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3 Ways to Be Careful With Annuities

Joanne Cleaver

It's not annuities themselves that worry regulators. It's how they're sold.

In January, the Financial Industry Regulatory Authority, an independent agency that regulates sales of investments, said it was ratcheting up oversight of annuity sales to senior citizens.

"Across the country, FINRA is examining firms to ensure that they have supervisory controls in place to ensure they're being sold properly. We are especially concerned about abusive switches and costly surrender fees, firms' supervision of switch activity and over-concentration of annuity products in customer accounts," says Susan Axelrod, FINRA's executive vice president of regulatory operations.

She says FINRA is meeting with firms and "senior investor advocates" to understand the "key issues confronting senior investors." "Variable annuities are very complex and sophisticated products. FINRA continues to closely examine and monitor how firms are selling variable annuities to seniors," Axelrod says.

[See: 6 Ways Retiring Can Be More Affordable.]

Criminals go where the money is, and if you have enough money to buy an annuity, you have enough money to interest a criminal.

Typically, consumers consider buying annuities in the decade before retirement, with the aim of providing guaranteed retirement income. "They're the ones who have saved their entire lives for retirement, so they're a prime target for fraud," says Patricia Kelley, chief compliance officer for Prudential Annuities in Shelton, Conn.

Here are three cues to take from FINRA's concern:

1. Don't gloss over the details and ignore statements. The annuity prospectus explains the underlying investment machine that will deliver the guaranteed income. It's not an easy read, Kelley says, and neither are the regular statements. But it's important to wade through it all. "Don't ignore statements," Kelley advises. "They're a great indication that might set off yellow flags, such as, 'Why did I get a confirmation of transaction?' if you didn't authorize a transfer."

Kelley and other financial advisors agree that the key question to ask is, "What exactly do I need for retirement, and will this product fulfill that need?"

[Read: How to Choose a Financial Advisor.]

Approach annuities early and methodically, advises Mary Anne Heyman, a certified financial planner with Financial Design & Management in Fort Collins, Colo. "The time to think about this is when you're not in an emergency mode. If you can be proactive, you'll know if you have a need for an annuity, and you'll know if it's immediate or deferred, equity or fixed ... There are a lot of moving parts to these instruments. You don't want to make a move when you're in panic mode," she says.

2. Don't put annuities on automatic pilot. Most people buy annuities a decade or more before they start taking the guaranteed income, Kelley says, and your mental acuity and understanding of your affairs might change over the duration.

Minimize the chance of fraud by keeping close track of the financial advisors and salespeople you deal with, for yourself and for your parents, if you are helping them with their affairs, says Joy Loverde, a Chicago consultant to the elder care industry.

Know who you're dealing with, so you aren't taken by surprise if a new advisor crops up, claiming to be someone you spoke with in the past. "Create a spreadsheet with the contact information of brokers and agents, and do an annual sweep of licensing and regulatory agencies to detect any complaints or lawsuits," she says. "Do it for yourself, and offer to do it for your parents."

[See: 12 Surprising Facts About Boomer Retirement.]

A senior's ability to manage complicated investments, like annuities, might start to slip at the same time he or she is beginning to take income from the investment. Fraudsters often operate on the assumption that a senior citizen is impaired, but not aware of his or her impairment, and thus is an easy mark, Loverde says. "You don't change your attitude about money because you got old, but you can slip into dementia and become unaware of trends and not be aware of it," she says.

3. Openly discuss investment advisor relationships with other family members. Everyone should be on the same page about who is in contact with seniors and what the seniors are being told.

"If your parents have a relationship with a stockbroker and the broker suggests that they move their money, there is trust built into that relationship, and you or the senior may not realize exactly what they are being asked to do," Loverde says. "That's when there can be a violation of trust."

A subtle way to protect seniors from investment fraud is to first conduct reviews of advisor qualifications and statements for your own portfolio, then suggest that you do the same for your senior loved one, Loverde recommends. This strategy "puts you on their side," she says, so the senior doesn't think you are implying that he or she is incompetent.

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