Throw Them in Jail!

Jailed for selling an annuity! The number of times I have seen annuities inappropriately used in investment portfolios for clients who subsequently hire me is mind boggling. This is not to say that all annuities are poor investment vehicles, nor that all who sell them are criminals, but there has been a fair amount of abuse in this space.

The March 19, 2012 issue of the Wall Street Journal carried a headline that read, “Annuity Case Chills Insurance Agents.” The article spoke of an insurance agent who faces a jail term for selling an elderly woman a complex annuity when he should have known that she was suffering from dementia. I thought the article actually missed the point – dementia wasn’t the problem, the annuity’s complexity was!

We frequently evaluate sales pitches that clients forward to us from insurance salespeople offering annuities and the contracts are often nearly undecipherable (and our analysts are seasoned, have degrees and some have advanced degrees from top notch universities and/or hold the CFA and CFP® designation). So drop the dementia angle – these are difficult vehicles to wrap your brain around, period.

I keep in my desk one such sales piece from an insurer that will go unnamed. In it, the marketing material is steeped with phrases such as, “This line is the Protected Withdrawal Value (PWV), your basis for guaranteed lifetime income in retirement” and “You also have minimum guarantees.” We read through the contract over and over and could not determine just what was being guaranteed. So, we asked the agent for a copy of the document that the client would have to sign to purchase the annuity. Mid-way through the contract was the clause “I understand that annuity payments, benefits or surrender values, when based on the investment experience of the separate contract investment options, are variable and not guaranteed as to a dollar amount.” Huh? This is all we want from a guarantee – a set dollar amount! Imagine the uproar if the US government put this clause in a social security claimant’s application package?

Buyer beware.

We welcome all comments or questions.

Bob Bilkie, CFA