I’m writing this post mostly as a way to vent. My hope is it will be a helpful word of warning to someone who may read this. The securities industry is so regulated we often joke about needing to get permission to use the bathroom. In spite of that we still hear about the Bernie Madoffs and the Valley Mortgages of the world who give the rest of us a black eye.
At Legacy Wealth Management we strive to do the right thing for our clients, always keeping their best interest as our number one priority. From time to time this involves doing pro bono work for someone who can’t afford to pay for it. Recently, I was asked to help a friend from church with some questions about her reverse mortgage. As I tried to answer the questions she had about her mortgage loan, what I discovered made me heartsick. This friend is a 78 year old widow. When she began working with her “advisor” in 2005, she was debt free but her income was very limited. She was advised to take out a reverse mortgage and use the money she borrowed as supplemental income. That advice was not necessarily bad. Borrowing the equity in a person’s home is an option that can provide a person who has no other options some needed cash flow. Usually the money is used to pay off the mortgage or other debt, freeing up money for other expenses. In my friend’s case, she could have taken out a line of credit and drawn on the money as she needed it. What she didn’t draw out would not accrue interest.
Unfortunately she was advised to invest the borrowed money with her advisor. He bought her an annuity that paid her monthly income for 5 years. He also bought her a deferred annuity. I imagine the idea was to start taking income from the second annuity when the first one ended. Instead, he recommended she cash out the second annuity, paying an $11,000 surrender charge, and invest the remainder in a tax shelter that would pay her income for 15 years. This tax shelter was intended for wealthy investors who need to shelter income from taxes. My friend has such little income she doesn’t even have to file a tax return! The tax credit she received from this investment in the amount of $17,000 has never been used. She can’t take advantage of it and will never be able to. It was an inappropriate investment for her and a waste of her money. The income payments she is getting from this investment are paying her less than 1%. The investment’s objective is not reasonable income. It is tax savings. She never needed that.
To make matters worse, he talked her into loaning him money. It was a verbal agreement and she didn’t ask for a promissory note. He is currently experiencing financial problems and can no longer make payments to her. She could take him to court and sue him for the money he owes her but she’d have to hire an attorney, which she can’t afford. In the end, the only person who benefited from this relationship was her insurance agent. He does not hold a securities license because he only sells insurance products. Unfortunately the insurance industry is not regulated like the securities industry. This is too bad because I would bet that more elderly people have been taken advantage of with insurance products than with securities. What her insurance agent did was unethical and certainly caused her harm but it was probably not illegal. He had her sign all the required disclosures, even if she didn’t read them or can’t remember signing them. Unfortunately she placed her trust in someone who didn’t deserve it.
The moral to this story is that while most financial advisors and insurance agents have their client’s best interest at heart, there are still many who don’t. Read everything you sign. It almost never makes sense to pay a surrender charge. It’s always a good idea to take a friend or family member with you when considering financial options like reverse mortgages, and investing in securities and insurance products. A second pair of eyes and ears never hurts, especially with the elderly.
I am heartsick over this situation because it could have been prevented. Now I have to tell my friend there is nothing I can do to fix it. The damage has already been done. At Legacy Wealth Management we always welcome you to bring a family member or friend to our meetings. We encourage questions and strive to be completely transparent. Your financial wellbeing will always be our number one priority.
Linda Eden is a Registered Principal offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2012 Linda Eden. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
