Kim, Dylan and I will be on vacation until late May, traveling in our boat, Perfect Partner, to Georgia’s Golden Isles, the longer Bahamas trip this year being nixed by the responsibilities of our growing business.  So for vacation filler I dredged up these true stories from the book fragment “Got Annuities?” (You can read the entire book fragment elsewhere on this blog). Sad but sometimes amusing and enormously insightful, I hope you find them worthwhile.

True Horrors:  Annuity stories you won‘t believe

            The following stories are based on actual situations, and shared by people we have met in our professional practice.  Their names, and non-material details, have been changed, so as to protect their identity.  In short, the stories have been fictionalized to save those affected farther embarrassment.
            The essential facts dealing with product representations and sales practices have been faithfully recorded.
            These tales will amaze, amuse, and incite you.  They may also inspire you to take action.

            Most importantly, they will help you to realize that you are not alone, if you feel that you may have been subject to less-than-forthcoming annuities sales tactics. From the incredibly high frequency with which we encounter stories like these, we can only infer that this kind of monkey business is nearly epidemic where these products are concerned.

            Some are truly beyond belief.  And we see things like this every day.

The Politician’s Wife

Judy came to one of our “Got Annuities?” workshops in Jacksonville, driving over two hours to get to the first scheduled session, even though one much closer would be held a day later.  But she was nearly frantic, and could hardly wait.

She was also simmering mad.

Judy came up to me after the workshop, wanting to learn if she could do anything about the annuity she never wanted, but had unwittingly purchased for something like a half-million dollars.  It seems that she had agreed to invest with a representative of the stock-brokerage arm of a major life insurance company, and had only learned that a variable annuity was the vehicle when the contract arrived in the mail some weeks after she agreed to the transaction.  She claimed that the broker had referred to the investment merely as “the product,” and had never told her that it was an annuity.

Later on, she came in with her husband, a prominent political figure in a small Florida city, who is also a practicing attorney. They are both intelligent people, with substantial net worth. He reiterated her contention that they were never told that their investment would be in an annuity during the sales process, which spanned many months.  They also said that they had never received a prospectus, and one was not to be found in their file on the product, even though Judy’s husband claimed she was a meticulous record-keeper.

Apparently they had received a large lump sum from the sale of real estate, and put the cash in a money market account with the broker, who was referred by a family member.  They did not invest it right away, they said, because the “product was not ready,” according to the broker.  This is difficult to fathom, since hundreds of investment vehicles – myriad variable annuity products among them – were certainly available at the time they wrote their check.  We can only surmise that this new annuity product had some special commission, contest value, or other allure for the broker, which is why he waited, and kept them out of the intended securities exposure for an inexcusable time.

In answer to specific questions by the lawyer and his wife, the broker said that he would make “next to nothing,” when in reality the commission was something on the order of $40,000.

Moreover, the couple was concerned about fees and charges should they choose to access their money, and specifically asked about them.  They were told that there would be no charges or penalties if they chose to withdraw the entire amount at a specified date that was important to them.  In actuality, the surrender charge on their target date was about $50,000, according to the contract.

Before coming in, Judy had read this in the policy she got in the mail, and called the broker about it. He told her that she had misunderstood the document, and that there would, in fact, be no charges, so she should not worry, and send in the policy delivery receipt.

As it turned out, the broker’s answer was entirely factual, but completely unrelated to the question they had asked!  Unfortunately, the answer – dealing with excise taxes – had nothing to do with the question the couple had asked, and amounted to unconscionable omission, if not outright misrepresentation.  Whether this was due to ignorance or deceit, of course, does not matter.

They had also asked, they said, about other fees and charges for the investment, and were told that they were so nominal as to be insignificant.  Of course, the insurance and mutual funds charges were on the order of several percent per year, or over $15,000 annually for these folks.

Both the politician and his wife were quite angry when they learned of the magnitude of the “miscommunication” to which they had been subjected, and asked me to help them to file a formal complaint, requesting the return of their money.

 
  The Widow and the Credit Union
                        Martha            ‘s husband died unexpectedly in his forties, and had left her a couple of hundred thousand, mostly by way of a life insurance policy.  She was rather unsophisticated in money matters, but knew she would have to watch her pennies in order to make in through retirement, since the modest pension she could expect at the end of her working days delivering packages for an overnight service would barely keep her above the poverty line.  Martha had been referred to us by a friend, who was concerned that something was dismally amiss in her investment planning.

            Like many in her situation, Martha turned to the good people in her credit union for help when her husband died, the place where she had banked for years, and the only place she thought to go when it came to financial matters.  The registered rep (translation:  securities salesperson) with whom she dealt was kindly, and she believed that his advice was simply part of the credit union’s overall service to its members. She was shocked when she learned that he was a product salesperson earning commissions.

            Soon after she deposited the proceeds from her husband’s insurance policy, he began to approach her, telling her that she “had to do something” with “all that money.” Although initially advised – by him – to  “wait at least six months” for her grief to clear, he would prospect her on nearly every visit, and in short order convinced her to buy a bunch of products. They turned out to be back-end-loaded mutual funds, and a variable annuity. The new account application contained misinformation, painting her as having more liquid funds than she did, and so giving her a higher apparent risk tolerance than she had.

            Martha became concerned when her account values began to plunge in a market correction, exacerbated by fund recommendations that tended to not control risk as well as might otherwise have been the case.  When she called the credit union’s branch manager, she was directed to the registered rep himself, who told her, essentially, to ignore fluctuations in value, that investing was “like baking a cake,” and admonishing her for peeking into the oven too often. This bit about baking a cake really galled her.

            Finally, Martha could take no more, and demanded, on several occasions, that her investments be liquidated, and the funds sent to her.  Such an order requires oral instruction only.  Yet the rep delayed, and finally sent her a letter for her to sign, in which she would admit to all responsibility for investment losses and surrender charges, as a condition for liquidating her account. She says this is the first time she was aware of any surrender charges. She balked, and came to me.

            When I first took data on Martha, it was clear that she really had no idea that she had purchased commissionable products, and truly believed that this “financial planning” was a free service of the credit union.  But what really struck me was her “guaranteed” product:  she had put $30,000 in a vehicle which she swore was invested in the stock market, but could never go below her initial investment. Of course, it smelled like a variable annuity, and of course, she would have to die to collect on the guarantee. When I suggested this might be the case, she said “Oh, no, it is guaranteed. My kids are OK. That money’s for me.”  Even when the statements showed a drop in value, and she got doubletalk when calling the rep on it, she believed in the “guarantee.”

            Like so many others, she was amazed and angry to learn that she owned an annuity contract with a life insurance – only! – guarantee.

            Although the account was small and she could never afford to pay me for my time, I was so incensed at the abuse of this unsuspecting widow, and agreed to some pro bono work. 

            Calls to the branch met with a very friendly stone wall. I was referred to the rep’s supervisor – legally charged with overseeing sales activity to make sure it was legal and proper – who worked out of another city and did not return any of my calls. Several hours and many threats later, I reached a compliance staff person at the insurance company’s home office, who tried to refer me back to the rep’s elusive supervisor, but finally agreed to contact Martha.

            She eventually did, and basically told Martha that all of this was her fault, that she signed all the paperwork, and should have known better if this was not what she wanted to do.  She was even kind enough to put all of this in writing, and mail it to Martha.

            Martha has also filed a formal complaint, but will probably have to go to arbitration to have any hope of being made whole.

The Rouge Broker and the Written Guarantee

            This is one of the most incredible stories I’ve ever come across since entering the financial world as a young stockbroker in the early 1980’s. I’d thought I’d heard everything, but this one just blew me away.

            Don had inherited several hundred thousand dollars from his father’s estate, and sought the advice of a local broker from a major firm, who convinced him to buy a variable annuity, describing the product in glowing terms, and promising both the chance for stock-market gains, as well as a rock-solid guarantee of minimum interest every year. A trusting but meticulous man, Don faithfully took notes on the glory of this product, and returned a day or so later with a very specific document which recorded his understanding of the investment’s characteristics and guarantees. The letter included the ways he was told he could profit, along with a schedule of the minimum guaranteed values for each year in the future that he could expect, if the markets did not cooperate and all he got was the guaranteed interest.

I even have a copy of the letter, and it says, in part, “that annually the account is guaranteed to increase by either 5% or, if the net increase of the portfolio (high water mark) is higher, than that amount will be the new guaranteed increase.”  Later in the letter, Don says, “if this is not correct, please correct any misunderstanding.”

Of course, if true, such a guarantee would be a wonder of the financial world and a great thing to have.  Unfortunately such a thing is not possible, and is, in fact, a contradiction in terms.

But this is how the broker sold it, and this is the understanding that induced Don to buy.  Moreover, Don wrote all this stuff down to make sure he got it right, and brought it to the broker.

The broker agreed that the information in the letter was right.

Don asked him to sign off on the letter.

The broker said he would have to show it to his branch manager first before he could sign it, and went away.

On returning, he said the manager agreed that it was correct, and the broker signed the letter of guarantee.

Such a guarantee is of course illegal as all get out.  As unbelievable as the foregoing has been, what comes next will truly chill you.

The broker was terminated shortly thereafter, for unknown reasons.

Naturally, instead of the guaranteed increases, the value of the account plunged soon after purchase, on the order of 40%!

Don, of course, seeing values plummet on his statements, inquired as to the guarantee.

The new branch manager said that the broker “should not have done that” and passed the case on to headquarters.  Remember that we are talking about a huge, very major brokerage firm here.

Don got no response.

He complained to the SEC.

Nothing.

He had a lawyer buddy write a letter to the firm.

It went unanswered.

Don wrote a letter himself to the firm.

This was finally answered by a lady in New York who referenced the guarantee letter and said that clearly the broker’s “intention” could not have been to guarantee anything, since such a thing was impossible. She went on to wish Don a nice day and the best with his investment.

Remember that Don was in procession of a signed, written guarantee, with very specific English!  “Intention” played no part!  The broker was the agent of the firm, and had the apparent authority – bolstered by the manager “check” – to issue such a guarantee, to which the firm as the agent’s principal would be bound.

Despite all this, the brokerage firm behaved as if all of this never occurred, and clearly was hoping to stonewall Don until he just gave up and went away.

In desperation, Don saw our ad for a “Got Annuities?’ workshop, and came in.  I called the lady in New York repeatedly with Don, and she constantly refused to take the calls. We have helped him draft a more effective letter of complaint, and we are confident that he will get all his money back, with specified interest.

His case is still pending.

 
The PVC Tycoon

Harry’s in his early 70’s and still runs several companies, the most profitable of which cranks out plastic in Georgia like you would not believe.  Phyllis is his wife. They’re worth millions – mostly due to Harry’s grit and sweat – most of it tied up in real estate and businesses.  Since only a small portion of their substantial wealth was liquid, Harry and Phyllis were quite concerned about Harry’s ability to finally retire and enjoy the time they had left.

This couple came to a workshop after watching the value of their products at a major brokerage house nosedive nearly 35% in less than a year.  As it turned out, they had been with the same outfit for something like twenty years, and were barely break-even after all that time, when they should have doubled their money many, many times in that period, given what the markets had done in the 80’s and 90’s.

Of course, when they came in after the seminar and laid their portfolio on our conference table, we found it full of those high-commission annuities, even though it had been built at a stockbrokerage firm.  The largest part of the portfolio was in a very expensive variable annuity, which had dropped something like $100K to $150K in the short time that they owned it.  Once again, they did not know that they owned an annuity, or just precisely what they owned, only that whatever it was had a guaranteed return of principal in I’ll say eight years.

As is often the case, losses were exacerbated by very poor choices of fund accounts, resulting in a concentrated portfolio exposing the owner to far more risk than anyone involved – salesperson or buyer – ever realizes until it’s too late.

The hidden fees (which Harry and Phyllis said they knew nothing about) in this jewel went something like this:  1.25% mortality charge (fortunately, they wound up with the cheapest life insurance option), up to 1.3% for the most expensive available  “sub account,” and a whopping 1.5% for the 8 year “guarantee.”  Total charges ran to something like 4%, and, had the broker checked the box for the most expensive life option, could have approached 5% per year! The surrender charge was $40,000.  This annuity was issued by a huge name insurance company.

            The rest of their portfolio was comprised of other very expensive product, but none so breathtaking as the crown jewel described above.

            The broker who sold Harry and Phyllis this load of stuff was described by them as a “very nice man.”

Stunned after the results of this analysis, Harry and Phyllis went into denial, hoping, I suppose, that things would magically recover and they would be able to retire into the sunset.  Less painful to put the papers back into the box under the bed, than to confront the carnage of their financial life.

 
The Nice Man from the Library

This a story we drew from for one of the very first chapters.

Fred and Ethyl – both in their late 60’s – went to a seminar at the local library, and would up getting hard-pitched on a super-high commission annuity from a young fellow they described as a “very nice man,” whom we’ll call Ralph.

Ralph had some letters after his name (though when I investigated one of these “designations” I found the coursework to consist mostly of life insurance and annuities sales and marketing techniques), and advertised his seminars in the local paper. After 9-11, his ads took on a distinctly patriotic flair, swathed in flags, and touting annuities as being “patriotic” for patriotic seniors, and stating that they were somehow backed by the U.S. government (this is specifically prohibited by Florida statute).

But the ad looked good to Fred and Ethyl, and they went to the seminar, where they completed the coloring-book-level workbook to help them focus on their goals. One of the pages showed a couple and their goals surrounded by cartoon alligators, and Ralph referred to the ”mutual fund alligators,” among others.

Ralph also claimed to have written a book, and gave a copy to Fred and Ethyl. The book turned out to be mostly ghostwritten, and published by a company that was paid by life insurance agents to customize such books for them.  The agent would get his or her name and picture on the book, and got to write or be interviewed for some custom material which made up a very small part of the book. 

Fred and Ethyl were pretty impressed by the book.

It seems that Fred had inherited a pretty good chunk from his Aunt, and was wondering what to do with it.  This was the first real money that the couple had seen; before the inheritance, they had a small bank balance and got by on Social Security.

Ralph, true to form, suggested that they take the entire inheritance and invest it in his “conservative” equity index annuity.

This is the one, you’ll remember, with the 15-year surrender charge schedule – 25% for the first five years – and the only 70%-of-principal guarantee. The effective surrender charge was damned-near 50% the first year.  The surrender charges – still over 12% in the tenth year – would not be completely gone until the couple were in their early 80’s. And while the product was touted as offering a opportunity to participate in the performance of the stock market, the actual contract could allow the insurance company to pay as little as 6% per year, no matter how high the market went.

After these folks called me to their house, I sat at their table and read the fine print to them.  As usual, they had heard only the syrup from Ralph’s tongue, and saw only the big pictures of the happy elderly couples on the brochure.

Ralph called them, yet again, while I was there.  Fred wondered why he was so anxious, and I jested that he had probably already bought the car.

I did not know until the next morning just how high the commission would be:  17%, or $51,000 on this sale.

Fortunately, Fred and Ethyl got lucky and narrowly eluded the shiny, powerful trap.  They wound up keeping their money where it was.  Sadly, too, too many do not.

This is the story that really inspired our series of “Got Annuities?” workshops, and, ultimately, this book.

 
The Plumber’s Helper and Her Last $10,000

Marcie is divorced and the 38-year-old mother of one.  She really has to scrap to get by on the $15,000 or so she makes a year carrying plumbing supplies and gluing plastic pipe. Like so many these days, she wandered into the bank looking for investment advice when she got her meager divorce settlement – the $10K – that represented every nickel she had, if you don’t count next week’s paycheck.

Instead of putting it in a savings account where it belonged, the bank rep took the far more profitable route of selling Marcie a variable annuity, which promptly plunged in value.

After surrender charges, Marcie lost nearly half her money.

At least this 38-year-old avoided – because of the loss when she surrendered – the 10% tax penalty that would have applied for 21 years until Marcie broke 59 ½ on the product the bank rep so carefully chose for her.

 
The Teacher and the Worthless STACK of Annuities

            Beatrice has been a client for many years, now.  Her husband Jack used to handle most of the finances, but since he died, Bea has dealt with me directly.

            Fortunately, Bea is quite well off.  Between Jack’s retirement plan and his life insurance proceeds, she will enjoy a very comfortable retirement, and be able to leave her three sons a very substantial inheritance.  All of this is prudently invested in no-load funds which my firm manages using Modern Portfolio Theory.

            So where’s the annuity story?  When Bea finally retired from teaching, she brought me information on a bunch of products she’d never told me about before.  Probably, she did not know herself what she had, had stuffed all the paper in a box, and only was motivated to have me untangle the rat’s nest by the seminal event of her retirement.

            For whatever reason, there we finally sat, with a pile of annuities contracts, annual statements, and spiffy brochures covering my conference table. One by one, I arranged the paper by product, putting the statements she had with the respective annuity policy.  After a few minutes, a chilling pattern began to emerge.

            Every policy was worthless.

            Each had been surrendered within a year or so of purchase, and the surrender proceeds transferred to another TSA policy.

            Although Bea was contributing money each year, values continued to plunge, as the surrender charges whacked down the value with every churn.

            Obviously, the agent profited from each switch, but Bea’s once-princely TSA balance had been whittled down to a mere $20K or so by the mid-90’s, fifteen years into this game.

            Then, the agent switched tactics:  he had Bea cash out the last annuity, and put the proceeds into a high-commission viatical product.  You remember those, where life insurance policies on the terminally ill were bundled and pawned off as investments?  Then better AIDS therapy came out, and viaticals died, instead of the AIDS patients who had sold their life insurance policies. 

            Like a good knight, the agent got Bea out of the viatical with only a modest 25% loss, and had her plunk the shriveled remains into what turned out to be an illegal, unregistered bond issue, for a company which has since gone belly up.

            And there, at the end of my review of this virtual library of documents, lay on the table the worthless smudge-mark that represented decades of Bea’s toil and saving for retirement.  It reminded me of an old life insurance industry joke:  “The definition of estate planning?  Estate planning is the orderly conversion of estate assets into commission dollars.”  That’s exactly what happened here.

            The agent who stole all this, by the way, still has a current life insurance sales license, and continues to peddle product. Bea asked me to call him, but not go so far as to help her prepare a formal complaint or chase him to court; she’s just not the suing type. The agent – who had merely changed corporations, not stripes – basically told me to sue him if I did not like what he had done.  He brazenly even gave me his lawyer’s name and number!  When I asked if he’d be willing to disgorge the commissions he had “earned” on the bad product he’s sold Bea, he refused, pleading his own problems.

            I really wish that Bea had pursued this, if only to protect the hundreds of thousands of others this parasite may yet bilk.  At least she did not wind up needing the money she’s saved for retirement.  But I wonder how many other teachers are cheerfully welcoming shoppers to Wal-Mart in their old age, because of him, and others like him?

 
George and the 3% “Misunderstanding”

            George has been a client for a while, recently retired, and has plenty of money to get through retirement, though he worries about it all the time.  It turned out that George had purchased a small (for him) index annuity before coming to us, which he thought he had a pretty good handle on until he came to one of our “Got Annuities?” workshops.

            When George got home, he started digging.  When he had been sold the annuity, the agent told him that he was guaranteed to get his share of the market return, or 3%, whichever was greater, each year.

            Thumbing through his statements, he was shocked to find that his annuity showed no gain whatsoever for the prior contract year.

            Puzzled, George call the insurance company, who merrily explained to him that that guaranteed increase was cumulative, not annual.  Which is to say that since George’s share of the market gain the first year (1999, the last booming bull year before the bear market beginning in 2000) was something like fifteen percent, he already had received something like five years of guaranteed return before the insurance company was on the hook again.  And wasn’t it an amazing product?  Wouldn’t he like to buy more?

            Now George is a shrewd man, and had made his fortune in the financial arena. He understands the difference between cumulative and annual.  And what the salesman sold him was not what the contract delivered.

            Thankfully, the amount in this annuity is small change to George, and he’ll just wait it out, and chalk if up to experience.  At least he has good reason to say no when the agent calls looking for fresh commissions, as he does monthly.  George sure is lucky, he says, that he didn’t trust this “rascal” with more of his money.

            On learning all this, George promptly called me to pass it on, so I could pass it on to you.

 
He’ll be 99 When He’s Free

            An engaging 84-year-old, Bill showed up a lunch workshop just after Thanksgiving, and had brought all his paperwork with him. Like so many others, Bill had sensed that “something just wasn’t right” with his investments, and just on the opportunity for professional help when he saw a “Got Annuities?” workshop ad.

            It turned out that Bill and his wife, Amy, had just purchased a new index annuity for 150K, almost all of their money. With a 15-year surrender period, Bill will be 99 before he gets out of the penalty box.  But the product has strong guarantees, the salesman said:  in fact, Bill and Amy are guaranteed to break even in ten years, when Bill’s 94.  If they needed the money now – like to pay for an operation for Amy – the surrender charge is something like $30,000. Worse still, the agent involved had convinced them to surrender an essentially identical index annuity to buy this one, incurring something like $40,000 in surrender charges on that one!

            But here’s the real kicker:  Amy’s four years younger, and has a statistically much longer life expectancy than Bill, being younger and a woman to boot. In recognition of this, the agent said, they should make Amy the annuitant, which is what they did.  Of course, what this really means is that if Amy dies first, the surrender charges are forgiven, but if Bill dies first – which is clearly the way to bet – Amy is still stuck with the sky-high charges!

            Why would the agent set things up so that what the customers wanted to avoid – and the agent pointed out – would actually happen?

            Can you guess?

            Hint:  a one-word answer, beginning with “c.”

            That’s right, commissions! Try singing it to the tune of Fiddler on the Roof’s “Tradition.”  Commissions, commissions! Commissions!

            Sorry.  It is likely that the agent made Amy the annuitant either because 1) the insurance company reduces commissions after a certain age for the annuitant, or 2) the insurance company will not issue the product for annuitants past a certain age, and Bill was too old to serve as the annuitant.

            The reason for this is simple:  all annuities, being annuities/life insurance contracts, are designed to annuitize or pay death benefits at some point in the future. That’s what makes them annuities.  The older the annuitant is, the shorter the time before this inevitable event.  The shorter the company can expect to keep the money, the less they will pay in commissions to get it.

            So Bill and Amy got exactly what they did not want, and what the agent said he would help them avoid, just so the agent could get paid an estimated $23,000 off the dwindling nest egg of these sweet old folks.

            There are obviously a number of potential violations involving this sale – inappropriate, poorly explained, twisting/churning, material misstatements regarding annuitant selection – and data is still coming in on this case.

            But Bill and Amy are likely to complain, and stand, I think, a good chance of getting their money back, plus the surrender charges on the product they were twisted out of.

 
Johnny and the Annuity He Didn’t Have

            This one’s not really an annuity story, but probably sets the stage for a new book, “Got Life Insurance?”  “Got Whole Life?” or something like that.

            Johnny is a professional in his mid-40’s who does quite well.  He came to a workshop to better understand the annuities he thought he had.

            When we sat down and read his contracts, it turned out to be far worse than he had feared.  What he really had was Variable Universal Life insurance (“VUL”), a cash value life insurance product that allows one to risk cash value by investing in mutual fund-style sub accounts (which, like their annuities counterparts, tend to be on the hard-to-get-disclosure but very expensive side).  Not that variable life does not have it’s place – like the last-to-die kind for estate tax planning in insurance trusts for the elderly wealthy who care – but John was definitely not it.  He had been paying something like $3,000 a month – $36K a year – into what the agent told him was a “term life/annuity combination.”  The reality is that he had VUL with zero cash value (because of exorbitant charges and commissions, and poor fund selection/performance) after over $100K in premiums!  Just to clue you in, commissions to the field on this sort of product generally run something like 100% of the first year’s premium – maybe $36,000 in this case – which goes a long way towards explaining why cash values in pure life insurance products take so long to develop. Worse still, instead of getting the amount of insurance he needed to protect his family by buying maybe a million of cheap term for hundreds a year, he was spending thousands a month and underinsured. And the major cash flow of $3,000 per month that should-a, could-a been invested for Johnny’s-and-wife’s financial security and retirement, to say nothing of the kid’s college funding needs, was dancing at the edge of the life insurance bonfire, instead.

            We suggested that Johnny apply for an appropriate amount of cheap term insurance, and dump his expensive VUL if approved at reasonable rates for the term. The freed cash flow should then be directed at the family’s real goals. We offered to help the couple prepare a complaint if they wanted and the facts warranted; they declined – as many do, for some reason taking responsibility for being hoodwinked in areas they know nothing about and rely on those holding themselves out to be experts.  

The agent probably still has whatever the $36,000 commission bought him, but Johnny and Mary would just rather forget the whole thing.