Dick and Eric delve into annuity scams and alerts in this weeks blog entry.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

For more information on Avoiding scams we have provided and excerpt from Dick’s book – The New Retirement.

Avoiding Scams

The SEC also offers advice on how to avoid scams. In the financial services industry, there are many scams. And unfortunately, every year a great many individuals fall victim to these frauds and lose some – or even all – of their savings. So, here are some of the things that investors can do that may help in preventing them from falling victim to a scam.

Ask questions and then verify the answers to those questions. Many scam artists will rely on the fact that a great many people simply do not follow up or investigate important information prior to placing their money in an annuity, investment, or other financial opportunity. It is simply not enough to ask the advisor for more information, as it would only be more of the same fraudulent “facts.” Instead, check out the information from other sources, verify then trust. Take some time to really research the investments and other products that are being offered in order to make sure they are what the advisor has said they are.

Research all companies before investing in them. Prior to investing in a company’s stock or other opportunity, one should fully understand that company’s business and its products or services. Before purchasing any shares of stock in particular, be sure to read over the company’s financial statements on the SEC’s website. It is possible to also contact each states securities regulator. Most companies are required to file financial statements with the SEC and states they are doing business in.

Know the advisor. As mentioned, spend some time doing research on any financial services representative before doing any investment of any money at all. This includes finding out if the advisor is correctly licensed and if he or she or the firm has had any disciplinary issues with regulators or clients.

Be skeptical about unsolicited offers. Should one receive a call or an email from an advisor out of the blue regarding any type of investment, be sure to research both the advisor and the investment opportunity offered.

Remember, if it sounds too good to be true, it probably is. Compare any promised returns with actual current returns on well-known stock indexes.

There is no such thing as **guaranteed returns in securities, so be careful. Even the safest of investments or financial opportunities carries with it some degree of risk. Typically, this will correlate with the return that can be expected on the investment. In other words, if money truly is perfectly safe, then it is likely headed for a lower return. Likewise, just the opposite is true as well; if high returns are promised, there is probably going to be a great deal of risk involved, too.

Pretty marketing materials do not mean that a firm or advisor is legitimate. Pretty websites and brochures are fairly easy to make in this day and age. In fact, a nice looking simple website can be created in just a few hours. Therefore, just because a company or advisor has nice-looking marketing materials, it does not mean that they are offering legitimate financial opportunities.

Do not cave in to pressure to invest immediately in a “great opportunity.” Scam artists will often tell their victims that they are offering a one-time-only opportunity and that if an investment isn’t made immediately, the client will lose out forever. Here again, research the “opportunity” prior to investing any money.

In any case, being an educated investor or consumer will be the best defense against scams. So take the time to do homework before putting money anywhere. It will be more than worth the effort to do so.

Annuity Guys® Video Transcript:

Dick: Eric, our topic today is one that I’ve been thinking about for a long time.

Eric: You trying to figure out the best scam you could run on somebody?

Dick: Well, when we start talking about annuities and folks, a lot of you found us by going on the internet, and you did a google search and you searched some term, and you brought up our website. So when you did that you probably, since you’ve been out there looking into annuities and things about annuities, you probably experienced a lot of material that, I would say an inordinate amount of material that warn can you about scams. Scams on annuities and this type of thing, and we’d just like to talk about that.

Eric: Yeah, if you’ll look at the sidebar, up and the ads around the thing when you search for the term annuity. They’re like, “Alert! Scam! Beware!”

Dick: Senior alerts, retirement scam alerts.

Eric: Everybody wants to pile on the negative, and you know why, because you click.

Dick: Right, it gets your interest.

Eric: It’s like everybody who wants to watch the car accident as you drive by. For some reason, negative sale sells and in this case scams; alerts are what draws people in so it’s a marketing term.

Dick: It is true that there really are scams, so it’s not as if we want it say, that you don’t ever have anything to be concerned about, but on the other hand you kind of want to understand, what’s really the driving forces, behind the information that you see on the internet.

Eric: Right, and financial services have gotten a black eye a lot lately, because you’ve got Madoff, you’ve got these big name accounting, not accounting firms but…

Dick: Investment firms and the like.

Eric: That people have run off with the money, millions of dollars.

Dick: Right and let’s be really frank. These large schemes that people put over on unsuspecting victims literally, they’re not that easy to discern. They’re not that easy to know, what’s really going down, underneath. I mean if you were to look up Madoff’s character at the time when he was flying high you probably wouldn’t find any fault with him.

Eric: One of the most respected guys in the investment world at the time. Unfortunately, they have all studied Ponzi schemes and that’s basically what they’re doing, they’re taking one person’s money and passing it off up the chain.

Dick: One thing Eric, that you and I have frequently told our clients, it’s just a standard theme. Always beware if an adviser asks you to make a check out with their name on it, so Madoff, a lot of people were making out checks to Bernard Madoff and his investment company directly to him. He had more or less full custody, full control over their money, and so at least there should be some red flags going up.

Eric: In fact one of the things when we’re doing paperwork here in the office, I’ll tell the person, “If anybody ever tells you to make a check payable to them, you run as fast as you can.” Here, you’re working with a company. And I don’t want to throw company names out there necessarily, but you’re making the check typically payable, to the insurance company or the investment company. Those are where those checks should be going not to the individual, even though that person is your adviser and you have complete trust in them, you still don’t make the check payable to them.

Dick: It’s a safeguard. Its checks and balances, and so now, if we switch gears from a lot of the big Ponzi type schemes, and the investment company scams that take place, and we switch over to annuities. Annuities are highly regulated by state insurance departments. These are companies that are perhaps 50 to 100 years old.

Eric: Most of them are…

Dick: Older.

Eric: Have significant time spans that they’ve been in existence for.

Dick: There are third party ratings that you can look at, folks that will tell you following them over a long period of years, how they have fared, how well they have done. It’s really a different realm when you get into annuities with the protections and the regulation that’s involved, and yet there have been some accusations of scams with annuities.

Eric: By whom?

Dick: Well, primarily what we run into and what we read in the news are those that go after the older people, the senior citizens.

Eric: The unsuspecting person that should never have bought an annuity.

Dick: In the first place.

Eric: The scam there is basically, it’s the suitability of the product for the individuals. It’s somebody taking advantage of somebody’s, I don’t want to say diminished mental capacity perhaps or just not understanding the product and how it works. That’s one of the things we stress a lot. You buy what you know and what you understand. There is nothing wrong with needing to understand how a product works before you purchase it.

Dick: Right, equip yourself. Do your research. Understand how third party rating agencies work. Look at the background of the annuity company and then you have to have a certain mind about your own finances, in the sense of how much do you put into an annuity.

We often say if an adviser tells you, you need everything in annuities you should run the other way. So there’s this balance of allocating the proper amount. In fact, you want the least amount in annuities as a rule that will produce the maximum amount of income that you need.

Eric: We talked about the foundational aspect. You know having a secure foundation. That’s what we utilize. We don’t want to put more in than you have to, but we want to protect a certain amount.

Dick: And on the other hand, there are reasons why folks use annuities. It could be for avoiding probate or just safety of the money and a reasonable growth on that money to get it over to heirs. You just have to weigh over what your purpose for that money truly is, and not let somebody talk you into something that is not going to be good.

Eric: Right and in the scam aspect with annuities, oftentimes we hear the things that really if you hear them on their face, they’re too good to be true; you know **guarantees of unlimited potential.

Dick: And no downside risk. I mean we do agree there is no downside risk, but when you couple that with unlimited upside potential, it’s not true.

Eric: Right. When you hear something that sounds too good to be true, it often is, is the rule of thumb. Somebody that doesn’t play out for your, layout rather, both the positives and the negatives of a product, really isn’t giving you the full picture. We all like to paint a rosy picture of what you can do on this side, but there is a reality of what actually will happen, and you need to understand all those, when you’re working with an annuity and any financial property.

Dick: Right and you know something that probably many different ones that have experienced or been invited to these free lunch and free dinner seminars…

Eric: Oh, those scams? Free food scams?

Dick: Are those scams?

Eric: Of course, they are.

Dick: What if it’s good food?

Eric: Well, then it’s good food, but still, nobody buys an annuity over dinner.

Dick: I would think it might be a scam, if I was really going to buy an annuity over dinner.

Eric: Never sign the check if it’s if the know that it’s free. No, when you hear about the free food and the free dinner aspects we always laugh, because from an advisory standpoint it’s a way of getting people and talking to a room of people, and that’s why you see them out there. It should be really thought of as an educational seminar, but it’s just like when you get that call to go see a time share. “Oh, we give you a free weekend in this great sunny…” The expectation is you’re going to sit through the sales presentation.

Dick: Right and that’s what you’re getting with the free dinner or free lunch. You may get some valuable knowledge about something, you may have a nice meal, but you are going to be asked to set an appointment.

Eric: Right, it’s the expectation. When you get something you’re expected that law of reciprocity, that see people want something back from you, and so don’t be surprised when you’re asked.

Dick: Yeah, and I think, folks that there’s really nothing wrong with that, when it’s done correctly without that scam aspect to it, where someone is trying to do something that is not legitimate, sell something that is not legitimate or talk you into something that is not suitable or just target people over 70, or something of that nature, because they’re easier to sell an annuity to. So I think that as long as you’re aware, that you look at both sides of the equation. You do a little research then your potential for being scammed in these situations is greatly minimized.

Eric: That’s right. It’s all about educating yourself, being realistic in what you’re getting. Going back to what we said, “If it’s too good to be true, it probably is.” The same goes for somebody sitting through any presentation, whether it be annuities, investments, whatever. We’ve all been sold that bridge that goes to nowhere, right?

Dick: Folks, never tie up more money than you can afford to tie up in annuity. Make sure you have liquidity. If somebody comes along and starts talking to you about the mortgage on your home to buy an annuity, reverse mortgage, this type of thing, it would be the rarest of occasions that that would have any validity. So you want some red flags to go up and think about it. That would go for any investment you know, “Hey, mortgage your home and here’s an investment.” I mean there may be certain situations where that would be warranted, but it would be very rare.

Eric: And let us tell you there are places that you can go online and the internet is a great tool to investigate if you think something is a scam or you’re concerned about the broker, the company, there’s ways of researching all of those pieces.

Dick: Let’s just reiterate just a little bit about what we started out talking about, and that is that many times on the internet, you’re going to see a lot of stuff that talks about scams and the real intent is just to sell you an annuity. So you have to see that thinly-veiled marketing aspect and it’s everywhere. It’s very pervasive.

Eric: People are just trying to get in front of you is really what they’re trying to do. Take your time, educate yourself. One of my favorite sayings is, “You only get to do retirement once, so make sure you do it right.”

Dick: No do-overs. You know I just might mention that, for any of you that would like, you can go on, you may have already had access to it, but you can get my book, which does have some interesting chapters in it that talk about annuity scams and talk about [unintelligible 00:12:04] and the SEC and how they can help you, also about advisers, the different types of advisers.

Eric: The broker-check pieces, and how you can investigate an adviser, excellent.

Dick: So, use that.

Eric: Thank you for visiting today. Have a good day.

Dick: Thank you. ‘Bye, now.

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