That headline is slightly misleading, but let me explain. In the morning, as my wife and I wake up and get ready for work we turn on VH1. It’s the only channel playing music videos at the time, but it’s starting to drive me insane. Forget the overplayed Taylor Swift videos; I’m talking about the commercials. Given my family tree I’m lucky to still have my hair, but seeing these commercials that sell “financial solutions” is probably accelerating the inevitable balding process.
First, it’s usually the JG Wentworth opera commercial, which admittedly has a catchy jingle. The company is in the business of buying structured payments or annuities—a customer receives a lump sum today in exchange for their future payments. In theory, this is a fine idea, but of course theory and practice are often very different. The problem is that your lump sum is often determined based on discount rates in excess of 20%. Basically, what that means is that you would have to earn over 20% on the lump sum you receive in order to equal the financial benefits from your original payout. That is an awfully high liquidity premium.
Second, I usually see several short-term loan commercials, one of which says that you can have $500 in your bank account in less time than it takes to get a cup of coffee. In that same commercial, the $500 is being used to fund a birthday party. Sounds awesome! High-interest loans to purchase consumer goods—what could go wrong? I’m always impressed how short-term loan companies manage to take all the bad parts of credit cards and eliminate the few benefits.
Then finally, I usually get treated to my favorite one of the lot: The Gerber Life Grow-Up Plan. With all due respect to the lady in the video, her dad is giving terrible financial advice. To be fair, the intent is noble. Starting your child out with an asset that can grow with them is great planning, but a Whole Life insurance policy is absolutely the wrong vehicle. There’s no reason to have life insurance for a newborn unless it’s the baby starring in this ad, I suppose, and he’s the main breadwinner in the household. So, you basically end up with a very expensive and low returning investment product. You’d be much better off putting that money into a 529 college savings plan or just a regular investment account.
I don’t expect many reading this blog to get suckered in by a morning commercial, but I wanted to make the point that deception in the financial product world is everywhere. (Also, my wife said I needed to rant about these commercials to someone else so she doesn’t have to hear it anymore). Your best bet is to educate yourself and keep in mind that there is no free lunch. If it’s too good to be true, it probably is.