We are a financially illiterate society. Best sellers like People magazine may keep us properly informed regarding Britney and Lindsey’s unbelievably interesting lives, but heaven forbid, please don’t ask us anything about economics or finance. There’s an old saw that states, “If you think education is expensive, try ignorance.” When it comes to your own financial affairs, how true that is. Financial planning needs intelligent discussion. If done right, financial planning can be a lifesaver. If done wrong, it can be a disaster. I’ve seen both sides of that coin.

In general, there are two types of financial planners — and the main distinction is how they are paid. The first are those who work up a financial profile and plan for you, then offer to implement that plan by selling you securities and insurance products from which they receive a commission. Not to paint all commissioned-based planners with the same brush, but, in my opinion, if payment to the planner doesn’t happen until they sell you a commissionable product, you have to wonder whose best interest is really being served. Also, commission-based planners often are limited to selling you the products they represent. That eliminates an awful lot of potential suitable solutions for your financial future’s best interest. 

The second type of financial planner is a “fee-based” planner. That means you pay him or her either a set fee, or an hourly rate, to work up a program for you. Suggestions can and should include investment products that are “no-load” — meaning there is no conflict of interest, commission-based motivation to sell you anything. I like that model. While the fee-based model doesn’t guarantee that you’ll necessarily get a good plan, at least you will know who your planner is really working for. That would be you.

There is a skyrocketing trend in recent years to sell a financial product called a variable annuity. There may well be a number of good variable annuity products out there, but they are not all created equal.  

Here’s a true story. I know an individual who was sold a variable annuity insurance product in 2000. (Remember this — annuities are always sold; they are never bought.) The sales story was that the money going into that annuity would be invested in a select group of funds (picked by the salesman) that had been doing particularly well. Here’s the kicker: Part of the sales pitch was a so-called “6 percent” guarantee, which the individual was led to believe meant that the value of the annuity would be guaranteed to grow by at least 6 percent, no matter what.   

Fast forward eight years later to today. The annuity, which had an initial value of roughly $200,000, is now worth roughly $130,000 (bad investment picks by the salesman — go figure). The client went to make arrangements to cash out and was shocked when told that the 6 percent guarantee applied only to an income option against the original amount. In other words, there was no principal protection. To make matters worse, the fine print stated that once income withdrawals began, the principal amount originally put up to buy the annuity is forever surrendered to the annuity company. Rather than receive the original $200,000, or better yet, the original $200,000 plus supposed growth, what this individual will now receive is $1,500 per month for life. And only that. Bye-bye $200,000.

Oh, and by the way, don’t die too soon. It turns out there are no benefits paid to family if this individual elects to begin receiving the monthly check of $1,500 and then passes away. While this is not the picture that the salesman painted, it was exactly the picture found in the very fine print of the contract.

I tell this story for a reason. The market for variable annuities has exploded in recent years. The fees to the salesman and the insurance company on a $1 million annuity policy can run as high as $35,000 per year. That’s a lot of incentive to sell those products; there is roughly $1.5 trillion currently invested in the annuity industry. And that figure, given the fees and commissions paid to salesmen to sell those products, is likely to grow substantially in the years to come. Here’s an interesting question: If there is a sustained market downturn such as a repeat of 2000-2002 or 1973-74, where will the annuity companies get the money to pay this new group of $1.5 trillion policyholders their guaranteed payments? It won’t come from stock market gains — it will have to come out of the pockets of the insurance companies behind the annuity. Do they actually have enough money reserved to handle a prolonged period of market duress?

This may not have been an issue years ago, but with the market mushrooming in size, it may become very relevant in the years to come. It’s an unknown risk, and to say that the insurance industry can handle it, guaranteed, is not accurate. Annuity companies can and have failed. In the late 1990s, one of the most venerable names in Britain, U.K. Equitable, hit the wall and couldn’t keep up with the annuity payments to households because interest rates didn’t behave in line with the predictions of their actuarial models. Payments to policyholders were ultimately cut by 30 percent. Caveat emptor.

The last point regarding annuities I’ll mention is this: For heaven’s sakes, don’t ever let anyone talk you into putting retirement money such as an IRA or a 401(k) rollover into an annuity. One of the main selling points for an annuity is that the money grows tax-deferred — but retirement money is already tax-sheltered. No one needs to wear a raincoat while swimming and then be charged up to 10 times the normal price of entry for the privilege to do so. So, don’t do it. Period.

I mention all of this to impress upon you how important it is you know, 1) who is working up your financial plan, 2) how they are paid (in other words, who they are working for — you or an insurance company), and most important, 3) that you don’t simply take anyone’s word on how an annuity works — read the fine print. All of it. It’s important. And if the fine print is too confusing to understand, let that in and of itself tell you something. Caveat emptor.

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Bo Billeaud is president of Lafayette-based money management firm Billeaud Capital Management.