Investment Losses due to Variable Annuity Switching
Have you suffered losses due to variable annuity switching? If so, the securities attorneys at The White Law Group may be able to assist you in the recovery of your investment losses.
An annuity is a long-term investment that is issued by an insurance company, with a series of payments made at equal intervals. Through annuitization, your purchase payments (or contributions) are converted into periodic payments possibly lasting a lifetime.
People typically buy these as a way to diversify their portfolios and as part of a retirement strategy. To explain the way an annuity works, think about social security — you put money into it, and once you reach a certain age or disability, you begin getting money back. The difference is, it is not the government that guarantees the annuity, but the insurance company. Some of the popular annuity companies are MetLife, American Equity Insurance Life, Prudential Annuities, Lincoln Financial Group, Allianz Life of North America, among others.
Annuities, or insurance products, have four basic types:
- Immediate – initiate payments to the annuitant on the onset
- Deferred – postpone payment until a later date, such as a set age
- Fixed – guarantee payout
- Variable – fluctuate based on the performance of the stock market
Each type of annuities can be tailored to meet the suitability of the investor, 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, however, your earnings are taxed at your regular income rate. This is a huge advantage, allowing you to put money away and allowing it to 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 Risks and Problems Associated with Variable Annuities
Every time a broker sells a variable annuity, they receive a larger than average commission for the sale, which is anywhere from 3-7%. Many brokers primarily work for commissions, and may not always have their client’s best interest in mind. The Insurer of the annuity makes their money on annuity fees and management services.
Variable Annuity Switching
Overselling variable annuities or variable annuity switching can be a problem and is not in the best interest of the investor.
For a client to truly benefit from investing in variable annuities, it is the long term that pays off. Sometimes a broker may entice his client to sell variable annuities to roll into another annuity for the sole purpose of collecting commissions. Not only does the client lose the income that they were receiving from the annuity that was sold, but they will have to pay a surrender charge as well as commissions on whatever product they are switching to.
A surrender charge is a fee paid by the owner of the variable annuity to withdraw all of or some of their principal 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 charged 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 lapsed there will not be a fee. In some cases, surrender fees drop from year to year. For example; 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. Once you add in the state and local taxes, front-end fees, and 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, 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 persons.
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 the account, must be able to articulate and justify trading transactions 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.
Filing a complaint against your Brokerage Firm
If you have been a victim of variable annuity switching, you may be able to file a FINRA complaint against the brokerage firm that had the responsibility to supervise your broker while the switching occurred.
If you feel you have been a victim of variable annuity switching, the attorneys at The White Law Group may be able to help you recover your investment losses. For a free consultation with a securities attorney please call (888) 637-5510. For more information you can visit 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 Franklin, TN.