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Q&A: Poor Advice on Variable Annuity?

Sometimes it's a good idea to get a second opinion.

Question: Our financial advisor recommended that my husband and I transfer the money from our two IRAs into a variable annuity that has a minimum guarantee. He suggested this after I told him we were concerned about stock market volatility and the fact that our accounts haven’t done that well. I also told him we are concerned about the general state of the global economy. But when I looked online about the annuity idea, I found many warnings against it. What is your opinion? Did we receive poor advice?

Ric: Your advisor might have been trying to pacify your fears about the economy and your unhappiness with the performance of your IRA investments, saying in effect, “Here’s an alternative that moves the money into a vehicle that lets you continue to invest in the stock market, but which offers a guarantee so that if the stock market drops in value the company offering the annuity will guarantee that you don’t lose any money.”

So maybe he’s trying to placate your concerns. Or maybe he’s just twisting your concerns into a sales pitch so he can sell you a product that pays him a big commission. (When dealing with an advisor who makes a living selling products for commissions, you need to be sure about his motivations.)

Another reason this recommendation is suspect is that a primary benefit of annuities is the fact that profits are tax-deferred; you don’t pay taxes until you make a withdrawal. But your money is already tax-deferred because it’s in an IRA. That means you’re getting no tax benefit from the annuity. So why buy it?

It may interest you to know that the North American Securities Administrators Association, a group of state securities regulators, lists annuities as one of the nation’s top financial frauds. It’s not that every advisor who sells annuities is committing fraud, but enough of them are to warrant NASAA’s warning.

For all these reasons, I suggest you get a second opinion — this time from an advisor who is fee-based, objective and independent — to help you confirm that your advisor’s advice is in your best interests and not his.

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