Making Your Money Last
The Great Annuity Rip-Off
Unscrupulous agents take advantage of seniors with risky investments that cost too much.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, January 2007
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And here's the best-kept secret in the annuities business: There's no reason for you to pay high up-front commissions or get stuck with a long surrender period. Most companies offer identical annuities with lower commissions and shorter surrender periods -- if you're savvy enough to ask. The ones Cortazzo recommends are those that carry a commission of 1.5% to 2% the first year, followed by 1% annually, and have a relatively short surrender period of three years or less.
Outrageous returns
But even a good deferred annuity isn't suitable for most people. Younger individuals should invest first in 401(k)s and IRAs, and then in taxable accounts; older people like Alice Bouchard should stick with immediate-income annuities.
To persuade seniors to buy deferred annuities, "salespeople use any argument that appears to be effective," says Galvin. Sometimes agents pitch annuities as estate-planning tools, even if the death benefit is paltry. And some agents promise outrageous returns.
In one extreme case, an agent persuaded 32 Exxon employees from Louisiana to retire early, take their retirement money in a lump sum and invest it in deferred variable annuities. The agent promised they could replace all of their monthly income by earning up to 18% a year. If he couldn't produce returns of 10% to 14% a year, the agent said, his clients could fire him.
Most of the employees didn't understand that they were investing in annuities, says their lawyer, James Swanson. Nor did they realize they were paying close to 3% per year in expenses and that the agent was investing their money in ultra-risky mutual funds with no guarantees to protect them. His clients were "slaughtered," says Swanson. "These people started with $600,000 or $700,000 in 2000, and by 2002 they had $200,000."
NASD charged the broker with securities fraud and last fall fined his broker-dealer, Securities America, $2.5 million for inadequate supervision. The company has also paid investors $13.8 million in restitution. However, it is appealing $9 million in punitive damages and lawyers' fees, according to a spokesman.
No free lunch
Seniors are particularly vulnerable at "free lunch" seminars where agents feed them the hard sell. Michael Huggs, a senior examiner for the Mississippi Secretary of State's office of business regulation and enforcement, recently interviewed an agent who referred to seniors attending these free-lunch seminars as "plate lickers" -- a phrase that even appears in some agent-training materials. "If you have that much disdain for your clients, you shouldn't be in this business," says Huggs.
And disdainful is one way to describe the treatment of Alice Bouchard, now 92, and others like her. Florida investigators identified three other individuals allegedly ripped off by the same agent, Bijan Razdar. Razdar was permanently banned from the insurance business in Florida, but was arrested last October for conducting business without a license and is awaiting trial.
Razdar denies doing anything wrong. He says surrender charges were irrelevant because his clients wanted the annuities for their death benefit. But Bouchard says she told Razdar repeatedly that she didn't want to lock up her money for more than five years. And Lanier, the Florida official, points out that her beneficiaries would have inherited about as much if she had simply put the money in a CD.
Razdar says he was advised to settle the cases by his insurance company, and that he couldn't afford to continue fighting the state. He also says he is contesting the charge that he was conducting insurance business without a license.
Bouchard settled with Razdar in September for an undisclosed amount. Most of those to whom he sold annuities have gotten part of their money back from him through civil suits or by working with the insurance companies to cancel any penalties. Some of the victims are suing the insurers to get back more of their money.