Two financial giants fight to profit from senior

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(MoneyWatch) COMMENTARY I see so much senior abuse in my practice that I'm almost numb to it, but this story made me downright angry. It's a story of two financial powerhouses, Ameriprise (AMP) and Fidelity & Guaranty Life, fighting over a senior's money and crying foul at each other when it looked like one would lose out to the other. That senior is Gene -- a 76 year-old man who came to the U.S. from China as a child and built the American Dream with his dad in the restaurant business. Together they ran a restaurant in Colorado Springs for a few decades. Gene loves to talk about his three children.

The free educational dinner

It's a storyline all too familiar to anyone who has followed the financial industry: Gene attended a "free educational dinner" and, eventually, the speaker, a woman claiming to be Gene's advocate, helped him complete the application for an equity indexed annuity with Fidelity & Guaranty Life Insurance Company, a $20 billion Baltimore-based financial firm (no connection to Fidelity Investments). Equity indexed annuities are complex contracts with an insurance company that offer a return tied to the stock market. They are often sold with the promise of stock market returns with no risk. In reality, they deliver little of the market return and lock up investors' money for years. If you want access to your money early, you get hit with surrender fees.

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Unfortunately, to buy the new annuity, Gene would have to cash in an existing $124,000 annuity he had bought from Ameriprise years ago, and pay a nearly $8,000 surrender charge to do so. Gene said the Fidelity & Guaranty agent was unconcerned about the surrender charge, as she said Fidelity & Guaranty was paying a bonus that would offset it. A key detail (which Gene said the agent left out) was the fact that the Ameriprise surrender penalty was in cash, while the Fidelity bonus is only in the form of a future promised payment stream at a rate set by the insurance company.

Now Ameriprise wasn't going to take the loss of business without a fight. Ameriprise gave Gene the telephone number to the Colorado Division of Securities. At about that time, a friend told me about Gene and I met with him. In my investigation, I was shocked to find out the Ameriprise surrender would have expired in less than four months. In other words, Gene would have been able to move the money to Fidelity & Guaranty without penalty by waiting a short time. Either the Fidelity agent didn't want to wait that long to make her sales commission or hadn't bothered to check to see when the surrender charge would expire. Neither possibility suggests she had Gene's best interest at heart.

As horrible as this seems, it's an all too common problem I see far more often than I'd like. Seniors are sold complex products with great promises by agents who convince them that they are acting as their advocates. In reality, I've found the agents generally don't understand the products yet sell them because they pay great commissions. I've written before about some of the tricks in equity indexed annuities.

Though the agent didn't return my call, I did follow up with Fidelity & Guaranty. A company spokesman objected to my calling the annuity illiquid, noting it was "100 percent liquid" under certain events, such as Gene going into a nursing home or being diagnosed with a terminal illness. I don't consider an investment to be 100 percent liquid unless you can turn it into cash immediately, for any reason, and without costs. When I asked why Fidelity wouldn't wait four months to let the $7,910 surrender expire, the spokesman responded by criticizing Ameriprise.

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[sandlere]

While we agree with Mr. Roth that fair and ethical sales practices are of the utmost importance, this article fails to provide the complete story on indexed annuities and inaccurately spotlights marketing practices and product features. Specifically:
• Strict suitability rules established by the NAIC ensure indexed annuities are sold fairly and ethically to consumers. These requirements were designed to mirror the Financial Industry Regulatory Authority (FINRA) suitability standards for investment products.
• There are a wide variety of indexed annuity features that are detailed when products are considered and purchased. This transparency gives individual investors' choice and control over their insurance products for retirement planning.
• A recent LIMRA study found that 98% of Indexed Annuity buyers had medium to high-level of understanding of the products after sale, which underscores that the majority of those selling the products are doing a good job of educating their clients.
• Annuities offer many liquidity features not available in investment products, including 10% of the annuity being available each year as free liquidity. Surrender charges, which limit liquidity to an extent, are clearly disclosed, decline over time, and provide a known cost of exit.
• If withdrawal is necessary, many indexed annuities waive surrender charges in the case of events such as nursing home confinement, terminal illness, and disability.
No one financial product can meet every individual's needs. That's why we believe a customized approach to retirement planning - one that harnesses the right combination of products - is necessary. This means evaluating the potential benefits of all products, including fixed indexed annuities, and not generically classifying the entire offering as unsuitable or inappropriate
For more facts on indexed annuities, visit indexedannuityinsights.org

[JerryNA100]

Mr. Roth has written quite a bit about indexed annuities or whatever is the name of the day for this product. They are unsuitable as a means of building wealth for the client, but that is the main sales pitch by your industry (because they are so lucrative for the seller). In short, having a high confidence in rotten garbage does not make it more palatable, or in fact edible. You may wish to limit your advertising to the less informed and more gullible.

[Allan_Roth]

"sold fairly" is about the opposite way I would describe indexed annuities. Not only have I never met a consumer who understood what they have bought, I've never yet met an agent who understood what they sold. They are complex and the agents are paid a lot of money and have every incentive not to understand.

Why not put in bold print on page one of the brochure that "S&P 500 index carves out dividends which have been the key source of returns and the word "average" essentially means you will get half of that index return without dividends.

[FeeOnlyTom]

Good stuff, Allan. I'm afraid that our leaders in Congress will never have the guts to pass strong laws that require all financial 'advisors' to put clients' interests first. We'll continue to read about stories like Gene's forever.

[Royal Group]

Not all together accurate with your depictions of the annuity products but, based upon your storyline, the recommendations are subject to scrutiny. Am curious, have not seen an annuity product with a 6% (or so) penalty in the final year of a contract? Also, was liquidity an issue with the customer or just the son? And, CDs?? .5% interest or so-falling behind inflation? Lastly, if you were to manage the monies-your fee?

[Allan_Roth]

I hadn't seen a cliff penalty either until this one. Liquidity was a big issue and illiquid products are usually expensive and underperforming. Why would you pick a 0.5% CD, though it would have far outperformed what was sold? I'm hourly and try to keep my one-time fee to well under one percent of assets.

Sounds like you sell this stuff.

[Royal Group]

Interesting