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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.

What Ameriprise did to Gene

While I agree with the concern Ameriprise had with Gene paying the surrender to buy another annuity, why did it sell him an annuity in the first place? To be sure, these products are frequently sold to people of all ages, but that doesn't make them good investments, and in my opinion the surrender charges make them even less appropriate for people in, or near, retirement. In fact, Ameriprise had also sold him another annuity, as well as private real estate investment trusts (REITs). Though these private REITs aren't liquid, they pay some of the best commissions in the business. First, I spoke to the Ameriprise advisor and asked why he would sell high-commission and illiquid products to a 76-year-old man? The advisor said that the relationship was deteriorating and Gene "had the potential for dementia and other issues." Gene's son said his dad has no signs of dementia, and, while I'm not an expert, I didn't see any either. That said, if an agent suspected a client suffered from dementia, that condition would certainly make it easier to sell non-liquid, high-commission, complex products, which I think makes it even more wrong.

Though the advisor said that private REITs have been good investments, Ameriprise first declined to support this statement. After I pressed the issue, Ameriprise sent me this study claiming private REITs performed as well as public REITs. But the study only looked at those private REITs that had had a liquidity event such as going public or being acquired. Those would presumably be mainly the successful REITs. In actuality, Investment News magazine has reported that most private REITs issued over the past decade have declined in value and are worth far less than the price at which they were originally sold, and the Financial Industry Regulatory Authority has issued an investor alert on the securities..

The two private REITS sold to Gene show the dangers of the securities. The KBS Real Estate Investment Trust had an issue price of $10, but had fallen to $5.16 per share by Gene's March statement. Recent prices in the thinly traded secondary market (19 trades in 2 months) were between $2.00 and $3.50 per share with an average of $2.61 per share, according to Direct Investments Spectrum. The REIT no longer pays any dividend. The second REIT, the Behringer Harvard Opportunity REIT II, is newer and hasn't yet traded. The predecessor fund, the Bheringer Harvard Opportunity REIT I, has suspended dividends and trades for about $1.21 per share, down from the $10 original price. Meanwhile, Morningstar shows the Vanguard REIT Index fund (VGSLX) of public REITs is up 88 percent over three years and 195 percent over 10 years, as of September 10, 2012. They don't pay commissions, however.

An Ameriprise spokesman declined to say much more, explaining that the company would require a release from its client. As I did with Fidelity & Guaranty, I let Ameriprise know Gene would be willing to provide this release, but the spokesman still declined. Ameriprise was willing, however, to go on record stating that it stands behind its advisor and that Gene was treated appropriately, observing that Gene had some additional liquid assets outside Ameriprise.

My take

Investing can be quite complex and, as people age, they become more vulnerable to predators. "For seniors, it is the financial equivalent of the Wild West," says Harvard economics professor David Laibson. I personally find it deeply disturbing when seniors like Gene get ambushed, and it happens far too often.

Gene spent most of his life working to achieve the American dream. Fidelity & Guaranty's web site says "own your future," while Ameriprise runs a Tommy Lee Jones commercial asserting the company has "a steadfast commitment to putting clients first," and states "our advisors - your dreams." Words are easy. In this instance, however, I see both Fidelity & Guaranty and Ameriprise as willing to fight each other to see who can take the biggest share of Gene's dreams. Ameriprise won this fight, as Gene did not buy the new annuity. But it is Gene who should have been the winner as he is the one who worked so hard for those dreams.

Gene's son contacted me and will be working to protect the rest of Gene's dreams with some good old- fashioned and very transparent certificates of deposit. Unfortunately, my industry will find other seniors to exploit. Let this cautionary tale guide you so you, or your parents, won't become one of them. Stick to simple, transparent, and low-fee investments. You need the money more than Ameriprise, Fidelity & Guaranty, or any other investment firm claiming to put your interests first.

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