Peoria resident Rick Brady says his fixed-indexed annuity earned him 2 percent returns, less than advertised. Nick Oza, The Republic | azcentral.com
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 claimÂ that consumers wonât lose their original investment even if the stock market crashes.
The products, known as âfixed-indexed annuitiesâ 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,Â a Scottsdale, Arizona, financial adviser who has taken an intense interest in FIAs, says the advertising often misleads consumers. And theÂ contracts they signÂ 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,Â over the past two decades companies have beenÂ marketing exotic hybrids usingÂ deceptive sales tactics that prey on older consumers.
A few years ago,Â there were just six exotic FIAs on the market. Today, according to Wink Inc.,Â a market research firm, there are more than 50.Â During 2016, Americans poured $58 billionÂ into FIAs.
Thatâs 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,Â they should be treated as securities, which cannot be sold by insurance agents. Instead, they should beÂ sold only by licensed professionals obliged to act in the best interest of their clients.
âWe have all seen the movie, âWolf of Wall Street,ââ Vazirani warns, âand the sequel will be âWolf of Annuity Industry âŠ ââ
All his criticism, so far, hasÂ apparently had negligible impact.
Of course, there is another side to the story.Â Industry leaders insistÂ FIAs can be smart investments for consumers who shop prudently.
âMore and more people are finding this to be good for them as a long-term, safe place to put their money,â says Jim Poolman, former executive director atÂ 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.
While many consumersÂ have never heard of FIAs, this isnât anÂ esoteric debate:Â FIAs represent nearly a third of annuities purchased, according to some estimates.
Just the phrase âfixed-indexed annuityâ sounds bewildering. So letâs 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 âindex.â (The Dow Jones industrialÂ average is perhaps the most famous stock 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,Â 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.Â
Consumers may also be charged for special provisions, known as riders, that increase their benefits. And, if they cashÂ out early, there areÂ stiff penalties.
For many, including Rick and Debra Brady,Â it began with a free dinner. As the Peoria, Arizona, healthcare workers neared retirement, they worried about outliving finances âÂ especially after their 401(k)s were hit by the stock market crash of 2008.
A flier 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 private meeting later with the Bradys.
Debra, a dialysis technician, and Rick, a nurse, admit they knew little about investing. But the deal sounded good.Â
In 2011 and 2014 they invested a total of $275,000.
Rick, 65,Â says contract-signings were a blur, much like when real estate agents flash page after page of escrow papers, just glossing over dense,Â legal verbiage. Even today, he admits, he would struggle to explain a fixed-indexed annuity.
In a complaint letter this year to Arizona Attorney General Mark Brnovich,Â Rick says the adviser “dazzled us with illustrations that reflected 9 to 10 percentÂ 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. Because there are severe penalties for early withdrawal, they did nothing for a couple years, but finally went to another financial adviser, canceled the FIA contracts and re-invested their money.Â
The Brady’s say they lost $50,000, plus interest they could have realized elsewhere.Â
In his letter to Brnovich, Brady concludes:Â “We were lured with aÂ 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.”
The Bradys are not alone.Â
After a career in customer service with British Airways, Tony LauritaÂ and his wife retired to Mesa, Arizona. They had a small pension, Social Security benefits and modest savings.Â
For years, Lauritaâs son â an investment manager â directed their cash into stocks and bonds. Then the son died, the market plunged, and Laurita, a 74-year-old military veteran, began looking for a safe financial harbor.
In 2015, after seeing an ad for fixed-indexed annuities, he attended a seminarÂ and sat down with an insurance agent. Some illustrations showed interest accruing at up to 9 percent annually for a decade, Laurita says.
âTheir message was, âNo way is anyone going to lose money,ââ 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.Â After a year, that index lost another $3,500 in value.
Laurita says he decided to quit FIAs entirely, paying another surrender fee.
He admits never really understanding the 25-page FIA contracts, and accepts some responsibility. But, mostly, he blames unscrupulous marketing.
âIâm going to say 80 percent was getting ripped off and 20 percent I didnât do my homework,â Laurita says.
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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 âhypothetical illustrationâ and, upon closer inspection, contains this notice: âThe values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. âŠ Not to be used for illustrations of in-force contracts.âÂ
While FIA terms areÂ 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.
The FIA brochures on Vaziraniâs desk contain brain-numbing legal declarations such as this:
âFor the S&P 500 Annual Point to Point Index Account, we compute and credit the Index Interest Rate at the end of each one-year Index Term based upon the difference in the starting and ending index values for the Index Term. If the difference is positive, we divide the difference by the Index Termâs starting index value to determine the percentage change in the index value for the Index Term. We then compare the percentage change to the Cap and use the lower of the percentage change or the Cap as the Index Interest Rate.â
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Those sentences are part of a 17-page marketing document.
âAll of it is there in fine print, but that doesnât make it right,â Vazirani says.
While a customerâs principalÂ 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.Â If the insurance company goes broke, clientsÂ lose.
Vazirani’s integrity quest is complicated by complaints filed with the Arizona Department of InsuranceÂ accusing him of the very conduct he criticizes.
In 2013, an elderly Phoenix widow named Patricia BellÂ alleged that Vazirani andÂ associates made false marketing claims, fraudulently misrepresented annuitiesÂ and churned her business, collecting commissions while she lost money via surrender penalties.
Bell’s son-in-law, Paul Yamashita,Â asked the agency to revoke licenses of those involved. He also asked for sanctions against annuityÂ 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 meritlessÂ â based on factual errors and his misunderstanding of annuities orÂ law.Â
FilesÂ released to The Arizona Republic indicate the complaintÂ wasÂ “referred forÂ disciplinary action,” but contain no recordÂ showing a referral or otherwiseÂ indicating how the case was resolved.Â Department of Insurance spokesman Stephen Briggs said under state law he could not comment because those issues may be the subject of continuing investigations.
That same year, Julian Q. SanchezÂ of MesaÂ lodged a similar complaint against Vazirani and associates. During a free dinner seminar, Sanchez wrote, he and his wife were told âour money could only go up, not down.Â Sounded good, so we trusted them. âŠThreeÂ years later, we are finding we are losing our money fast âŠ and we took a heavy penalty for getting our money out.â
Insurance department investigators did not find evidence to support a violation.
Vazirani says annuities sold to Bell and Sanchez are distinct from exotic FIAs because they are transparent and not based on unproven stock indexes. Although he did not write theÂ contracts, Vazirani adds,Â he offered refunds without penalty as an act of good faith. Instead, he says, both clients decided to keep theirÂ annuities.
Vazirani denies any fraud or misrepresentations in the two cases.
While those inquiries were underway, FINRA issued a 30-dayÂ suspension and $5,000Â fine against Vazirani for the alleged sale of unregistered securities without a license. The federal agency found heÂ concealed his role in $500,000 worth of transactions with seven customers.
Several state insurance agencies subsequently issued penalties for failure to disclose those sanctions.Â
Vazirani saysÂ the FINRA action did not involve consumerÂ complaints. WhileÂ seeking a securities license through another company, he says, some customers asked about investing, and a corporate compliance officer advised it would be allowableÂ to refer them to a licensed broker.
Vazirani says he accepted discipline, without admitting guilt,Â to avoidÂ legal costs. Neither the fine nor the suspension were imposed because he decided not to get a securities license.Â
Vazirani says he used anÂ online system to notify insurance regulators in the 40Â states where he is licensed. However, four states did not accept that method,Â and issued sanctions.Â
While exotic FIAs have many critics, Poolman, a former state insurance commissioner for North Dakota, insists they can be smart, safe investments.
âThe only way to lose is if you take the money out early,” he explains. “But we consider the FIA a long-term investment.â
Perhaps more importantly, Poolman says, complaints about annuities nationwide are âthe lowest across the spectrum of products to put your money in.â
Few have tried to measure FIAs’ performance. A 2010 research paper co-written by expert Jack MarrionÂ says fixed-indexed annuities outperformed the S&P 500 market index over a decade-long period. However, that study was based on information provided by annuity vendors, not objective data, and Marrion was hired by the National Association of Fixed Annuities,Â aÂ lobbying organization, after he wrote it.
Marrion stressesÂ that consumers should carefully study FIA contracts before signing, and should never put all their assets in annuities â or any single product.
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In January, Vaziraniâs attorney, Kathryn Honecker,Â sent a letter to the SEC whistleblower office urging the federal agency to re-examine exotic FIAs.
Some companies are âoffering unregistered securities through fraudulent illustrations that show unrealistic and baseless hypothetical returns âŠ ,â the letter claims.
For example, Security Benefit Life Insurance Co.Â marketed FIAs in 2012 with hypothetical illustrations showing return rates as high as 52 percent after five years, according to the letter. Ads compared that projection with just over 3 percent annually anticipated from the Standard & Poor 500 stock index.
Consumers investedÂ more than $1 billion inÂ Security Benefitâs product, which was created in 2009. Honecker wrote that the index was so new it had noÂ performance history. In fact, she added, after five yearsÂ the fund sustainedÂ a 5.86 percent loss, rather than a 52 percent profit.
Security Benefit declined toÂ comment for this story.
Sheryl Moore,Â president and CEO of Wink,Â which analyzes the annuities market, says FIAs are generally sound investmentsÂ with annual returns of about 2.32 percent, slightly better than certificates of deposit.
Asked about companies projecting annual returns up to 9 percent, Moore says, âNobody should be advertising anything like that at all.â
She concedesÂ some companies useÂ deceptive sales tacticsÂ âÂ âthe naughty stepchildren of the life insurance industryâ âÂ but saysÂ FIAs generally are âa fantastic product that not a lot of people know about. Itâs just that the marketing-conduct issues kind of give it a black eye.â
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