Q         Dear Rick:

I have a problem I hope you can help me with.  I got divorced about three years ago.  As part of the divorce settlement, I was obligated to pay my ex $75,000 by the end of this year.  The money was basically coming from the sale of our home which closed in February.  I didn’t want to give my ex the money early and it was recommended by my financial advisor that as opposed to putting the money in the bank, which I wanted to do, he convinced me that I can make more money by putting the money into an annuity.  I just found out that not only is the annuity worth less than I originally paid, but in addition, I have a substantial penalty if I close the annuity out.  I now find that my annuity has a 10-year penalty provision.  I would never have purchased this annuity if I’d known that I could lose money or I had to pay a penalty to get my money out.  My advisor knew that I needed this money by the end of the year.   Is there anything I can legally do?

J.D.

A         Dear J.D.:

You may have a legal claim, but it will be difficult.  What you would have to show is that the advisor, or as I prefer to call them, salesperson, sold you an inappropriate investment for your goals and objectives.  Depending upon the documents that you signed, you may have to go through an arbitration procedure which unfortunately, will take time.  It’s unlikely that you can have this issue resolved either through litigation or arbitration in just a few months.  That being said, I do believe that you should sit down and consult an attorney who specializes in this area of the law.  The attorney may be able to reach out to the annuity company to reach some sort of settlement.  In many situations, annuity companies are willing to make settlements when the facts are clear that the investment was inappropriate.  However, you do have a difficult road ahead of you.

The reason I say you have a difficult road ahead of you is because more likely than not, you signed a variety of documents and one of those documents would have acknowledged that there are early termination fees on the annuity.  That being said, it doesn’t mean that you don’t have a case; but, it does mean is that it is not a slam dunk.

Unfortunately, many annuity salespeople are just that – purely salespeople, as opposed to advisors. They don’t necessarily look at what’s good for you but rather, what’s good for them.  No responsible advisor would ever invest someone’s money in a long-term investment knowing that the client needed the money over the short run.  However, too many annuity salespeople drink the company Kool-Aid and believe that annuities are good for everyone in every situation; unfortunately, that is not the case.  To me, particularly in this environment, it does not make sense to buy an annuity where you’re going to have substantial penalties if you decide to cancel your annuity over the next few years.  The annuity salespeople don’t like to talk about the penalties because they know that these penalties are not for the advantage of the client but rather, for the salesperson.  The type of annuity you purchased is what is known as a variable annuity and there are many variable annuities you can buy that have very low costs and no backend penalties.  Companies like Fidelity, Vanguard and Charles Schwab all offer no-penalty annuities.  Of course, if you go to a commissioned salesperson they won’t recommend that type of annuity because they don’t receive commissions.

One last thing and that is we have to recognize that as investors we have an obligation to ourselves to review documentation before we sign it.  All too often when people buy an investment such as an annuity, they swamp you with paperwork and they tell you that you really don’t have to read it because it’s all standard.  Don’t believe them.  It may be standard for them, but it is not standard for you.  It is important that you always understand the terms of a document you are signing.  It should never be an issue to ask for more time so you have a chance to read a document before you sign it.  I know some of these annuity people will tell you that you have the opportunity to cancel the policy for a limited time after you receive it.  However, why sign a document that you are not sure of and why go through the hassle of trying to cancel a policy?  It would be much easier to make sure you understand the terms right from the beginning.  In addition, if someone won’t give you the opportunity to read the documents and ask questions, then you know for sure they’re not interested in you; they’re only interested in making the sale.

Good luck!

Rick is a fee-only financial advisor.  His website is www.bloomassetmanagement.com.  If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com