Advisor Portfolio

Start Making Sense

Your industry provides a full menu of financial investments, but which one is right for your clients?

By Bryan Bibbo

Mr. Bibbo is a fiduciary retirement planning professional in Cleveland, Ohio. Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”), an SEC registered investment adviser.  Registration as an investment adviser does not imply a certain level of skill or training. JL Smith Group and PCA are separate, non- affiliated entities. PCA does not provide tax or legal advice.

You complete your continuing education requirements, go to industry events, and do research on different investment vehicles for your clients, but you probably wondering, “Does it make sense for my client?”  Most advisors understand what bonds, stocks, real estate, or CDs are, but what about high net worth Roth IRA contributions, Target-date funds, Annuities, or Universal Life insurance? When considering any investment, time horizon for clients is one of the biggest considerations for investing. Segmenting out client’s funds between money the client needs now, soon, and later is becoming more prevalent in the industry. Consider some of the more published alternative options to investing and how they function within the client’s best interest.

Roth IRA

Roth IRA’s are a building block to any financial plan in today’s investment world. How do you go about educating the client on how important it is to have this in their portfolio? Ask your clients, “If you were a farmer and the taxing authority showed up to tell you to either pay the tax on the seed or the harvest, which would you rather do?” After thinking it through, the answer is clear. The client would rather pay the tax on the seed and a Roth IRA works the exact same way. The taxes are paid before the money goes in and, in turn, the growth and original principle are tax free when you pull the money out. It’s important to explain to investors they can withdrawal original contributions at any time without taxes or penalties, but they do need to own the account for more than five years. When they turn 59 ½, they then have the ability to take out the earnings tax and penalty free. It’s important to emphasize that Roth accounts allow investors to control their taxes in retirement because the distributions will be tax free. Proper planning can potentially save their Social Security from becoming taxable, which is why they hired. Employer 401(k)’s are a little different. What most people don’t know about employer 401(k)’s is that many offer a Roth or after tax options to invest into. This allows the investor the ability to contribute directly from his or her pay into a Roth. While not everyone has this option, there is always the ability to contribute outside of work. Have you ever told a client they cannot contribute to a Roth IRA because they make too much money? In these cases, consider a back-door Roth conversion. This allows higher income earners the ability to contribute money into a Roth by adding an extra step.


Target-date funds are a simple, low maintenance investment vehicle. These mutual funds have been created for the average or novice investor who is seeking a hands-off approach. Target-date funds are mutual funds that hold a variety of stocks, bonds, and other investments. Each Target-date fund has a date assigned. An earlier date signals a less aggressive investment, while a date further in future is higher risk. While this seems simple, the internal working for each fund varies. Educating client on the fees, risk profile, performance, and asset mix is important when choosing these types of funds as investments. If an investor was going to retire in 2035, he or she might consider a 2035 Target-Date Fund. The company offering the fund will change the internal holds periodically and handle all the investments while the consumer cannot make any changes. One of the biggest unknowns surrounding these types of funds is the difference between “to” and “through” Target-Date funds. A “to” target-date fund is one that will reach its most conservative state at the point of the target-date while a “though” target-date fund will continue into the future beyond the target-date in an attempt to achieve higher capital appreciation. Not knowing this difference could expose a consumer to unwanted risk. Financial advisors need to do their due diligence on these funds prior to investing client’s assets.


An annuity is an investment issued by financial institutions designed to protect investors from outliving their income or as an alternative accumulation vehicle. While annuities usually receive a bad reputation, they can make sense within a financial plan and actually have a lot of ancillary benefits for our clients. Consider 4 different types of annuities.

Single Premium Immediate Annuity (SPIA) 
This is an insurance contract where the investor gives a lump sum to a financial institution and, in return, the investor will get a set amount of money for the rest of his or her life. The goal is to ensure the investor never runs out of money so that if he or she lives a long life, he or she will continue to have income coming in.  While there is no real market risk involved, there are negatives to this type of annuity. Interest rates on the original contract could be less than they are in the future and the death benefit could be nonexistent if he or she were to pass away early. Not all contracts are the same so it is important to know all the ins and outs before purchasing.

Variable Annuity 
A variable annuity is an insurance vehicle that allows an investor to choose from a selection of underlying internal investments commonly referred to as sub accounts. Furthermore, this type of annuity could pay investors a level of income which could either be consistent, increase, or decrease depending on how the contract is set up and performs over time. These subaccounts are more like mutual funds that are composed of stocks, bonds, and other investments that usually have an expense ratio (fee) associated with them. Fees on variable annuities can range from 2% – 5% annually and they can have high surrender fees if you were to pull money out early or not according the contract specifications. These annuities are used for the deferral of investment gains, income for life, or, in certain states, they can be used as assert protection against creditors and lawsuits. They also offer rider benefits that can be added to the contract. This could be a bonus on a death benefit or guaranteed income for life. Before signing up for a variable annuity, it is crucial to understand the costs, benefits, and state regulations.

While mutual funds prices are determined at the end of trading each day, ETF’s offer ways to get into market indexes with out having to buy all of the individual stocks...

Fixed annuity 
This is an annuity contract between the investor and the insurance company where the insurance company offers a fixed rate on the money invested. These are usually referred to as alternatives to certificates of deposit because they both provide a fixed rate. The key difference is that an annuity commonly allows annual withdrawals up to 10% without penalty where a CD might not. In some cases, the fixed annuity could also offer higher rates than CD’s. Fixed Annuities can also offer income for life if they are set up that way, but traditionally they are simply a fixed rate investment vehicle. They offer preservation of principle and no market risk. However, fixed annuities are intended to be held long-term and may be subject to surrender charges. Further, it is important to realize that these accounts are not insured by the FDIC, rather they rely on the overall strength of the insurance company.

Fixed Indexed Annuity (FIA) 
A Fixed Indexed Annuity is a tax-deferred contract issued by an insurance company.  While it shares similarities with the downside protection of a fixed annuity, it also offers an upside of the stock market. How the interest is credited is based on the performance of the S&P500, NASDAQ, or Russel’s 2000 index.  While that may seem promising, the tradeoff is the annuity either caps upside returns or a spread is in place. This is a percentage given up before any interest is credited to the account. FIA’s can be a good investment vehicle if used properly within a financial plan since they offer downside protection, current favorable interest rates in today environments, and withdrawal options.  However, it is important to consider the caps, spreads, and potential surrender charges. These can vary from company to company. A financial advisor would never want to put 100% their client’s money into a FIA because of the lack of liquidity associated with these contracts.


Exchange-traded funds (ETF’s) are similar to mutual funds but are traded with price fluctuations like stocks intraday. While mutual funds prices are determined at the end of trading each day, ETF’s offer ways to get into market indexes with out having to buy all of the individual stocks. An example is the S&P 500 where an investor can purchase an ETF tied to the index while not having the cost of purchasing all 500 stocks. All ETF’s have a stock symbol, where they can be purchased one minute and sold the next. Advantages of these are lower fees and tax efficiencies of when they pay capital gains. ETF’s do have drawbacks that include settlement dates, trading costs, market risk, and sometimes don’t track the index 100% accurately.

Universal life insurance

Universal Life Insurance (UL) protects the insured with a guaranteed amount of death benefit proceeds.  While this is typical for all life insurance, universal life insurance also gives the consumer the ability to have flexible premium payments, a level or increasing death benefit, and cash accumulation within the policy.  The premium pays for the insurance while additional cash funds the investment portion of the policy known as cash value. This portion of the policy will grow over time gaining interest credited based on various crediting methods the policy offers. The cash value can be used to take out loans against the policy for planned expenses, income needs, or emergency situations. It can get tricky if there is a loan out when the insured dies or if the insured dies with a cash value in the policy. If the insured dies with cash in the policy, the insurance company will pay out the death benefit, usually tax free, but will keep the cash value. If the insured dies with a loan outstanding, the outstanding amount will go against the death benefit payout. UL Policies are appealing to a consumer since there is the ability to invest their money and provide a death benefit all under one policy. To avoid a calamity, know that a UL policy needs cash in it or it will lapse essentially becoming worthless paying no death benefit. Before purchasing a policy, it is important to know the ins and outs such as what is the loan interest rate, management fees total, and cash surrender fees. If handled properly, this type of policy provides families money in an untimely death or can help create a tax free retirement.

Financial advisors should always lead their clients with holistic financial plans, understanding each client’s goals, concerns, and risk tolerance. The financial industry is moving away from solely selling clients an investment or product but rather developing an inclusive plan that incorporates all aspects of a client’s financial life. Educating clients and doing due diligence as a financial advisor on what is out there and how it fits within a client’s financial plan is the tactful route to take. ◊