Perhaps more disturbing than the papers I found were the papers that were not in the box. There were no copies of signed applications for any of the annuities. There was no evidence of an effort to discover this widow's cash flow needs before recommending the products. Nor was there any evidence of an effort to understand Gloria's estate issues, although every contract indicated a beneficiary. (As an aside, one of the named beneficiaries was Gloria's deceased husband; now there's a great estate-planning idea.)
With one exception, the only "guarantees" I could find among the policies were the guaranteed death benefits. I later told Gloria that there were guarantees, but someone had neglected to tell her that she had to die to take advantage of them. The one feature I discovered, in the smallest of the contracts, was a Guaranteed Retirement Income Protector (GRIP). This feature allows Gloria at a certain age (I think it was 70) to annuitize either the market value of the investment account or the original contract value, whichever is higher. This account's value is now one-third of its starting value, so it will be important for her to hang onto that contract.
As I explained the cold realities to Gloria in a subsequent meeting, she was alternately livid at the way her trust had been abused and relieved to hear from me that she was not crazy ... it was as bad as it had seemed to her. "Well, what do we do now?" she asked, extending an open palm toward the cardboard box of documents.
"First of all, Gloria, I agree with you that you appear to have a legitimate basis for a legal challenge to the way your affairs have been handled. I do not practice law, so we have to be very careful to delegate all legal issues to a person who is skilled and licensed to handle these matters. The same thing goes for insurance; there are licensing issues, and I have to be careful to defer to licensed professionals where that is appropriate. Next week I will call your attorney and offer him what assistance I can from the perspective of my experience."
What To Do Now?
Gloria's very first request to me had been, "Stop the bleeding." She had asked the broker over and over during the past two years to "do something," and nothing, absolutely nothing, had been done to change the investment allocations in her annuities. I decided that at least I could review the investment options available in each policy and suggest a way to diversify her portfolio of aggressive equity funds and dampen the overall volatility. I explained to her that in so doing, we would also reduce the ability of the portfolio to bounce back if technology enthusiasm should return to the market. I don't think she really understood that.
Naturally, every contract listed the broker as her representative. So I drafted a letter for her signature to advise her broker to liquidate certain of the technology funds and replace them with several specific fixed-income and utility stock funds as a way to begin reordering her portfolio.
Next, we drafted letters for her signature asking the broker to provide forms for requesting a withdrawal from the nine nonqualified annuities in the amount that she could take free of surrender charge once each year. At least, I thought, we could begin to reduce the amount she has in these contracts that I consider inappropriate. For the three IRAs, the letter we wrote to the broker for her signature asked that the allowable "free" withdrawals be made to her IRA brokerage account to preserve the tax-deferred status.
We did manage to extract something like $200,000 from the nonqualified annuities, but the broker ignored her written instruction with respect to the IRAs, suggesting that she just change her investment allocations in those policies. An anniversary date came and went, costing Gloria that withdrawal opportunity.
What I really wished I could do, of course, was to take all the money out of the annuities (except the one with the GRIP feature), and deposit the proceeds into ordinary brokerage accounts where investment choices would not be limited to the (mostly very poor) house funds these annuities provided. This would also remove part of Gloria's remaining assets from the burdensome annual expenses built into these annuities. But, no surprise, the surrender charges were substantial. Little did I suspect just how substantial!
Bad enough that in the third year after purchase, the surrender charges still ran to about 7%. But the pièce de resistance was that the surrender charges are levied against the original investment amount, not the current market value! So an annuity that was originally a $500,000 investment and that had shriveled to $150,000, would have a surrender charge of $35,000 (7% of the original investment, but 23% of the current value!) I would have to call that a prohibitive barrier to withdrawal ... which, of course, is exactly what it was designed to be.