A SMA Chain Is Only As Strong As Its Weakest Link: The Secondary Market Annuities Purchasing Process

There are many steps in the Secondary Market Annuity “SMA” purchasing process and a chain is only as strong as its weakest link. The challenge is finding where the weak link exists, if at all, and how to find it? The SMA purchasing process is more like buying a house than buying a primary market annuity. There are far more steps than most people realize and any one of the following items can trip you up.  

Always require proof of the following on every SMA you purchase:

1              Contact Information

• Payee/Originator Name and Address Information
• Factoring Company/Transferor Name and Address Information
• Factoring Company Name and Address Information
• Interested Party Name and Address Information

2              Lien Payoff Information (if applicable) names, addresses, account numbers, and amounts

• Promissory Notes or Payee/Originator Advance Documents

3              Transaction Summary

• Transaction Summary will show the interest rate, date and amount Investor owes.  It will also provide the amounts due to the Originator, any third party and to the Payee less any Advances provided by Originator less any Holdbacks and less Missed Payments.

4              Amortization Schedule

• An Amortization Schedule of the transferred payments schedule on the day of agreed funding using the interest rate that the investor will receive.

5              Petition and Petition Exhibits

6              Notice of Hearing

7          Certificate or Proof of Service.

• This will include either an affidavit of personal service or service by mail or private carrier with US certified mail receipts or, if by private carrier, with corresponding tracking numbers and signature confirmation.

8              Executed and File Stamped Court Order

9              Notice of Assignment

• A copy of the Letter sent to the Annuity Issuer, a copy of the administrative fee check made payable to the Annuity Issuer (if applicable) and US certified mail receipt or a copy of the private carrier label with tracking numbers evidencing delivery.

10           Acknowledgment Letter or Stipulation

• Documentation wherein the Annuity Issuer acknowledges the assignment, the payment stream being assigned and the name and address of the buyer (Purchaser) to receive the payments. In the alternative, a Stipulation executed by all interested parties agreeing to the transfer and setting forth payment details and addresses for payments will suffice.

11            Purchase Agreement and Disclosure Statement(s)

12            Annuity Contract or Benefits Letter

13            Underlying Structured Settlement Agreement

• This may also include, where applicable, a Minor’s Compromise Order.  If this is unavailable, an Affidavit in Lieu of Settlement Agreement executed by the Annuitant and in a form acceptable to SWS may be supplied.

14            Qualified Assignment Agreement (if available)

15            Visible Copy of Photo Identification and Copy of Social Security Card

16            Certificate of Marital Status

• If Payee/Originator is Married it must be signed by spouse and notarized
• If Payee/Originator is Divorced, a copy of the Divorce Decree must be provided
• If Payee/Originator’s spouse has died, then a copy of the Death Certificate is required

17            Independent Professional Advice Form

Confirms that the Annuitant received independent professional advice or knowingly waived receipt of advice before electing to sell payments. This is required by most applicable states’ laws.

18            Declaration or Affidavit from Payee

• Identifies the Annuitant’s dependents and typically provides the factual basis upon which a Court finds that the decision to sell payments was in the Annuitant’s best interests.

19            Credit Report for the Payee and the Payee’s Spouse (if applicable)

20            Lien Report for the Payee and Payee’s Spouse (if applicable)

• Payee State UCC Search
• Payee State UCC/Fixture Filing, Tax Liens & Judgment Liens
• Payee Federal Tax Lien Search and Bankruptcy Search

21            Payee/Originator Application

You may ask why I’m publishing our 21 point proprietary checklist?  That’s because regardless of whether or not you go through us, by better educating the investment public and by helping to keep you safe we get to continue to offer these to investors where we deem them appropriate. Plus our “Checklist” is now up to 26 now and you’ll have to contact us to find out what the other 5 are. That said, done correctly and with the aid of highly qualified, insured, outside legal counsel you should be fine as long as all of the boxes are ticked and no short cuts are taken.

In July of 2010, I was quoted by Jason Zweig in the Wall Street Journal with the following quote, “Somerset Wealth Strategies of Portland, Ore., is a leading broker of factored structured settlements. Its chief executive, Thomas Hamlin, says his firm may spend thousands of dollars per settlement to make sure that all the due diligence has been done. “These are the financial equivalent of fugu, that special kind of sushi. It’s a wonderful delicacy if it’s prepared with proper care and diligence. If not, it’s a death sentence.”

Why am I saying all of this? I’m saying it because it needs to be said and anyone considering this investment class needs to hear it. There’s a right way and a wrong way to do just about anything and this industry is certainly no different. If I had to equate this asset asset class to a time in our country’s history, it’s still very “Wild West” and you need to proceed with caution and surround yourself with a very experienced team, much like the right Sherpa team going up Everest. When we stumbled across this asset class in 2009, my knee jerk reaction was that it was “too good to be true” but I knew better than to dismiss it at first blush. After researching it for a short period of time I quickly learned it was real but there were many potential pitfalls and so began a 4 1/2 month journey before we participated in our first factored structured settlement payment stream acquisition, a purchase that my one of my business partners and President of our company, Andrew Murdoch, purchased for himself. Upon the culmination of the aforementioned, I vowed to my team that it was a prerequisite that we would perform tremendous due diligence on the asset class and every transaction prior to funding by surrounding ourselves with the top legal counsel and experts in the industry.

Lastly, I disliked the names “Factored Structured Settlements”, “In-Force Annuities” and “Pre-Owned Annuities” so I came up with “Secondary Market Annuities” and the “SMA” acronym, but just in case I was wrong and as a hedge I reserved all the other previously mentioned URLs. Amazing they weren’t already taken.

In closing for for the evening I implore you to “do your homework” and look up the background of the people in which you are placing your trust, confidence and retirement savings. What licenses do they hold? Do they have to deal with regulation beyond 26 USC 5891? Do they hold insurance licenses only or no licenses at all? Do they hold securities licenses? It doesn’t take a securities license to be involved in this asset class but it does help to have someone that has regular daily, weekly and monthly compliance experience and a familiarity for what the securities regulators (FINRA and the SEC) look at. I’d encourage you to locate a team that has more than just an insurance license or no licence(s) at all, e.g. I hold Series, 6, 7, 24, 63, 65, as well as Life, Annuity and Disability insurance licenses. In addition I own part (soon to be 100%) of a 50 year old Boston area broker dealer that’s never had a customer complaint and I’m surrounded by CFPs and people that have multiple letters behind their name. Furthermore, there’s never been a single customer complaint with any member of my team and that’s not easy considering the litigious nature of our society and the fact that I’ve been doing this for 24 years.

Well, it’s been another long 13 hour day, fairly typical for me but none the less a long one and I’m not nearly done, but at this moment I’m heading to the house to see my beautiful wife and kids and in the next couple of days I’ll share the rest of what you need to know. A tidbit… “Beware the Entity.”

Take care, be well and invest wisely.