal article here.  And, just in case you're wondering - yes, these are the same products from the same company that a local firm has been pushing on the radio claiming "double digit returns."  It probably comes as no surprise that the same firm is pushing investments in indexed universal life insurance and precious metals.  Their home page proudly claims that "Our clients have never lost a penny of principle!"  The rest of their site is similarly lacking in financial literacy.  But, based on the frequency and cost of the commercials that they run, they are making plenty of money - and that's scary.

We've written about life settlements before in the post titled A Risky And Wild Investment.  The Wall Street Journal just ran a story that confirms everything that we've said and adds some analysis of one of the biggest providers of these products.  You can read it here.

We hear the advertisements on the radio frequently that make statements about offering "double digit returns with no market risk."  The facts don't support it.  These investments are illiquid and the industry is, at least in Texas, unregulated.  Unfortunately, by the time most of the people who have invested in life settlements figure out that the return isn't going to be what was promised, there won't be much that they can do about it. 

If it sounds too good to be true, it almost certainly is.  If it's a product that's heavily promoted or sold on the radio, be suspicious.  Radio time and advertisements are not cheap, so that's a pretty good clue that the product pays big commissions.  Where do you think that money comes from? 

It is axiomatic in the study of capital market behavior that "there's no such thing as a free lunch."  If you're not familiar with it, this phrase was popularized by economist Milton Friedman and it simply means that it is unreasonable to expect something for nothing.  In this case, it is unreasonable to expect a high rate of return for an investment that supposedly carries very little risk.  Either the return is being overstated, the risk is being understated, or both.