EIAs - Financial Advice Gone Bad

Q. My brother was talked into selling his old annuities, paying the penalty with the bonus this new company (####) was giving him and buying their equity indexed annuity. All this was done by his 'financial adviser'. Since then he has come to realize this was a big mistake after reading up on them. What would be his best course of action now? He is 55 yrs. old and has other investments.

A. It was good to hear from you and, unfortunately, your brother’s story is all too common. Legally, if your brother signed the paperwork which says he understood what he was doing then he essentially relieved the financial advisor of any liability!

How long ago did this happen? If it has been within 10-20 days then he may be able to get out of it. Let me know and I will explain. If it has been longer than that he is stuck.

The #### EIAs are some of the worst out there. Does he know that even though it is a 10 year contract, that if he wants the money in a lump sum he won't get the index gains? In fact, with this particular EIA, someone who put in $100,000 and took all the money out at the end of the 10 year period will only get $101,547 regardless of how well the market does!!!!

The only way to get the index gains in the #### products is if you annuitize. That means taking distributions over a multi-year period. So after 10 years, if he wants any index gains, he has to annuitize over an additional 10-year period!!

It is absolutely incredible. And it was all done so the advisor could make a 9-10% commission.

The first thing your brother needs to do is find another advisor! Then he needs to tell everyone and anyone what the advisor did to him. As for his money, he's probably stuck other than being able to withdraw 5% per year without the penalty. Even then, he will only be able to get 50% of his money over the 10 years.

Let me know if I can be of further help.

Q. From what my brother told me it is a 7 year contract (Master Dex10??). It has been longer than 20 days so that option is closed.

As to his advisor, he has already let her know what bad advice she has given him but I doubt she even understands that it is a bad deal. My thought was to take the 15% penalty for canceling, write it off on his taxes and then invest in good no-load funds. Would he be better off going this route and hopefully make up the loss and then some in the market. He has 10 yrs. to retirement.

Thank You

A. There are several issues involved. First, is it IRA money? If so, you can't deduct the loss.

Secondly, the 15% penalty probably does not include the loss of the bonus. So if he put in $100k and got a $6k bonus, he may only get back 85K. So not only will he be out the 15% penalty on this annuity but he will also be out the penalties he paid on the other annuities to get into this one!

There are ways to invest the money that would give him complete control and flexibility, allow him to participate in the growth of the market while significantly reducing the potential for loss all without commissions, surrender penalties, set-up fees or time commitments.

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