I am not sure if it is the full moon, the 0% interest rates, or the volatile market, but my friends and family have been subjected to a big increase in
annuity salesman attempting to steal their
money. Has anyone else notice a pick up in people pitching Equity Index Annuities (EIA), and their cousins Variable Annuities (VA)?
Last week I was visiting one of my best friends in California, last year I attempted but failed to wrest him from the evil clutches of his Amerprise
representative. I was pleasantly surprised to see that she actually put his inheritance money in a 50/50 AA of MFS family funds. Sure he paid a load but the ER of most of the funds is not outrageous 1-1.25% and M* rates them as 3 stars for the most part. I told him I doubt they will do better than Vanguard but they don't suck. Then he told me, she convinced his to put his late wife retirement into the god awful RiverSource Variable Annuity. Argh could someone explain why financial adviser are so keen on taking tax sheltered investments and sticking them into a tax sheltered annuity...
Then yesterday my mom called to say that her partner, had at the advice of a
"very nice young man from Edward Jones", 'bought an annuity. She said I know you don't like annuity, but the man explained that this is different type of annuity. A few minutes latter I realized that this 85 year old man was sold an EIA because it would provide with 10% a year income and still let him leave the original amount to his daughter his and son. After I stop screaming, I found out that this 'very nice young man,' had recommended my Mom's friend (who helps mom around the house and has very limited funds) invest in a variable annuity. I told mom don't let her buy one of these perhaps an SPIA is good but buy it from Vanguard.
Then yesterday I got an email from my older sister, they are looking to retire in 4 or 5 years. A few weeks ago she had talked to a
financial advisor who told her about EIAs. She said she didn't like this guy so I explained to her about why EIAs are awful investments.
In this email she explain that the new financial guy, "who seemed like a really nice guy and fact reminded her of me a lot'
" had a proposal that she want my advice on. She smartly scanned the proposal, and copy of the, you guessed it an EIA brochure. Here was his proposal
1. Rollover the 40 1k to an IRA. Keep the 40 1k open so you can still contribute and
receive matches, but roll the already matched balance to an individual IRA.
2. Split the IRA into 2 buckets:
a. One for Growth beyond retirement (to be used for later income
b. One for Income in 5 yrs to achieve the net $4,500/mo goal
3. Buy a Fixed Index Annuity with an 'income rider'. Use $507,343 to fund the
annuity. At the end of 5 years this will give you a guaranteed income stream of
$41,000 for life ... an 8.08% payout for BIL life on the original $507,343
within 5 years.
4. Take the remaining 401k balance and look at a long term 'growth' approach via a
managed money account that will not just invest 'long' (relying on the market to
go up), but can also make money when the market goes down. Utilize Core States
money managers for this. This can create a 2nd source of income in later years to
use as an inflation hedge and supplement to the annuity.
5. Look at converting the Term Life insurance to a permanent life insurance policy.
6. Purchase long term care. The premium is minimal compared to the benefit later if
used. This can save your estate from medical attrition.
Now it turns out that this
financial adviser is actually an insurance salesman who was pitching a product from American Equity Insurance (A BBB rated insurance company subject to class action lawsuits and SEC action). The product actually offers a 1% minimum return and an 8% cap but only if you are willing to pay a .45% rider which increases the ceiling from 5% to 8%.
The bottom line is they were convinced that by investing 500K now and leaving it untouched for 5 years that would have a 41K/year for life. I explained that entire forum was struggling on how to ensure that $1 million invested would give $41,000 much less half that amount.
The reason that I have called the financial advisers/annuity salesman vampire in this post is only partially because they suck money from their victims. I honestly think that selling Equity Index Annuities or VA must give you incrediable powers of persuasion like in Twilight
. None of these
people are stupid (3 out of 4 have master degrees) and none of them are mathaphobic. They aren't particular financially sophisticated but that are not idiots about money management either. EIA are exceedingly complicated products, so there is no simply way to explain them but I don't think the brochure was particularly misleading. Yet all three folks keyed into the stuff they wanted hear and either weren't told or didn't listened the bad parts of these annuities.
I know that I am not the only one frustrated by the very low interested rate environment, and yet am I less than excited about investing in equities. The lure of EIA is quite appealing. "you can't lose money if the markets go down and if the markets go up you 80% of 90% of the upside". The lure of EIA they way they pitched/heard by ordinary folks "you get 8 or 10% guaranteed" is irresistible. Help protect your friends and families fortunes, if they mention the word "financial advisor" tell them about EIAs before the advisers does.
FINRA - Investor Alert - Equity-Indexed Annuities—A Complex Choice
EIAs just say not interested.