by John Darer CLU ChFC CSSC RSP
The image in the Wall Street Journal article "Another Can't-Miss Deal That Can Miss Spectacularly ", shows a crouching vulture over a yield sign.
Perhaps that's the reason one can't help cackling with the irony of author, Jason Zweig, citing as authority, Jim Terlizzi of Peachtree Settlement Funding, a company with the formidable reputation of charging very unfavorable and uncompetitive discount rates to tort victims for liquidity. All sneering aside, Terlizzi does actually provide sage advice in suggesting you do your homework. Yet it is this author's opinion that Terlizzi's company relies on tort victims who are too ignorant, lazy or desperate to "do their homework" and shop around for better deals. Why else would someone pay well over the discount rates available in the market to get liquidity for structured settlement payments?
Zweig's article is a cautionary piece about investing in the structured settlement secondary market that focuses on the negatives and irresponsibly, in the opinion of this author, on none of the positives. Even on the negatives, the article runs short, failing to address the most significant aspect of the market- the lack of regulatory oversight and lack of licensing requirement.
The article also fails to differentiate between the risks, if any, of the purchaser being the one who is the buyer in the Court hearing of payment rights directly from the original annuitant, or a follow on sale of payment rights from that purchaser to another buyer.
Investing in structured settlements via the Secondary Market has been compared to this Japanese fish, which must be prepared by specially train chefs to avoid the ultimate form of food poisoning.
Zweig cynically implies that somehow the returns are too good to be true or are even false advertising:
"Boasting guaranteed high yields for typical terms of five to 20 years, the investments sound like an ideal way to augment your income with safety".
"Thus the word "guaranteed"—which rarely accompanies yields of 7%—beams out from the promotional materials of firms that market these deals".
Indeed the working title for Zweig's article was apparently "A Yield of Dream's That Really Wasn't", according to the Google Alert I received Download Google alert 7252010 composite was:
A Yield of Dreams That Really Isn't - WSJ.com
What is a factored structured settlement? It all starts with the plaintiff in a wrongful death or injury lawsuit, who has the right to receive the ...
(Note: Clicking on the aformentioned title from the Google alert leads you to the article with the tltle displayed at the begining of this post)
Yet "The Intelligent Investor" fails to prove in his article that these returns are not achievable. This author contends that they are very achievable if one understands the factoring discount. Anyone with any concern can simply analyze the cash flow using our factoring discount rate calculator that appears on this blog or, if you want to spend some money, the widely used T-Value software.
I'll give credit where credit is due to Jim Terlizzi. who is quoted:
"If you're going to deploy any real capital, you need to do some real homework," says Jim Terlizzi, chief executive of Peachtree Financial Solutions, a structured-settlement packaging firm in Boynton Beach, Fla., that sells exclusively to institutional investors. You will need to verify that the documents signed by the original seller are valid, that the court order originates in the proper jurisdiction and that your contract fulfills all the state and federal requirements. You should also call the annuity issuer and the company that services the annuity payments to confirm that you are officially recorded as the new recipient". Terlizzi's general advice is relevant for any major purchase. Know what you are doing. Research and learn what you are doing.
One other point that Zweig does not make is that insurance companies are known to be purchasers of securitizations of structured settlements. If these deals were so bad why would they do that?
Those that choose to take the time to learn more about the secondary market have something extra to offer their clients. I have spoken and written about ways to use the secondary market to help deal with the primary market problem of currently low short term interest rates, to provide ideas for allocating deferred lump sum payments when they come due, et cetera. I have also spoken privately with a few insurers about how they can improve their offerings using this asset class.
In the meantime potential purchasers of structured settlement payment rights should not be afraid. They SHOULD do their homework.
On Friday July 23, 2010, the NSSTA notified its membership that The Wall Street Journal would publish Zweig's article about investing in factored structured settlement payment streams. The email emphasized that NSSTA engaged The Journal columnist directly and at length about problems related to factoring. The email went on to state that NSSTA obviously cannot guarantee what finally appears in The Journal but you should know that the new (management) team is working to represent this industry and its interests. Other than a cautionary quote from attorney Mike Miller of Drinker Biddle, one wonders what part of the meat of Zweig article content can be attributed to "engaged directly and at length" with the NSSTA.
Financial advisors are, sometimes effectively, competing with a slow to adapt primary market using secondary market opportunities. Addressing suitability is not foreign to them. One longtime insurance general agent offers E&O coverage for secondary market purchases placed through its facility. As the segment becomes more mainstream, I expect others will offer E&O as well.
Kudos to NSSTA for seeking publicity about the problem areas of factoring. NSSTA membership must realize that "the train has already left the station" on this issue. Perhaps it would be appropriate for NSSTA to seize the opportunity to include this topic in its Las Vegas Regional meeting program in November.
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