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Financial literacy raises its head again

How much better our society would be if everyone did what is right. I choose not to watch the news much because it’s so depressing but I made an exception last night and, as predicted, it was depressing. So much so that I feel compelled to share something with you.

It was a story on CBS Evening News about the DA for the District of Maryland (I think) who is setting out to recover money that was effectively “stolen” from a bunch of people who had received court settlements that involved the payment of an annuity over a period of time. These poor people, many of who are old, physically disabled, or cognitively challenged, were offered an immediate payment of a lump sum in return for assigning their annuity entitlement by various companies in the finance industry – there were no names mentioned and I must emphasize that not all companies that buy annuities are necessarily crooks.

My attention was piqued when I heard of a young African American lady who had received a settlement of $630,000 as a result of lead poisoning. It was to be payable by means of a structured annuity over 40 years. I further understand the current value of the annuity was said to be $480,000 at the time she “sold” it for $66,000!

I don’t know the details of the transaction but after I heard this I took out my pencil and estimated that if the annuity was based on a 5.5% yield, the annual payment for a $630,000 settlement sum would be about $30,000 per year. Now, it would of course be a bit less than this if the payment was indexed and I’m only guessing at the yield but what I know for sure is the people who “bought” the annuity from this poor soul picked up an asset with a present value of $480,000 in return for $66,000 – a clear profit on the transaction of $414,000 which, quite frankly, gives me the utter shits!

As practicing CPAs we know this stuff and I believe we have a responsibility to do what we can to improve the degree of financial literacy in our community. I would like to suggest that we make sure our clients know not to entertain these sorts of transactions before talking to us and we should let them know to alert their family, friends, and neighbors to do likewise.

This is not a way to generate revenue for your practice but my guess is that if you take a public position on this in your community you’ll be rewarded from the excellent PR it will generate and you’ll sleep well in the knowledge that you have done the “right” thing by taking on the bad guys.

  1. Kerry King
    May 13th, 2016 at 17:20 | #1

    Your point is a good one Ric. It has always been my view that the accounting Profession and in particular those in Public Practice have to give more thought to their community and how they serve them. Operating ‘compliance’ Practice is a model that falls far short of what most practitioners are capable of in terms of contribution to their community. I suspect that many believe that they have to take on a full ‘Business Advisory’ role to make that contribution which of course is unnecessary. There is plenty A Practitioner can offer the ‘business community’ that does not require a full suite of advisory tools to help improve the financial literacy of their clients and hopefully the financial results of their businesses.

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