Here’s One Sales Pitch That Says It’s Time to Shop for New Advisor

Q: I am working with a financial advisor who suggests that the $80,000 that I have in a previous employer’s 401(k) plan might better serve me in a variable annuity. There is a back-end sales charge and an annual expense deducted from the total investment value. My advisor gets paid by commission, so I know that some of his suggestions may be made as a sales pitch to purchase his company’s products. I would appreciate any advice or information you could provide.

A: Good financial planners hate, simply hate, the kind of advice you just got.

If you don’t want to leave your 401(k) money where it is, you should roll it over into an individual retirement account. Then you can invest the money in stocks, bonds, mutual funds, certificates of deposit--whatever you’d like--while preserving its tax-favored status.

We’ll give your advisor some credit by assuming that’s exactly what he wants you to do. It’s his next suggestion--that you invest the IRA money in a variable annuity--that prompts his responsible colleagues to tear their hair.

Variable annuities’ main selling point is that your gains will be tax-deferred. But your gains within an IRA are already tax-deferred. So you’re paying a bunch of fees and expenses for something you’ve already got.

There are some financial planners who think it should be illegal to sell a variable annuity for an individual retirement account. No less an authority than the Securities and Exchange Commission has warned that variable annuities typically don’t belong in IRAs.

Yet advisors like yours continue to push the idea that variable annuities are a dandy idea for an IRA.

It’s too bad, because the company you mentioned in your letter offers a wide variety of other investments, including a full complement of mutual funds, as well as a brokerage through which you could buy stocks and bonds.

Unfortunately, variable annuities tend to pay a higher commission than a mutual fund purchase or a stock transaction, which is probably why you got the advice that you did.

Then again, maybe this guy did you a favor. If this is the quality of the financial planning he’s going to offer, it’s best to know that now so you can start looking for a replacement.

By the way, there’s plenty of information on just how to find a good financial planner at http://161.35.110.226.

Long-Term Care

Q: I read your column about long-term care insurance with considerable interest, especially the very last paragraph where you say that “some people insist on having it so they can avoid spending the children’s inheritance.” I understand that philosophy, but if the purpose of the insurance is to protect the children’s inheritance, shouldn’t the children pay for the insurance? I have proposed that to my brood, but the response has not been overwhelming.

A: Imagine that!

You probably didn’t really expect them to leap at your offer, but some children do indeed buy long-term care insurance for their parents. Usually their motive is less inheritance preservation than dignity preservation--they want to make sure their folks get good care and don’t have to impoverish themselves to qualify for government-funded help.

Long-term care insurance is designed to pay for the kinds of custodial care--either in a nursing home or in your own home--that aren’t covered by regular health insurance.

Many financial planners don’t recommend long-term care insurance for people who can pay for their own care. Generally, that includes people with $1 million to $2 million or more in assets. Nursing care typically costs $50,000 to $75,000 a year and lasts less than three years, although sometimes the care may be needed for 10 years or more.

Some wealthy people do buy the insurance to make sure long-term care costs don’t deplete the money they leave to their heirs. If you don’t care about leaving an inheritance, there’s little reason for you to pay for the insurance yourself.

That said, you should be pretty confident you can pay for your own care, and that of your spouse, before you dismiss the idea of long-term care insurance completely. The costs of care can be substantial, and you probably don’t want to risk being a burden on your children--despite their underwhelming response to your bright ideas.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at http://161.35.110.226/moneytalk.