Where To Put Your Money
There are three places you can put your money and get a piece of paper in return. The financial world calls them 'intangibles,' The three
places are a bank, a brokerage and an insurance company. So where do you belong?
When you deposit money in a bank your money is safe. Bank deposits are insured by the Federal Deposit Insurance Corporation. Nobody has lost their bank deposit since the FDIC was formed in the 1930's. The downside is that the interest the bank pays you on deposits is historically low. So you accept a low interest rate in return for safety.
Pros: Money is safe
Cons: Interest is historically low
Money in a brokerage account has a chance to grow at a rate far greater than money which is in a bank or insurance company. They brokerage suggests securities which will hopefully match your risk profile as an investor. Brokerages are regulated at the federal level by the Securities and Exchange commission and self regulated by the Financial Investment Regulatory Agency. It is important to understand that regulation does not equal guarantees. A broker may act in the best interest of the investor and the investor may still lose a great deal of money. The market provides potential increase in securities value and also allows for potential loss in value. Market value is whatever price someone is willing to pay at a given point in time. When you have money in a brokerage the risk of market loss is borne by you.
Pros: Potential forgrowth is greater
Cons: You bear the risk of loss
Insurance companies offer a compromise between the safety offered by banks and growth potential offered by brokerages. An annuity is a retirement contract guaranteed by an insurance company. Annuities are not guaranteed by the FDIC. In fact they are not subject to any federal regulation. The insurance companies which offer annuities are regulated by the states in which they do business. The underlying investments of an annuity are investment grade corporate bonds. The insurance company must prove each year that the bond portfolio is equal to the legal reserve requirement set by the state. Most insurance companies maintain a surplus bond portfolio greater than the state legal reserve. Fixed annuity interest rates usually pay the owner higher returns than bank deposits. With a fixed annuity the risk of market loss is borne by the insurance company.
Pros: Safety of banks, growth potential of brokerages
Cons: Not guarenteed by the FDIC
OK, what about AIG? Isn't that an insurance company? Didn't they go broke? Good questions. AIG's holding company was threatened with bankruptcy and the U.S. government bailed them out with millions of taxpayer dollars. The individual insurance companies owned by AIG, thanks to their legal reserves they kept right on making all scheduled payments. No AIG annuity owner lost a dime.
My personal belief is that the public is served best when bankers, brokers and insurance agents all hate each other. Bankers keep your money safe; brokers offer the potential to grow your money; insurance agent can offer a compromise, safe principal yet positive return of the fixed annuity.