Be in­formed about FIAs

Com­pli­cated an­nu­ities de­liver less than promised to re­tirees

USA TODAY US Edition - - MONEY - Den­nis Wag­ner

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.”

Rick Brady

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.

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.

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.”

NICK OZA/THE RE­PUB­LIC

Rick Brady says he was de­ceived.

NICK OZA/THE RE­PUB­LIC

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.

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