I raise the question in the headline of whether or not structured settlement annuity yields, which are net of taxes, net of advisory fees and able to factor in inflation increases, might be the best investment deal available to ANY investor, let alone personal injury victims.
The article that got me thinking was written last week by Jason Zweig in his Intelligent Investor column in the Wall Street Journal. The link to the entire article is available by clicking here.
In the article Zweig looks at the hard numerical evidence that confronts most financial planners and investment advisors when looking at how to achieve the kind of superior yields necessary, year in and year out, to return 6% on average, net of taxes, net of fees and commissions and net of inflation, which he calculates at 3% per year on average. His quick math indicates that the typical planner needs to find investments that produce 11% to 12% every single year to obtain that 6% standard yield. His question is where in the world of investment options will these planners go to find those kind of returns, each and every year? His quick survey of some of the most sophisticated investors and managers in the US found that most of them would be pleased with a net, net, net return of 2% to 4% per year, a figure that would certainly startle most advisors and planners.
As someone who has worked exclusively in the structured settlement annuity area for over 30 years and who has long been an advocate of balanced investing, I still believe there is a place in most clients plans for managed money. However, it is becoming abundantly clear to me as each year passes that the unique attributes of structured settlement annuity contracts stack up exceptionally well in the "new world of investment options" that will be facing advisors and clients in the coming decade. Factor in higher taxes certain to come and the math gets even better. Consider each of the net deductions that face investors, then contrast them with the structured settlement annuity:
1. Deduction of investments for income taxes. The fact is that the standard structured settlement annuity through application of sections 104 and 130 of the IRC code specifically exclude both principal and interest paid through qualified periodic payments. Thus there is no deduction from payments for income taxes on a structured settlement annuity!
2. Deduction of fees for investment or sales commissions. Again, the structured settlement annuity yield that you receive is already net of fee's, expenses and commissions, so there are no on going charges, fees or deductions. The yield or price quoted is already net and is contractually guaranteed to stay that way for the life of the payments. Match that against typical hedge fund fees or trust fees in excess of 3% to 5% per year.
3. The erosion of returns by inflation. Again, one of the only products in the entire investment world avaiable to the ordinary investor that guarantees a fixed increase for the suggested 3% inflation factor is the structured settlement annuity. You simply put the inflation factor on your payments. Now of course critics would suggest that this inflation factor "costs" because it increases the amount of premium needed to match a stream of payments, which I agree with in an academic sense. However, in the real world the fact that you can guarantee 3% increases in payments, with net yields still in the 5% return on long term deals is something that no other investment save TIPS can come close to matching, and you pay a similar premium for TIPS as well.
In short, while other investment advisors and planners are desperately searching for something that nets out their clients close to 6%, the structured settlement profession already has it. We just need to do a better job of telling clients, lawyers, courts and journalists what we have and how it works.
If you would like to know more about structured settlements you can contact my office at Wahlstrom & Associates or just browse the content here on The Settlement Channel and learn why a structured settlement might be best for you or your client.