Q. A widow friend of mine knows very little about investing, and when she retired last year she sought my advice. I advised and helped her roll her 401(k) to an IRA with one of the most well-known no-load mutual fund families and directed her to buy a diversified portfolio of low-cost mutual funds.
Unfortunately, she went to one of those free financial dinner seminars a few months ago, and now we think she has made a big mistake. She went to learn about Social Security in the seminar but then was offered a free one-on-one consultation, to which she agreed. It turned out to be three advisers and her at their office.
They asked her to bring all of her financial information, including her latest statements from any investment accounts, which she brought. The three advisers told her that her current IRA was not guaranteed or managed by anyone and that she would be much better off with a managed investment vehicle with guarantees.
She was told that there were no fees involved, because the company compensated the advisers. She signed a bunch of paperwork, but no copies were left with her. She was reluctant to tell me what she did, and now I’m afraid it is too late. She finally told me what she had done and asked me to review the paperwork she received last month which included a very lengthy prospectus.
It appears that the advisers talked her into buying an annuity with her retirement account. It looks like a variable or equity-linked annuity and her “free look” period allowing her to cancel is over. She’s 66 and this thing has a 12-year surrender charge, she could lose 12 percent of her value if she gets out of this now and the charges don’t really decrease much until after she has owned it for six years.
From what I can tell, the internal expenses are pretty high, and the guarantees have all sorts of caveats linked to them. If she takes any money out the guarantees change, and it looks like the guarantees aren’t really worth much unless she converts the investment to a future income stream.
Do you know of any way she could get out of this without paying the steep penalty? Shouldn’t she have been provided a prospectus when she signed the paperwork?
A. It’s too bad your friend didn’t take you with her to the seminar and/or the follow-up free consultation. It’s nice to have some support and a second set of ears in any meeting when discussing important issues of which you are not totally knowledgeable.
A three-on-one meeting would be intimidating for even the most knowledgeable investor. I’m sure your friend felt somewhat confused and pressured during her expensive free consultation. It seems as though a bait-and-switch technique was used on your friend and other seminar attendees. Did your friend learn anything useful about Social Security in the seminar or was this just a way to get in front of attendees to sell annuities?
Speaking of intimidating, the prospectus for most of the annuities I’ve analyzed are over 250 pages long; what average consumer would read one?
Since there is a free look period for annuities, the prospectus is usually delivered with the contract. If you demand one either before or when you sign the paperwork you should be able to receive one. I recommend this because it will give you more time to review the large document or hire someone to do so for you. You may be provided with a disc or a Web link, but at least you or an adviser can begin reviewing it before the free look period clock starts running.
There are attorneys who specialize in annuity fraud. You and your friend may want to contact one and see whether you are within the time frame and, if so, whether they think you have a case against the agents who sold the annuity.
You may also want to contact the Securities Department in your state. A recent case in Arkansas that was well-publicized in the financial planning community may be of interest to you and your friend; follow this link: http://swtimes.com/news/two-insurance-agents-fined-following-fort-smith-seminar.
Perhaps the agents your friend dealt with went to the same training seminar in Las Vegas the insurance company issuing the annuity involved in the above consent order sponsored.
Annuities are appropriate for some people in some circumstances, but in those instances there are low-load and flat-fee annuities.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624