Think Twice Before Following This Tony Robbins Financial Advice

Retirement dreams are important, but be careful how you go about achieving them. Source: Flickr user Sarah_Ackman.

Tony Robbins has helped millions of people with his life-success coaching and self-help books, infomercials, and seminars. The motivational speaker has had a huge impact on everyone from world-renowned politicians to corporate leaders, and his stated goal is to help people transform the quality of their lives. When it comes to recommending certain financial products, though, Robbins' advice has some financial experts raising their eyebrows, especially given the warnings from regulators that those products have received.

Looking for a guarantee

In his book Money: Master the Game , Robbins goes through several steps he sees as essential to reaching financial freedom. The key to his process involves creating income for life, and one of the products that Robbins talks about is the indexed annuity. As Robbins describes the setup of the typical indexed annuity, "These structures offer upside without the downside. Gains with no losses." He also notes that the insurance companies that sell indexed annuities also provide access to guaranteed income riders, which will allow you to set up streams of income later in life.

Source: Flickr user Simon Cunningham.

The financial structure of a typical indexed annuity is relatively simple. In order to guarantee no loss of principal, an insurance company can invest in bonds that will pay out a certain amount at the annuity's maturity. With the rest, the insurer can buy stock options to participate in a portion of a stock market index's upside.

Obviously, the chance to earn strong returns from stock-linked investments while avoiding any possible risk to principal is extremely appealing. Indeed, according to figures from the Indexed Annuity Leadership Council, fixed indexed annuities have attracted about $400 billion from customers in the 20 years since they were first offered, and annuity providers see them as a potential replacement for the disappearance of employer-sponsored pension plans.

Why indexed annuities sometimes fall short

Unfortunately, the reality of how indexed annuities actually work often leaves them missing the mark in terms of being a perfect investment solution for many people. Many indexed annuities have to put caps on the maximum amount you can earn in any given year, leaving annuity holders badly lagging market returns in strong years like 2013's 32% gains for the S&P 500 . Others limit returns by paying only a percentage of the market's overall gains. Annual expenses can eat into returns, and the expenses involved with guaranteed income riders add even more cost to the equation. In addition, surrender charges of as much as 20% can apply with some annuities if you pull money out within a 10-year period of buying the annuity. Granted, not all insurance providers have these draconian provisions in their indexed annuities, but it can be hard for ordinary investors even to find out about potential negatives from the voluminous paperwork that accompanies sales pitches.

Source: FINRA.

Indeed, Wall Street's own self-regulatory agency has put out an investor alert [opens PDF] about indexed annuities. The Financial Industry Regulatory Authority refers to the annuities as "a complex choice," citing factors like hefty surrender charges that can actually lead to your losing money on your investment. Moreover, the complicated ways in which insurance companies determine market returns can leave you with less money than you would expect -- and in some cases far less than you would have gotten simply from an index fund. For instance, many indexed annuities exclude dividends, while others use methods for calculating returns over certain periods that can leave you earning less than you otherwise would.

To be fair, Robbins has responded well to some of the criticism. After having talked in his book of his plans to partner with advisory firm Stronghold Financial, Robbins chose not to do so after some argued about the potential for conflicts of interest. Moreover, his core message of increasing transparency is completely aligned with the best interests of investors everywhere. Unfortunately, indexed annuities are far from the most transparent of financial products, and you therefore need to look at clearer, less costly alternatives in order to get the best results.

Tony Robbins has unquestionably made the lives of millions of people better. But some of his financial advice leaves something to be desired. By taking control of your own money rather than paying sometimes exorbitant fees to insurance companies for costly guarantees, you'll put yourself in a much better position to achieve the financial freedom you want.

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