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 claim that consumers won’t lose their original investment even if the stock market crashes.
The products, known as “fixed-indexed annuities” 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, a Scottsdale financial adviser who has taken an intense interest in FIAs, says the advertising often misleads consumers, and the contracts they sign 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, over the past two decades companies have been marketing exotic hybrids using deceptive sales tactics that prey on elderly consumers.
A few years ago, there were just six exotic FIAs on the market. Today, according to Wink Inc., a market research firm, there are more than 50. During 2016, Americans poured $58 billion into FIAs.
That’s 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, they should be treated as securities, which cannot be sold by insurance agents. Instead, they should be sold only by licensed professionals obliged to act in the best interest of their clients.
“We have all seen the movie, ‘Wolf of Wall Street,’” Vazirani warns, “and the sequel will be ‘Wolf of Annuity Industry … ’”
All his criticism, so far, has apparently had negligible impact.
Of course, there is another side to the story. Industry leaders insist FIAs can be smart investments for consumers who shop prudently.
“More and more people are finding this to be good for them as a long-term, safe place to put their money,” says Jim Poolman, former executive director at 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 consumers have never heard of FIAs, this isn’t an esoteric debate: FIAs represent nearly a third of annuities purchased, according to some estimates.
Just the phrase “fixed-indexed annuity” sounds bewildering. So let’s 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 “index.” (The Dow Jones industrial 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, 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.
Consumers may also be charged for special provisions, known as riders, that increase their benefits. And, if they cash out early, there are stiff penalties.
For many, including Rick and Debra Brady, it began with a free dinner.
As the Peoria healthcare workers neared retirement, they worried about outliving finances — especially after their 401(k)s were hit by the stock market crash of 2008.
A flier offered dinner and a seminar at Fleming’s Prime Steakhouse. 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.
In 2011 and 2014 they invested a total of $275,000.
Rick, 65, says contract-signings were a blur, much like when real estate agents flash page after page of escrow papers, just glossing over dense, legal verbiage. Even today, he admits, he would struggle to explain a fixed-indexed annuity.
In a complaint letter this year to Attorney General Mark Brnovich, Rick says the adviser “dazzled us with illustrations that reflected 9 to 10 percent 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.
The Brady’s say they lost $50,000, plus interest they could have realized elsewhere.
In his letter to Brnovich, Brady concludes: “We were lured with a 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. … We would appreciate your help in recouping these losses.”
The Attorney General’s Office does not comment on consumer complaints.
‘No way is anyone going to lose money’
The Bradys are not alone.
After a career in customer service with British Airways, Tony Laurita and his wife retired to Mesa. They had a small pension, Social Security benefits and modest savings.
For years, Laurita’s son — an investment manager — 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 seminar and sat down with an insurance agent. Some illustrations showed interest accruing at up to 9 percent annually for a decade, Laurita says.
“Their message was, ‘No way is anyone going to lose money,’” 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. 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.
“I’m going to say 80 percent was getting ripped off and 20 percent I didn’t do my homework,” Laurita says. “You skim over the parts that bite you in the ass, pardon my French.”
In December, he sent a letter to Brnovich urging an investigation of FIA companies.
“It is one thing to make a poor investment when you have all the facts,” he wrote. “We feel like the insurance companies and the agents representing them intentionally misled us.”
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‘Ultimate industry insider’
In correspondence with government regulators and law enforcement, Vazirani describes himself as among the top 1 percent of America’s financial advisers, a Hall of Fame inductee with the Society of Senior Market Professionals and “the ultimate industry insider.”
He also calls himself a whistleblower.
At his Scottsdale 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 “hypothetical illustration” and, upon closer inspection, contains this notice: “The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. … Not to be used for illustrations of in-force contracts.”
Vazirani says he came to the United States at age 19 from Mumbai with $500 in his pocket. He understands financial anxiety, and believes seniors desperate for security are especially vulnerable.
While FIA terms are 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 Vazirani’s desk contain brain-numbing legal declarations such as this:
“For 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 Term’s 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.”
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Those sentences are part of a 17-page marketing document.
“All of it is there in fine print, but that doesn’t make it right,” Vazirani says. “Arizona consumers. … getting zero when they were promised 30 to 50 percent.”
While a customer’s principal 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. If the insurance company goes broke, clients lose.
Vazirani points out language in an ad for one of the products: “… we guarantee that you will never lose any of your initial investment or credited earnings due to performance of the underlying index.”
Beneath multiple footnotes, a small box contains this notice: “Not FDIC or NCUSIF insured • Not guaranteed by the institution • Not insured by any federal government agency • May lose value”.
‘Let the war begin’
In 2008, Vazirani’s Scottsdale company, Secured Financial Solutions LLC, was selling standard annuities that included products from Aviva USA Corp., one of the world’s largest insurance companies. Aviva, which has since been acquired by Athene Holding Ltd., controlled nearly one-third of the U.S. market in fixed annuities.
Vazirani had marketed more than $100 million in Aviva products over the prior four years, making him a top seller, according to court records.
According to Vazirani, his contract with Aviva was terminated in retaliation for lodging a complaint about sales agents who were improperly advertising annuities. The move wiped out 40 percent of his company’s commission income.
Aviva denied retaliating, claiming in court submissions that Vazirani was expelled as part of a new distribution plan, and because he violated contract provisions.
As the dispute escalated, Vazirani’s attorneys warned they would “publicize the injustices.” When no settlement ensued, Vazirani emailed his lawyer: “Let the war begin.”
In court papers, Vazirani claimed Aviva breached his contract, defamed him and colluded with other companies to blackball him.
About the same time, more than a dozen internet sites suddenly popped up with names like “avivasucksusa.com” and “aviva-exposed.com,” mocking and condemning Aviva’s FIA business.
Vazirani sent out email blasts to people in the annuity business, and used his weekly radio show to assail Aviva and its marketing practices.
Aviva countersued, claiming Vazirani’s attacks amounted to a criminal racketeering operation that involved extortion, wire fraud, cyberterrorism and trademark infringement.
Litigation dragged on for eight years, in state and federal courts, with puzzling and contradictory judgments.
Ultimately, all Vazirani’s claims were denied, as were Aviva’s accusations against him.
While Aviva was subsumed and the hostile Internet sites have vanished, Vazirani’s campaign continues. The goal, he says, is to warn the public and stop unethical marketing practices.
Over the past two years, he’s bombarded members of Congress, the Department of Labor, the Securities and Exchange Commission, the Arizona Department of Insurance, the Attorney General’s Office and others with letters.
Vazirani wants investigations. He wants new regulations. He wants laws and rules changed.
“Maybe I lost the battle legally,” Vazirani says, “but I can win the war by exposing what I know to the regulators.”
‘We trusted them’
Vazirani’s integrity quest is complicated by complaints filed with the Arizona Department of Insurance accusing him of the very conduct he criticizes.
In 2013, an elderly Phoenix widow named Patricia Bell alleged that Vazirani and associates made false marketing claims, fraudulently misrepresented annuities and churned her business, collecting commissions while she lost money via surrender penalties.
Bell’s son-in-law, Paul Yamashita, asked the agency to revoke licenses of those involved. He also asked for sanctions against annuity 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 meritless — based on factual errors and his misunderstanding of annuities or law.
Files released to The Arizona Republic indicate the complaint was “referred for disciplinary action,” but contain no record showing a referral or otherwise indicating how the case was resolved. 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. Sanchez of Mesa lodged a similar complaint against Vazirani and associates. During a free dinner seminar, Sanchez wrote, he and his wife were told “our money could only go up, not down. Sounded good, so we trusted them. …Three years later, we are finding we are losing our money fast … and we took a heavy penalty for getting our money out.”
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 the contracts, Vazirani adds, he offered refunds without penalty as an act of good faith. Instead, he says, both clients decided to keep their annuities.
Vazirani denies any fraud or misrepresentations in the two cases.
While those inquiries were underway, FINRA issued a 30-day suspension and $5,000 fine against Vazirani for the alleged sale of unregistered securities without a license. The federal agency found he 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.
Vazirani says the FINRA action did not involve consumer complaints. While seeking a securities license through another company, he says, some customers asked about investing, and a corporate compliance officer advised it would be allowable to refer them to a licensed broker.
Vazirani says he accepted discipline, without admitting guilt, to avoid legal costs. Neither the fine nor the suspension were imposed because he decided not to get a securities license.
Vazirani says he used an online system to notify insurance regulators in the 40 states where he is licensed. However, four states did not accept that method, and issued sanctions.
‘A long-term investment’
While exotic FIAs have many critics, Poolman, a former state insurance commissioner for North Dakota, insists they can be smart, safe investments.
“The only way to lose is if you take the money out early,” he explains. “But we consider the FIA a long-term investment.”
Poolman says Congress, the courts and SEC have made clear that fixed-indexed annuities are insurance products, not securities. (The reason: While indexes involve stocks, and returns are calculated based on market performance, annuity purchasers do not invest in the market and do not risk a loss of principal.)
Perhaps more importantly, Poolman says, complaints about annuities nationwide are “the lowest across the spectrum of products to put your money in.”
Although exotic FIAs have almost no track record, experts contend consumers are shown worst-case scenarios. And they insist fair projections can be made based on historic performance of the selected stocks.
Few have tried to measure FIAs’ performanc. A 2010 research paper co-written by expert Jack Marrion 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, a lobbying organization, after he wrote it.
Marrion stresses that consumers should carefully study FIA contracts before signing, and should never put all their assets in annuities — or any single product.
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Alerting the SEC
In January, Vazirani’s attorney, Kathryn Honecker, sent a letter to the SEC whistleblower office urging the federal agency to re-examine exotic FIAs.
Some companies are “offering unregistered securities through fraudulent illustrations that show unrealistic and baseless hypothetical returns … ,” the letter claims.
For example, Security Benefit Life Insurance Co. 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 invested more than $1 billion in Security Benefit’s product, which was created in 2009. Honecker wrote that the index was so new it had no performance history. In fact, she added, after five years the fund sustained a 5.86 percent loss, rather than a 52 percent profit.
Security Benefit declined to comment for this story.
Another example from the letter: Honecker says Athene Annuity began offering a complex FIA in 2016 that “can help protect you from outliving your money.” Ads touted “consistent returns in good and bad markets.” Even though the index had only been created months earlier, marketing materials described hypothetical profits of up to 27 percent every two years.
Honecker, on behalf of Vazirani, urged federal investigators to determine whether specific FIA promotional campaigns constitute fraud or misrepresentation.
Sheryl Moore, president and CEO of Wink, which analyzes the annuities market, says FIAs are generally sound investments 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, “Nobody should be advertising anything like that at all.”
She concedes some companies use deceptive sales tactics — “the naughty stepchildren of the life insurance industry” — but says FIAs generally are “a fantastic product that not a lot of people know about. It’s just that the marketing-conduct issues kind of give it a black eye.”
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