The sign in the middle of a shopping mall reads, ”Stock Market Returns With NO RISK.”  As I approached the kiosk, I knew I was looking at the latest ad for an “Equity Index Annuity” or EIA.  They’re often also referred to as a “Fixed Index Annuity.”  If you’re over 50, you’ve probably received numerous cryptic invitations to attend a “financial” seminar with a free dinner.  More than likely, you’re being solicited to buy an EIA. 

Typically, these annuities promise guarantees for your principal or even a modest return, while “allowing you to participate in the upside of the stock market.”  In other words, “you’ll receive the gain, without the pain.”  To understand this claim, which, in my view, is quite misleading, you need to know how these products work, what you actually own and exactly what “participate in the upside” really means.

From Tim Bastian’s op/ed on Forbes.com.   

Those were the words meandering through my mental theatre after hearing the story of a new client who had been victimized by one of the most unethical sales pitches in the financial industry - the pitch for an equity index annuity.

If you are at or nearing retirement, chances are that you likely have received an invitation to an annuity sales presentation.  Sales forces offer these all the time and are usually elaborate and often include a free dinner at an upscale restaurant.

Some will even ask that you bring your brokerage account statements with you in an attempt to convince you to transfer your assets into their products. 

That is what happened to our client.

A few years ago he was sold an annuity which had an upfront sales commission of 12 percent.  That means if you had invested $100,000 into this product, $12,000 of your money would go directly into the salesperson’s product. 

Did I mention the client was 83 years old when he was sold the annuity?

The problem with that is with many annuities, you are penalized if you need immediate access to your money.  Only after owning the annuity for a period of years can most people escape what is referred to as a “surrender charge.”  Find the logic there.

But here is where the story gets worse.

In this particiular annuity he was sold, there was a provision that allowed him to withdraw 10% of his account on an annual basis without penalty.  This is precisely what this gentleman did but guess what the annuity salesperson recommended he do with the withdrawn funds?

Put it into another annuity, of course.

The salesman, marketing himself as a “Retirement Specialist,” took the proceeds of the withdrawal and plunked it down on another equity index annuity annuity, triggering another upfront 12 percent commission charge, and starting the entire process over again.  Sad.

It is episodes like these which remind me of the words of the Securities and Litigation Consulting Group which in recent years stated:  “Annuities stand out as the investment most likely to be unsuitable since in virtually every instance, the investor would have been better served by a mutual fund or a portfolio of individual stocks.”

Dateline NBC recently aired an undercover series on the hidden practices of equity index annuities.  I suggest you check it out. 

If you or someone you know has been sold one an equity index annuity or other types of annuity products and are not sure if it makes sense to have it, seek out someone who’s income is not based on selling annuities to evaluate your situation.