Martha’s husband died unexpectedly in his forties, and had left her a couple hundred thousand dollars, mostly by way of a life insurance policy. She was rather unsophisticated in money matters, but knew she would have to watch her pennies in order to make it through retirement, since the modest pension she could expect at the end of her working days delivering packages for an overnight service would barely keep her above the poverty line. A friend, who was concerned that something was dismally amiss in her investment planning, had referred Martha to us.
Like many in her situation, Martha turned to the good people in her credit union for help when her husband died: the place where she had banked for years, and the only place she thought to go when it came to financial matters. The registered rep (translation: securities salesperson) with whom she dealt was kind, and she believed that his advice was simply part of the credit union’s overall service to its members. She was shocked when she learned that he was a product salesperson earning commissions.
Soon after she deposited the proceeds from her husband’s insurance policy, he began to approach her, telling her that she “had to do something” with “all that money.” Although initially advised (by him) to “wait at least six months” for her grief to clear, he would prospect her on nearly every visit, and, in short order, convinced her to buy a bunch of products. They turned out to be back-end-loaded mutual funds and a variable annuity. The new account application contained misinformation, painting her as having more liquid funds than she did, and so giving her a higher apparent risk tolerance than she had.
Warning Signs: Annuity Dangers
Martha became concerned when her account values began to plunge in a market correction, exacerbated by fund recommendations that tended to not control risk as well as might otherwise have been the case. When she called the credit union’s branch manager, she was directed to the registered rep himself, who told her, essentially, to ignore fluctuations in value, that investing was “like baking a cake,” and admonished her for peeking into the oven too often. This bit about baking a cake really galled her.
Finally, Martha could take no more, and demanded, on several occasions, that her investments be liquidated and the funds sent to her. Such an order requires oral instruction only. Yet the rep delayed, and finally sent her a letter for her to sign, in which she would admit to all responsibility for investment losses and surrender charges, as a condition for liquidating her account. She says this is the first time she was aware of any surrender charges. She balked, and came to me.
Being Stonewalled About The Annuity
When I first took data on Martha, it was clear that she really had no idea that she had purchased commissionable products, and truly believed that this “financial planning” was a free service of the credit union. But what really struck me was her “guaranteed” product: she had put $30,000 in a vehicle which she swore was invested in the stock market, but could never go below her initial investment. Of course, it smelled like a variable annuity, and of course, she would have to die to collect on the guarantee. When I suggested this might be the case, she said, “Oh, no, it is guaranteed. My kids are Ok. That money’s for me.” Even when the statements showed a drop in value and she got doubletalk when calling the rep on it, she believed in the “guarantee.”
Like so many others, she was amazed and angry to learn that she owned an annuity contract with a life insurance (only!) guarantee.
Although the account was small and she could never afford to pay me for my time, I was so incensed at the abuse of this unsuspecting widow, and agreed to some pro bono work.
Calls to the branch met with a very friendly stonewall. I was referred to the rep’s supervisor—legally charged with overseeing sales activity to make sure it was legal and proper—who worked out of another city and did not return any of my calls. Several hours and many threats later, I reached a compliance staff person at the insurance company’s home office who tried to refer me back to the rep’s elusive supervisor, but finally agreed to contact Martha.
She eventually did, and basically told Martha that all of this was her fault, that she signed all the paperwork, and should have known better if this was not what she wanted to do. She was even kind enough to put all of this in writing, and mailed it to Martha.
Martha has also filed a formal complaint, but will probably have to go to arbitration to have any hope of being made whole.
The preceding story is based on an actual situation and was shared by an investor we met in our professional practice. The names and non-material details have been changed to protect identities. The essential facts dealing with product representations and sales practices have been faithfully recorded.
This case history may amaze, amuse, and incite you. It may also inspire you to take action if you had a similar experience.
Most importantly, this case study may help you to realize that you are not alone, if you feel that you may have been subject to less-than-forthcoming annuities sales tactics. From the high number of cases we’ve seen like this, we can only infer this kind of monkey business is too common where these products are concerned.
Camarda offers free Portfolio Stress Tests which can include annuity cost/benefit analysis and rescue plans. To request one just click here – no cost or obligation.
