USA TODAY International Edition
FIAs promise a lot, but return can be lower
Complicated annuities can deliver less than advertised to retirees
Each year, Americans pour billions of dollars into a curious financial product that, as it’s sometimes advertised, seems too good to be true.
Some companies tout returns of up to 50 percent over five years, with the claim that consumers won’t lose their original investment even if the stock market crashes.
The products, known as “fixed-indexed annuities,” or FIAs, function like life insurance in reverse: The purchaser sets aside a safe nest egg, accruing interest, and after a waiting period collects regular payments until death. It’s a pitch that appeals to retirees. Yet Anil Vazirani, a Scottsdale, Arizona, financial adviser who has taken an intense interest in FIAs, says the advertising often misleads consumers. And the contracts they sign are so full of jargon, caveats and options, they are impossible to fathom without legal training or a finance degree.
Vazirani acknowledges some annuities offer stable, guaranteed income and are sound investments.
However, he contends that over the past two decades companies have been marketing exotic hybrids using deceptive sales tactics that prey on older consumers.
Because FIAs are tied to stocks, Vazirani insists, they should be treated as securities, which cannot be sold by insurance agents. Instead, they should be sold only by licensed professionals obliged to act in the best interest of their clients.
There is another side to the story. Industry leaders insist FIAs can be smart investments for consumers who shop prudently.
Critics suggest Vazirani’s warnings ring hollow given consumer complaints filed against him in Arizona for allegedly unscrupulous annuity sales.
Fixed-indexed annuities
While many consumers have never heard of FIAs, this isn’t an esoteric debate: FIAs represent nearly a third of annuities purchased, according to some estimates.
Just the phrase “fixed-indexed annuity” sounds bewildering. So let’s break it down. ❚ Fixed: This means you cannot lose your original investment, or principal.
❚ Indexed: Profits on the investment are linked to a select group of securities known as an “index.” If the index rises, the annuity grows, increasing future payouts.
❚ Annuity: An insurance product that requires cash up front. That money is invested and, after an agreed-upon period, the purchaser receives regular payments.
FIAs often contain provisions allowing insurance companies to limit and reduce the profits that an annuity holder receives.
Consumers may also be charged for special provisions, known as riders, that increase their benefits. And, if they cash out early, there are stiff penalties.
Caveat emptor
For many, including Rick and Debra Brady, it began with a free dinner. As the Peoria, Arizona, health care workers neared retirement, they worried about outliving finances – especially after their 401(k)s were hit by the stock market crash of 2008.
A flyer offered dinner and a seminar at a local restaurant. The speaker, a financial adviser, recommended FIAs to about 20 prospective investors and set up a meeting later with the Bradys.
In 2011 and 2014, they invested a total of $275,000.
Rick, 65, says contract signings were a blur, much like when real estate agents flash page after page of escrow papers, just glossing over dense, legal verbiage. Even today, he says, he would struggle to explain a fixed-indexed annuity.
In a complaint letter this year to Arizona Attorney General Mark Brnovich, Rick says the adviser “dazzled us with illustrations that reflected 9 to 10 percent returns” and failed to disclose fees. The letter also says they were not told that, despite the purchase of a death-benefit rider, if they died the insurance company would keep most of the remaining funds, rather than family members.
By 2018, the Bradys say, their FIAs had earned just a 2 percent profit. Because there are severe penalties for early withdrawal, they did nothing for a couple years but finally went to another financial adviser, canceled the FIA contracts and reinvested their money.
The Bradys say they lost $50,000, plus interest they could have realized elsewhere.
In his letter to Brnovich, Brady concludes: “We were lured with a risk-free sales pitch about a high rate of return, but that’s not what we ended up with.
“I am coming forward in hopes it will prevent other seniors and retirees from becoming victims . ... We would appreciate your help in recouping these losses.“
The Attorney General’s Office does not comment on consumer complaints.
‘A long-term investment’
While exotic FIAs have many critics, Jim Poolman, a former executive director at the national Indexed Annuity Leadership Council and a former state insurance commissioner for North Dakota, insists they can be smart, safe investments.
“The only way to lose is if you take the money out early,” he explains. “But we consider the FIA a long-term investment.”
Perhaps more importantly, Poolman says, complaints about annuities nationwide are “the lowest across the spectrum of products to put your money in.”
Although exotic FIAs have almost no track record, experts contend consumers are shown worst-case scenarios. And they insist fair projections can be made based on historic performance of the selected stocks.