Buyer Beware – Indexed Annuities are not what they seem

Charlie McCulloughFrom the Desk of Charlie McCullough
In past blogs, I have told you about my parents, Donald and Janice. My family is fortunate to have them living with us. I think it is a great opportunity for our children to learn from the wisdom of the older generation, and it is an ideal way for my wife, Lisa, and I to keep an eye on them. Recently, we were reminded of just how susceptible the elderly can be to financial scams and other hucksters who prey on unknowing victims, and how lucky we are to have them in our lives on a daily basis.

My parents had just returned from a meeting with a potential new insurance agent. They were thinking about moving their current plan to another firm and were investigating their options. When they got home, they indicated that they were considering purchasing an indexed annuity product through this agent, because he suggested it was a wise investment and would be an excellent addition to their current portfolio.
While I was not completely aware of the intricacies of indexed annuities, I did recall a conversation I recently had with my advisor at Financial Fiduciaries regarding the value (or lack of value) these products hold. My advisor indicated that annuities were not only difficult to understand, but they were also very costly. In fact, the fees can be as high as 4-7% and every guarantee has a fee or string attached to it. Additionally, if a purchaser wants to get out of the annuity, surrender fees can be as high as 10%.
My dad showed me the brochure that the agent gave him about the annuity product he was pitching. After reviewing it, I could see why they were targeting my parents (and most likely other elderly people) with their propaganda. The language of the marketing material had a huge fear factor included. It spoke of market uncertainty and even offered an 8% guarantee (see comment above about “strings” attached to guarantees). Unfortunately, the brochure did not disclose any of the hidden costs or other stipulations. Instead it said, “Some restrictions may apply.” In general, the entire piece was a confusing jumble of empty promises and unfounded claims.
After reviewing all the information my parents had received, I called my advisor at Financial Fiduciaries who gave me the real story about indexed annuities. The only reason they are offered as retirement investments is because the person selling them makes a lot of money – end of story! My advisor also said “if people really had the big picture about annuity products, most would choose not to purchase them.” Armed with this information as well as viable investment options (in which my advisor did NOT receive any commission or bonus kick backs) I was able to give my parents the proper counsel about logical steps for their retirement plans.

Charlie and Lisa McCullough are fictitious characters who are utilized to illustrate situations in which people might find themselves.  Their family and friends are also fictitious.  While their stories are inspired by actual situations encountered by Financial Fiduciaries professionals working with clients and prospective clients, they are not intended to provide any specific investment advice.  Each situation is different and any general advice provided in the context of these articles may not be suitable for all individuals.  Always consult a professional for advice specific to your situation.


About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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1 Response to Buyer Beware – Indexed Annuities are not what they seem

  1. Tom and Charlie – When you consider the limitations on returns due to the “cap rate” and the “participation rate,” you understand the problems with such products. I understand that some indexed annuity issuers are offering IAs that do not limit the rate of return in return for receiving a percentage of the IAs return, often 2-3%. Do not know a lot about these new variations, but not imposing “cap” or “participation” rates would be fairer to the investor. Better yet, avoid IAs, and annuities altogether.

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