I was contacted by a male retiree who had been perusing my website and reading my articles. He emailed the office and asked, “Could I set up a time to talk to John? I want to email you some statements because I want to ask him some questions regarding some of my contracts.” So, my office set up a phone appointment for him and myself to speak on a specific date and time.

When I called the gentleman, he blurted out, “John, I’m at wit's end. Please let me tell you what’s happened. Around 2012 or 2013, I attended a seminar, and I was very nervous back then. The guy speaking said the market was going to crash here this summer (and he was wrong). So, I took my whole life savings out and invested about $1 million into three or four different annuities. I bought one in January, February, and March. I was promised to capture the upside potential of the market but with no downside market risk. I also liked the idea that I had a 7% guarantee. But let me give you a synopsis of what happened.”

He continued to present his case to me: “So, the first year, which was 2013, the market did all right but none of my annuities. None of them performed better than 3%. The second year, the market was low single digits, and I think I got about 2 or 3%. And the third year, I think I got 2 or 3% as well. Furthermore, each year the market was performing at pretty high levels (between 8 and 14%), and I was not receiving these returns. At the end of the policy year, I would get these statements from the company. The statements show what your performance was, which I was very disappointed in. But then they send a letter once every year that says I can change or choose new allocations for next fall. There were about seven or eight different options depending on the company product. I would just sit there and stare at those. I’m not an investment genius, so I don’t know what to do so I usually would call my agent. The first year, he said, ‘Oh, we underperformed a little bit but just let it ride, and we’ll do better next year.’ Well, after the year I called him again, and he said, ‘Well, we’ve underperformed. We’ll probably do better next year.’ I asked him if he could help me with the different selections. He said, ‘No, those are good selections. Just let it ride.’ Well, going on the third year, I think I knew what he was already going to say because my returns were very minimal. Then my agent disappeared, and his name disappeared off my statements. So, I called the company he worked for, and there was no help there. They kept telling me I had to talk to my agent. I was getting frustrated and told them, “it didn’t appear I had an agent anymore.” So, they said, ‘Find a new one.’ “Well so, I called a couple, two or three insurance agents and I told them that all my money was already invested, and they didn’t seem to want to talk to me from that point on.”

John, What’s Going On?

I said, “Sir, you may be an annuity orphan, and you’re certainly not the first one who has come to me.” He goes, “What is an annuity orphan?” Annuity orphans are a term I coined some years ago which represent people who at some point purchased an annuity and have been abandoned for one reason or another by their agents.

As an investment advisor, I will tell you, your investment return is determined by time, compounding interest, but more importantly, by what market segment you’re in. Think of the market as a loaf of sliced bread with individual slices. One slice might represent large-cap growth. One slice might represent value. One slice might represent small caps. One slice might represent large caps. One slice might represent foreign. One slice might represent emerging markets. One slice might represent health care. One slice might represent technology. I think you get the picture by now. The entire market is depending on the methodology is either sliced into about 45 or 50 different indexes or perhaps more. The key to return is in the right sections. 

The good news is that the newer fixed annuities let you change your interest crediting strategy into multiple indexes. Well, at the end of the contract term, you get a chance to pick, not only different crediting rates, indexes, caps, participation rates, and different periods. So, you know that you’re never going to participate 100% of the upside, but you can increase your chances, just like investing by rotating them to the better sectors.

John, How Am I Going To Do That?

Well, and that’s the bad news. Fixed indexed annuities first came out in the mid-90s, and back then, they had only one or two selections. One was an interest rate account, and one was the S&P500 -that was it. The insurance companies have made the products more like they have offered different market segments. I believe that the products are so sophisticated now and the average insurance agent (I’m not trying to belittle them) doesn’t really understand. What I mean when I say they don’t understand is, well, most of them may not even have any securities registrations, so they have yet to prove their competency by taking basic securities testing. I think the products have gone off and left them. So, I believe you should utilize a top-notch investment advisor because you’re picking from different segments of the market, just like if you were picking stocks or ETFs. There is good news, and it’s that there are more options to choose from. The bad news is that most people, especially the layperson, are just going to be like you and they are going to look at these statements, and they are going to turn around and say, “Let it ride.” So, how can I help?

You know, unfortunately, with these contracts, all the commissions are paid on the front end, and that’s pretty much a big problem. So, you’ve got your whole life savings in there. They’ve been underperforming for five or six or seven years. I tell you what. You're not a client of mine technically, but I’ll be glad to spend five or seven minutes. The reason why it won’t take me very long is that I follow these markets and at least, I can give you some guidance on these selections, if not do it for you. The guy said, “Well, John, you’re not going to get paid.” I said, “You know, maybe I’m not getting paid on the front end, but you will not believe how much ancillary business I get and referrals I get from people that I help.

Furthermore, I can’t just sit here and watch you underperform, and by the way, in two or three years, you’ll be done with surrender charges. So, if you’re an annuity orphan or you’re not getting help from anyone, and there is something wrong, don’t forget, we’ve been in a 10-year bull market that has had many years of double-digit returns. So, where are your returns? If your returns aren’t there and perhaps, you’re in the wrong sector, or you’re in the wrong product. Go ahead and give me a call or send me an email, whatever. Maybe I can help.

Is your current annuity not performing? You know, the market has been giving double-digit returns for years. However, you don't see it. Are you confused about your income options? Do you have an income rider that you don’t understand? Are you an annuity orphan? Well, maybe I can help. I certainly would be glad to. You don’t even have to come to the office, just shoot me an email or give me a phone call. I will either contact you directly or respond to your email. If you want to set up a time to talk to me on the phone, give my office a call.

Sincerely,

John Romano, CFP®

*Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest and some participation growth, if any, of a stock market index.  Such contracts have substantial variation in terms, cost of guarantees and features, and may cap participation or returns in significant ways.  Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity.  Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated.

*The return and principal value of stocks fluctuate with changes in market conditions.  Shares when sold may be worth more or less than their original cost.

*Investors cannot invest directly in indexes.  The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

*Exchange-Traded Funds are sold only by prospectus.  Please consider the investment objectives, risks, charges and expenses carefully before investing.  The prospectus contains this and other information about the investment company, can be obtained from your financial professional at (972) 385-1106.  Be sure to read the prospectus carefully before deciding whether to invest.