Q. I am really confused about the purchase of private annuities and when that is a good idea.
I am a FERS employee who just turned 59½. I plan on working for another eight to 10 years, as I only have 12 years of service. My Thrift Savings Plan fund is around $92,000.
Last year, my financial adviser, whom I met when his firm conducted a retirement seminar at the Atlanta Federal Center, suggested that I sell most of the securities in my private brokerage account and buy a fixed index deferred annuity from Midland National to avoid losses in the stock market and reduce tax liability. I agreed to do this and moved $47,000 of my private account into a fixed index annuity with a 5 percent premium bonus. I have to admit that I really did not understand exactly what I was purchasing. I am wondering if I made a mistake by moving money out of the market and into this kind of annuity? My reason was that I lost a lot of money from 2000 to 2002 and did not want to see that happen again.
Now that I am 59½, he wants me to take the one-time disbursement from my TSP and purchase a different fixed index deferred annuity with a 3 percent premium bonus. He says this would limit any losses from the TSP funds, and I would then start to rebuild my TSP from scratch for the next 10 years. From the answers I had read, I gather that you do not think taking money out of the TSP is a good choice.
I am really confused about annuities and now wonder if I am getting the best advice. I like the fact that they know federal benefits and can advise how everything works, which I find very confusing. The firm describes itself as a “registered investment adviser firm.” Is this who I should be working with? I am concerned about a conflict of interest?
A. You’re not getting advice, you’re getting a sales pitch from someone who is being paid big commissions for the sale of annuities. Unfortunately, the investment advice business is poorly regulated. Anyone can call themselves an “adviser.” A Registered Investment Adviser (RIA) is someone who is licensed to take a fee for advice directly from a client. This license does not permit them to accept payments, like commissions, from a third party. Unfortunately, an RIA may also be licensed as in insurance agent and/or a representative of a securities broker/dealer, and they frequently are. I can’t say whether the move you made was good or bad without knowing a lot more about you, your goals and your circumstances. You should not have trusted a commissioned agent or broker to advise you, however, and the move was more likely harmful than beneficial. If you engaged the individual or firm in their capacity as an RIA and paid them fees for this service, you probably have a claim against them for compromising your interests to further their own. An RIA has a fiduciary obligation to you, which this kind of self-serving “advice” may have breached. An agent or registered rep is not held to this same standard of care, however, and is actually expected take advantage of you to earn a commission!
The most important advice I can give any investor is that they NEVER TAKE ADVICE FROM SOMEONE WITH WHOM THEY HAVE A MATERIAL CONFLICT OF INTEREST!
Find an adviser without conflict and who knows the federal benefits system. You’ll have to pay for the advice, but in the long run, it should be a lot cheaper.