Investment Losses due to Variable Annuity Switching
Have you been a victim of Variable Annuity Switching? If so, The White Law Group may be able to assist you in the recovery of your investment losses.
An annuity is a form of insurance that allows for either a fixed sum of money paid to the annuitant each year of a death benefit to be paid to the heirs at the annuitant’s death.
Some of the major annuity companies are MetLife, American Equity Insurance Life, Prudential Annuities, Lincoln Financial Group, Allianz Life of North America, among others. People typically buy these as a way to diversify their portfolios and to be used as part of a retirement strategy. A simple way to explain what an annuity is, think about it as social security. You put money into it, and once you reach a certain age or disability, you begin retrieving funds. The only difference is it is not the government that guarantees the annuity it is the insurance company.
Annuities are an insurance product. There are four basic types of annuities;
- Immediate – Are annuities that initiate payments to the annuitant on the onset.
- Deferred – Are annuities that postpone payment until a later date, such as a set age.
- Fixed – Are annuities that guarantee payout.
- Variable – Are annuities that fluctuate based on the performance of the stock market.
Each type can be tailored to meet the suitability of the purchaser, which is the broker’s responsibility. Depending on the type of product selected, an annuity allows you to convert a single lump-sum of money, which is referred to as a premium, into a lifetime of guaranteed income payments (Fixed). You are able to recover your money if the need arises at any time. You will, however, receive less than you initially invested due to surrender charges. Another route that can be taken is receiving a payment which is determined by the performance of your annuity’s underlying investments (Variable). Immediate and deferred are self-explanatory.
Another feature of an annuity is the tax deferment. The money you contribute to your annuity is not taxed and grows tax-deferred but your earnings are taxed at your regular income rate. This is a huge advantage, allowing you to put money away and allowing it grow pre-taxed. Unlike IRAs or 401(k)s there is no annual contribution limit for annuities. Your monthly income will be determined by your total premium, how much time you have had it in the annuity and what plan your annuity is (deferred annuity accumulates money while the immediate annuity pays out.)
The majority of problems we see in our securities litigation practice involves variable annuities so we will focus on those.
Every time a broker sells a variable annuity, they received a larger than average commission for the sale, which is anywhere from 3-7%. Essentially, brokers are salesmen and women that primarily work for commissions, who may not necessarily have their client’s best interest in mind. A determination needs to be made if this investment is financially right for the client or for the broker. The Insurer of the annuity makes their money on annuity fees and management services.
This because problem we see involving variable annuities involves the overselling of such products – often called variable annuity switching. Variable Annuity Switching is, very similar to Churning, when a broker sells their client’s annuity to roll into another annuity for sole purpose of collecting the high commissions annuity pays out. For a client to truly benefit from annuities, it is the long term that pays off. Brokers may not inform their clients that it is possible to have a surrender fee to be released early from an annuity. Not only does the client lose the income that they were receiving from the annuity that was sold, now they have to pay a surrender fee just so the broker can make extra money for selling another annuity. In March of 2014 MetLife was charged $25 million over annuity switching. FINRA stated MetLife’s “annuity switching” business generated at least $152 million in commissions between 2009 and 2014.
A surrender charge is a fee paid by the owner of the variable annuity to withdrawn all of some of their principle before the annuity’s surrender period has expired. Let’s say hypothetically you invested $250,000 in a 10-year annuity with a 5-year surrender period and a 10% surrender charge. Depending on what annuity you purchased you are either receiving payments now, or will receive payments at a later date.
Now, let’s say you have an emergency and need $100,000 3 years into your annuity. You have not yet completed the surrender period of 5-years. You will be charge 10% on $100,000 which is $10,000 to receive your money. If you want or need to pull your principle after the surrender period has elapsed there will not be a fee. In some cases, surrender fees drop from year to year for example; if you wanted to retrieve funds within the first year the fee is 10%, within the second year the fee is 8%, the next year 6%, the next year 4%, until the surrender period is complete. This information is vital to have prior to investing into an annuity. If you take into account for state and local tax, front-end fees, surrender fees, this may offset much or all of the annuity’s tax advantages. Ensure you read all the disclosure materials and ask plenty of questions to your broker or advisor.
FINRA Quantitative Suitability
The Financial Industry Regulatory Authority (FINRA) is the regulatory entity that governs the rules and guidelines brokers/advisors and brokerage firms follow. Suitability obligations are critical to ensuring investor protection and promoting fair dealings with customers and ethical sales practices. If the investment is not suitable from the onset, the broker failed in his or her duties, and the brokerage firm failed in their supervisory obligation. FINRA Rule 2111 lists the three suitability obligations for firms and associated person.
One of the three is quantitative suitability which states “a broker with actual or de facto (in fact) control over a customer’s account to have a reasonable basis for believing that a series of recommended transaction, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.”
This means your broker, who has control over account, must be able to articulate and justify trading transaction to limit wrongdoings like annuity switching. If a variable annuity is switched for the sole purpose of generating commissions and there is no legitimate investment reason for doing so, this likely violates FINRA’s quantitative suitability rule.
If you have been a victim of Annuity switching, you have an option to contact a securities attorney and file a FINRA arbitration case against the brokerage firm that had the responsibility to supervise your broker while the switching occurred. This is the process in all security matters. FINRA is the Financial Industry Regulatory Authority. All active brokers and firms are registered members of FINRA and required by law to follow all the regulations and guidelines put forth by FINRA.
If you feel you have been a victim of Annuity switching, the attorneys at The White Law Group may be able to help you recover your investment losses. Call toll free (888) 637-5510 for your no obligation consultation. You can also visit us on our website at www.whitesecuritieslaw.com.
The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.