“I purchased an annuity from a financial planner and found out, after the fact, that what he sold me and I agreed to is not the same product that I purchased through him. He pre-filled the application and showed me where to sign. I feel foolish for not understanding how this annuity works.

I am disappointed that he presented himself as a fiduciary and told me this product would provide me guaranteed income, liquidity, and stock market returns. I now realize that the income guarantee, liquidity, and returns are not as straightforward as he described and appear to be costly versions of benefits I could have achieved with less complexity and lower fees. Do I have any recourse? Would hiring a new financial advisor help me figure out what to do?”

— Email from a prospective client

Have you heard the tale of a three-legged chicken? It serves as an apt metaphor for the "too good to be true" products marketed to unsuspecting investors. Recently, a client of mine was reminded of this tale when dealing with a complex Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity. Sold by a "friend" years ago, this annuity promised guaranteed income and stock market growth. Unfortunately, it turned out to be more of a cautionary tale than a golden goose.

Years later, the underlying investment value hadn't grown significantly. My client had been paying high annual fees—over 2%—which steadily eroded returns. When he wanted to move the account, he faced hefty surrender penalties, as high as 7%. Thankfully, we found a solution that helped him preserve his investment, but it underscored the dangers of chasing unrealistic guarantees.

For anyone considering "guaranteed" products, let me share a story about a chicken...

One of my first Accountable Update posts was about Three-Legged Chickens. I was reminded of this recently as one of my clients dealt with a complicated Guaranteed Minimum Withdrawal Benefit (GMWB) variable deferred annuity that a “friend” sold him for his IRA several years ago.

As is usually the case with products like this, it sounded too good to be true when it was sold to him. He could invest in the stock market but have a guaranteed minimum return of 7%. If only it were so simple.

Long story short, after over a decade, the value of the underlying funds were not much more, if any, than his original investment. After a few years, he decided to transfer the account somewhere else, but had been discouraged from moving it due to surrender penalties that were as high as 7% of his account balance. While market conditions and fund selection contributed to the dismal performance, the fact that he was paying over 2% in annual fees was the primary culprit.

We ultimately found a solution for him after carefully reading his annuity contract. The insurance company now sends him a check each year for the rest of his life and we deposit that into his IRA within 60 days of the distribution so it can continue to grow tax deferred. If you want to hear all of the details, or if you have a similar product and feel stuck, get in touch to discuss.

If you are considering any new investments, especially those touting guarantees, let me tell you a story about a chicken…