Have you heard the tale of a three-legged chicken? It serves as an apt metaphor for the "too good to be true" products marketed to unsuspecting investors. Recently, a client of mine was reminded of this tale when dealing with a complex Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity. Sold by a "friend" years ago, this annuity promised guaranteed income and stock market growth. Unfortunately, it turned out to be more of a cautionary tale than a golden goose.

Years later, the underlying investment value hadn't grown significantly. My client had been paying high annual fees—over 2%—which steadily eroded returns. When he wanted to move the account, he faced hefty surrender penalties, as high as 7%. Thankfully, we found a solution that helped him preserve his investment, but it underscored the dangers of chasing unrealistic guarantees.

For anyone considering "guaranteed" products, let me share a story about a chicken...

Three-Legged Chickens and Investment Chasing

The story goes that an Aggie laboratory developed a three-legged chicken to maximize drumstick yield. After a successful trial, the chickens were introduced to executives from a major fast-food restaurant eager to try this innovation. But there was one problem: the extra-legged chickens were so fast, no one could catch them.

The lesson here? Many investors spend their time chasing their own three-legged chickens—the elusive combination of high returns, predictability, and liquidity. Like those fast chickens, these three traits rarely come together in a single product.

In financial products like variable annuities, this metaphor holds remarkably well. Many annuity providers promote high returns, guaranteed income, and liquidity as if they can deliver all three without trade-offs. But as any experienced investor knows, high returns typically come with high volatility; predictability often means lower returns; and liquidity can limit growth potential. In short, “guaranteed” products often overpromise and underdeliver, especially when factoring in high fees and complex terms.

Why "Too Good to Be True" Often Is

My client’s experience with the GMWB variable annuity was a textbook case. Enticed by the allure of guaranteed minimum growth alongside market potential, he soon found that reality didn’t measure up. Variable annuities, particularly those with GMWB riders, sound appealing because they seem to offer both safety nets and potential gains. But here’s the catch: these products come with layers of fees—mortality fees, administrative fees, and investment fees—that chip away at returns. After years of underperformance, high fees, and penalties, many investors feel trapped.

In our case, we found a way for the insurance company to send my client a check each year, which he then deposited back into his IRA, allowing it to continue growing tax-deferred. This workaround mitigated some of the damage, though it’s not a solution available to everyone.

The Three Legs Investors Chase

So, what exactly are the three "legs" that investors chase?

High Returns: Often the reward for tolerating higher volatility. However, few products deliver this without substantial risk.
Predictability: Predictable returns typically mean lower potential gains. The more stable the investment, the less likely it is to grow substantially.
Liquidity: Many investments promising guaranteed income, like annuities, restrict access to funds through surrender penalties or lock-in periods, limiting liquidity.

When a product like a variable annuity promises all three, it’s wise to pause. Achieving all three goals simultaneously is nearly impossible, and variable annuity products often obscure the true trade-offs involved.

Annuities and the Three-Legged Marketing Myth

Variable annuities have become some of the biggest offenders in the financial product landscape, marketing themselves as the ultimate "three-legged chicken." They promise high returns through market-linked investments, guaranteed future income, and sometimes even withdrawal flexibility. But in reality, the costs of these features outweigh the benefits for many investors. With high fees, lackluster returns, and strict restrictions, annuities often fall short, especially in retirement accounts where other strategies could yield better results at a lower cost.

Questions for the Annuity Salesperson

If you’re ever faced with a sales pitch for a "guaranteed" product, keep these questions in mind to cut through the hype:

What are the mortality fees, and what do they cover?
What are the underlying expense ratios of the investment options?
How much more do I need to earn in the annuity just to break even with a similar taxable investment?
If the product guarantees a future amount or payment, what is the Return on Investment (ROI) of that benefit?
What are the surrender penalties if I need to withdraw funds?
How will I be taxed when I make withdrawals?
How will my heirs be taxed if they inherit the proceeds?
Are you paid more to sell this product versus other solutions?

These questions help uncover hidden costs and limitations. Most investors find that the “guarantees” don’t make up for the fees and restrictions.

A Better Approach: Choosing Simplicity Over Hype

Rather than chasing the elusive three-legged chicken, a more straightforward approach involves selecting investments based on their actual characteristics and holding them in a diversified portfolio. Here’s a brief guide to core investment types:

Stocks offer potential for high returns, though they’re unpredictable in the short term.
Bonds provide predictability with generally lower returns.
Alternatives, like hedge funds and private equity, can yield high returns but lack liquidity.
Cash is the most liquid and predictable, but returns are typically low and may not keep up with inflation.

A diversified portfolio balanced among these asset types can’t guarantee gains or eliminate losses, but it provides a pragmatic approach for long-term growth. Aligning investments with your risk tolerance and financial goals is ultimately more effective than chasing a financial “guarantee” that comes with hidden costs.

Conclusion: Avoid Chasing Three-Legged Chickens

In investing, as in the barnyard, chasing the "three-legged chicken" is a fool's errand. When products claim to provide high returns, predictability, and liquidity all in one, approach with caution. By focusing on clear, realistic investments aligned with your goals and risk tolerance, you can build a strong portfolio without falling for myths about too-good-to-be-true financial products.

If you’re considering a new investment product that seems to promise everything, remember the tale of the three-legged chicken and feel free to reach out if you’d like a second opinion.