Damage Control For Victims

Helping a widow whose dying husband was sold annuities.

The essential facts of this story are true; I am not making this up.

Three years ago Donald Millani, 65, told his broker that he had been diagnosed with terminal cancer and probably had just a few more months to live. What would the broker advise him to do with his $2 million investment account and his $1 million IRA?

"Annuities," said the advisor. "Just the thing. There's this new product that gives you a 5% bonus for signing, and it let's you build an aggressive portfolio while the death benefit guarantees your principal. If the investments go up, all the better."

Three months later, Donald died. The stock funds inside the variable annuities had lost value, but the death benefits enhanced by the 5% bonuses were available to his healthy 62-year-old widow, Gloria. When Gloria asked the broker what she should do with her inheritance, the answer was, "Annuities. Just the thing. There's this new product that gives you a 5% bonus for signing and your principal is guaranteed."

Mrs. Millani, who had never made an investment decision in her life, asked her son Jonathan, a history professor, to go with her to the broker's office. They made it as clear as they could, she said, that she wanted safety above everything. It seemed to both mother and son that the money Donald had left was more than enough to take good care of Mom, and they didn't want to take any chances with it. In a conversation laced with "guarantees," the broker assured them that deferred variable annuities were just what they wanted.

Two years later, Gloria found her way to our offices to see if we could help her understand what had happened, because it seemed to her that her $3 million had shrunk dramatically and she wondered what had become of all those guarantees.

Sorting It Out

Mrs. Millani brought me her entire collection of documents and correspondence related to her investments; stacked haphazardly in a cardboard filing box, they filled it to overflowing. I spent an hour listening to her recollection of the events. Apparently, the monthly statements she'd been receiving from the broker showed that the value of her accounts was steadily falling. She showed me copies of letters she'd written to the broker asking him what was wrong and to please do something. She recounted phone calls she had made to him in which he reportedly assured her that everything was fine. "The markets are just volatile. They will come back, and there is nothing to worry about."

Her telling was not without emotion, especially since this visit was right around the anniversary of Donald's death. I assured Gloria that I would work my way through her box of documents and try to understand what she had invested in, and come up with some strategy to at least stop the bleeding. Then we'd see what help we could offer to the securities lawyer she had already contacted.

Over the weekend I logged about 12 hours sorting statements and letters, jotting notes and creating a spreadsheet of the annuity contracts showing dates, features, original and current values, investment elections, owner, beneficiaries and so forth. What I saw was very upsetting; it helped me understand, yet again, why the first quality people look for when seeking a financial advisor is trustworthiness. Unfortunately, the majority of us who are trying to do an honest, skillful job have to contend with the notoriety of the charlatans and incompetents.

There were, indeed, 12 variable annuity contracts purchased on three or four different dates within two months after Gloria's husband died; three of the 12 were qualified annuities (IRAs) originally totaling just over a million dollars. Every annuity was invested 100% in aggressive growth and technology funds. The total original value was $3.1 million, and in approximately two years it had shrunk to $1.2 million.

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