Be informed about FIAs
Complicated annuities deliver less than promised 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.
A few years ago, there were just six exotic FIAs on the market. Today, according to Wink Inc., a market research
firm, there are more than 50. During 2016, Americans poured $58 billion into FIAs.
That’s why Vazirani has since 2008 waged war against a handful of FIA companies. He has condemned their sales practices on his radio show and websites. He has fought them in court. He has begged law enforcement and regulators to do something.
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.
“We have all seen the movie ‘Wolf of Wall Street,’ ” Vazirani warns, “and the sequel will be ‘Wolf of Annuity Industry.”
All his criticism, so far, has apparently had negligible impact.
Of course, there is another side to the story. Industry leaders insist FIAs can be smart investments for consumers who shop prudently.
“More and more people are finding
“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.”
this to be good for them as a long-term, safe place to put their money,” says Jim Poolman, former executive director at the national Indexed Annuity Leadership Council.
Critics suggest Vazirani’s warnings ring hollow given consumer complaints filed against him in Arizona for allegedly unscrupulous annuity sales.
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.
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.
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.“
‘No way is anyone going to lose money’
After a career in customer service with British Airways, Tony Laurita and his wife retired to Mesa, Arizona. They had a small pension, Social Security benefits and modest savings.
For years, Laurita’s son – an investment manager – directed their cash into stocks and bonds. Then the son died, the market plunged, and Laurita, a 74year-old military veteran, began looking for a safe financial harbor.
In 2015, after seeing an ad for fixed-indexed annuities, he attended a seminar and sat down with an insurance agent. Some illustrations showed interest accruing at up to 9 percent annually for a decade, Laurita says.
“Their message was, ‘No way is anyone going to lose money,’ ” Laurita said.
He invested $152,000. In 12 months, he says, the index value fell $11,000. He wanted out so bad he paid a $14,000 penalty. Then he went to another FIA company, which said he could recoup the losses. Laurita invested the remaining $127,000. After a year, that index lost another $3,500 in value.
Laurita says he decided to quit FIAs entirely, paying another surrender fee.
“I’m going to say 80 percent was getting ripped off and 20 percent I didn’t do my homework,” Laurita says.
‘Ultimate industry insider’
At his office, Vazirani pulls out sample ads for fixed-indexed annuities.
One features a chart showing how a
$100,000 investment can grow to
$400,000 in 20 years. It is listed as a “hypothetical illustration” and, upon closer inspection, contains this notice: “The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. … Not to be used for illustrations of in-force contracts.”
While FIA terms are spelled out in brochures or contracts, Vazirani contends key information often appears in footnotes, fine print or legal language that even experts would struggle to comprehend.
Meanwhile, he asserts, the consumer gets a spiel from an insurance agent who has no fiduciary duty and is looking to score a commission.
“All of it is there in fine print, but that doesn’t make it right,” Vazirani says.
While a customer’s principal is guaranteed, that does not mean it is entirely safe, he adds. Fees can eat into the total. And FIAs have no backing by the Federal Deposit Insurance Corporation. If the insurance company goes broke, clients lose.
‘We trusted them’
Vazirani’s integrity quest is complicated by complaints filed with the Arizona Department of Insurance accusing him of the very conduct he criticizes.
In 2013, an elderly Phoenix widow named Patricia Bell alleged that Vazirani and associates made false marketing claims, fraudulently misrepresented annuities and churned her business, collecting commissions while she lost money via surrender penalties.
Bell’s son-in-law, Paul Yamashita, asked the agency to revoke licenses of those involved. He also asked for sanctions against annuity companies whose products are “wildly inappropriate for seniors.”
“Consequently,” Yamashita concluded, “I am requesting you investigate whether the sale of such products to senior citizens should be legal in Arizona.”
In written filings, attorneys for Vazirani and other agents stated that Yamashita’s complaint was meritless – based on factual errors and his misunderstanding of annuities or law.
Files released to The Arizona Republic indicate the complaint was “referred for disciplinary action” but contain no record showing a referral or otherwise indicating how the case was resolved.
‘A long-term investment’
While exotic FIAs have many critics, Poolman, 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.”
Rick Brady says he was deceived.
Rick Brady tells his story how he was ripped off on fixed-indexed annuities and claims by financial adviser that they often are misrepresented, victimizing vulnerable retirees.