Senior Citizens beware

Doug Horn

I am about to get back on one of my many soap boxes, so readers beware! During a recent meeting with a prospective client, I was asked to review their investments to determine how best to assist and advise them.

Here is a little background. The couple is in their late 70s, and he had money in his individual retirement account (IRA) in addition to funds in their checking. Unfortunately, the husband was recently admitted to a nursing home, and his wife was visiting with me to determine how to best move forward. His IRA was now in two investments which were purchased three years earlier through another area financial advisor. Thus, both now and back in 2007 when the new investments were purchased, this client is at a time in their life where these funds may be needed for a variety of expenses in addition to income. While I was reviewing the current statements, the wife also shared an older statement that she was not sure of its importance.

It did not take long to put the pieces together. Back in 2007, a new financial advisor had come to their home to offer his services. The prospect shared with the advisor the only investment asset they had which was the husband’s IRA, and it was presently invested in a variable annuity. (The older statement which had been shown to me in our meeting.) After a conversation, the advisor was able to have the prospect agree to become his client. This could have taken one of two paths; but sadly for the new client in my opinion, they found themselves on the crooked path. The advisor could have kept the client in their current variable annuity and merely change the broker of record. This would not have cost the client anything, but would permit the advisor to take over the management of the funds. BUT, since it would not cost the client anything, it also would not pay the advisor a new commission.

Instead, the advisor was able to convince his new client to agree to transfer his IRA from the existing variable annuity into two new products. One was an equity index annuity which offered returns based upon the market or a guaranteed minimum interest. It also offered a bonus payment to the client’s contract for making the purchase in the amount of eight percent of the payment. While approximately half went into the first product, the balance was transferred to a new variable annuity that also offered a five percent bonus payment to the contract.

This may sound great; move money from an old investment into two new investments and be given a bonus to do so, what could be better? Almost anything, when the rest of the story is revealed.

The bonus payments did not come without costs! For the equity index annuity, a new surrender period of 15 years applies and a starting surrender fee of 20 percent! This means if the client needed additional cash for an emergency, if the amount withdrawn exceeded 10 percent of the purchase amount, they would owe 20 percent of the excess as a withdrawal penalty. The variable annuity’s surrender period was also increased by two years due to the bonus payment; however, the surrender fee rate remained at a more typical amount.

Unfortunately, the bonus payments really did not benefit the advisor’s new clients. This is because the clients incurred a surrender fee for transferring out of their existing variable annuity, and this fee was still larger than the bonuses they received! Both of these new investments needed to be managed, since the funds inside the products could be allocated based upon market changes. When I checked, I discovered there had been no changes for the last three years to the allocations, i.e. no management occurred.

While there are laws protecting seniors, and the advisor’s supervisor should have questioned this recommendation, it does not always occur. By changing from their existing contract, they extended the surrender period and increased the surrender charges in the event access to contract balances were needed. Additionally, the advisor could have found products that offered a surrender fee waiver in the event of a nursing home stay, but in this case he didn’t. The only person benefiting from this transaction was the advisor.

While I am very proud to be in my profession, it is advisors such as this who mar the integrity and professionalism of the industry. Clearly, before moving forward with new investment purchases, be sure the costs and future restrictions are understood.

For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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