Securities Lawyers Blog
As reported by InvestmentNews, A Financial Industry Regulatory Authority (FINRA) official recently expressed concern over the sale of variable annuities as the products continue to evolve and become more complex. Carlo di Florio, chief risk officer and head of strategy at FINRA was quoted as stating that variable annuities are now taking on features that resemble complex structured products. Structured products typically have features such as caps that limit returns during market rallies and floors that limit losses during market slumps. Now these features are appearing in variable annuity products. Variable annuities are already extremely complex products that are not suitable for all investors. Adding yet an additional level of complexity only heightens concerns that investors must understand what they are buying when they are recommended these vehicles.
As a background variable annuities are complex financial and insurance products. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. The SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.”
A variable annuity is a contract an investor makes with an insurance company where the insurer agrees to make periodic payments to you. A variable annuity may be purchased either in a single payment or a series of payments over time. In the annuity account the investor chooses investments and the value of the annuity “varies” over time depending on the performance of the investments chosen. The investment options for variable annuities are generally mutual funds.
The three primary benefits of variable annuities are periodic payments, a death benefit where your beneficiary is guaranteed to receive typically at least the amount of your purchase payments, and tax-deferment. That is, taxes on the investments within the annuity are deferred until the money is withdrawn similar to an IRA. However, these benefits are often outweighed by the terms of the contract including surrender charges, mortality and expense charges, management fees, market-related risk, and rider costs. Sales commission for variable annuities are extremely lucrative and induce some financial advisors to push these products on persons who do not need them or cannot benefit from them. For example, a tax-qualified account such as an IRA would is typically unsuitable for holding a variable annuity investment because an IRA is already tax deferred.
In the InvestmentNews article, FINRA’s spokesperson stated that investors are sometimes frustrated about the lack of disclosures, broker sales practices, and the surrender rules with variable annuities. Another concern was what is an appropriate investment concentration in variable annuities? FINRA does not provide a specific rule on how much variable annuities should weight in a portfolio. However, the spokesperson did state that whether a variable annuity portion of a portfolio is appropriate depends on the client’s objectives.
The attorneys at Gana Weinstein LLP are experienced in representing investors in cases concerning the inappropriate sales of variable annuity products including Equity-Indexed Annuities. Our consultations are free of charge and the firm is only compensated if you recover.