Millions of American investors are at risk of falling prey to a financial industry that often exploits their trust and lack of sophistication.
I want you to know the story of how one woman was led down a potentially ruinous dead-end path — simply so a smooth-talking salesman could add to his million-dollar-plus annual income.
That’s a harsh accusation. Once you know the facts, you can decide whether it’s warranted.
The story begins with a woman I’ve known for about 10 years. I’ll call her Doris. She was laid off by her employer, one of the largest companies in the Northwest.
The other key character, whom I’ll call Sam, is a successful insurance salesman posing as a trustworthy financial adviser.
When Doris was laid off, her employer recommended a workshop covering financial decisions employees would face, including what to do with their 401(k) retirement assets.
What stood out most to Doris was the strong emphasis on “10 reasons you should get your money out of your 401(k) NOW!”
A cynic might argue that from Sam’s perspective there was really only one reason to move money out of a 401(k): sales commissions. Sam’s promotional material boasts that he earns more than $1 million a year as a top national agent.
Sam appeared sympathetic, trustworthy, and understanding. He was also endorsed by Doris’s former employer — a powerful credibility boost.
In their first meeting, Doris emphasized that she preferred low-cost, broadly diversified mutual funds and did not want an insurance product.
In the second meeting, Sam claimed he had found something “even better”: a variable annuity.
He did not disclose that selling the annuity would earn him a large commission. He did not disclose that it would permanently raise her investment costs. He did not disclose that getting out later could cost her as much as $64,000 — 8% of her $800,000 account.
He also failed to disclose that the annuity was exactly what Doris said she did not want: an insurance product with an expensive embedded life-insurance component.
Instead, Sam emphasized supposed benefits like automatic rebalancing, presenting them as if they were free. They weren’t.
Doris should have walked out. But she didn’t yet have the knowledge or experience to recognize the trap.
At the signing meeting, Doris initialed boxes stating she was an “experienced investor”(she wasn’t) and that she had received a prospectus(she hadn’t).
Worse, Sam persuaded her to roll over a perfectly good 401(k) into an IRA — solely so it could hold the variable annuity.
No disinterested financial adviser would recommend placing a variable annuity inside an IRA.
The primary justification for variable annuities is tax deferral — which is meaningless inside an IRA. Doris was paying 2% or more per year for a benefit she already had.
Her money was now invested in high-cost actively managed funds, many owned by the insurance company itself — the opposite of what she had requested.
The result was predictable: Doris could expect to earn at least two percentage points less every year for the rest of her life.
That meant less retirement income, less security for her husband, and less for their heirs.
When this finally sank in, Doris called me. Undoing the damage appeared almost impossible without forfeiting 8% of her investment.
With help from Stan “The Annuity Man” and regulatory agencies, we were able to get Doris out of the contract.
During a follow-up meeting, nearly every time Doris asked about the downsides, Sam either deflected or provided misleading answers.
When asked if he was a fiduciary, Sam repeatedly said yes — a technically true but deeply misleading answer. In Doris’s case, he was not legally required to put her interests first.
Doris demanded her money back and threatened to escalate the issue to regulators and her former employer. Most investors are not this fortunate.
Three lessons stand out:
- Avoid advisers who earn commissions or are licensed to sell commission-based products.
- If a truly independent CPA recommends a variable annuity, shop only low-cost providers with no conflicts.
- Never move your life savings into a new structure until you fully understand it.
Had Doris kept the annuity, her retirement income could have been cut in half, and her heirs would have received far less.
As John Bogle said, “We investors as a group get exactly what we don’t pay for.”
Sam, meanwhile, would have pocketed at least $30,000 in commissions.
For more on this topic, listen to my podcast, “100,000 Ways to Lose Half Your Money.”
Richard Buck contributed to this article.