What to Do if Your Broker Sold You an Unsuitable High Commission Annuity
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As reported in InvestmentNews, three Raymond James entities have agreed to pay over $15 million to resolve an investigation by the SEC. The settlement and SEC order focused on Raymond James’s actions in improperly charging certain clients advisory fees when the...read more
Our FINRA arbitration attorneys recently discussed the financial hazards of variable annuities: controversial contracts in which buyers pay installment or lump-sum premiums to insurance companies, which then invest the contributions into risky stocks and mutual funds. In addition to being a gamble for purchasers, variable annuities also have exceptionally high commissions – not to mention a host of assorted fees and charges that can rapidly devour the investor’s funds. To make matters more difficult for investors, variable annuities are controlled by notoriously complex regulations, which unethical brokers and investment advisors can use to their advantage. Because they promise retirement income, variable annuity scams aggressively target senior investors. If you or one of your elderly parents was targeted by a high-fee annuity scam – or if you lost money because your advisor made risky investment recommendations – continue reading to learn more about your rights, your legal options, and how a FINRA lawyer can help.
Should I Purchase a Variable Annuity?
There are two core phases in a variable annuity:
- The initial or “accumulation” phase, during which the purchaser makes a payment (or multiple payments) to the insurance company. This payment or series of payments is invested in various securities.
- The second or “payout” phase, during which the purchaser may receive payments from the insurance company.
The dangers of variable annuities are well-known in the financial industry. Nonetheless, they remain popular products among many brokers – who, after all, have a chance to generate commissions as high as 10% by making a sale.
Variable annuities often gain traction with elderly investors because of the outcome they promise: guaranteed income for the rest of the purchaser’s life, providing a financial cushion during the retirement years. Unfortunately, this promise may be too good to be true. While variable annuities may offer high returns, they are ultimately tied to the performance of the stock market, which can of course never be guaranteed.
This risk is lower, though not completely eliminated, with fixed annuities, the other main type of annuity product. Unless the insurance company closes, fixed annuities are able to guarantee modest payments, because the insurance company predetermines a fixed return rate each year. To reiterate, however, the rate of return on fixed annuities is typically minimal.
Stock market volatility isn’t the only risk factor that makes annuities – especially variable annuities – risky for investors and seniors. Not only are returns uncertain; furthermore, variable annuities come with numerous fees and charges, including but not limited to the following:
- Administrative Fees – Generally about 0.15% of the account balance per year
- Initial Sales Load Charges – Variable
- Mortality and Expense Risk Charges – Generally about 1.25% of the account balance per year
- Surrender Charges – Varies by year, generally up to 7% of the account balance
- Underlying Fund Expenses – Various fees charged by the mutual funds into which the money is being invested
Furthermore, federal tax laws impose an additional 10% penalty – collection of which is aggressively enforced by the Internal Revenue Service (IRS) – if the investor withdraws funds from the account before he or she reaches the age of 59.5 years.
What Can Victims of Variable Annuity Investment Fraud Do?
Variable annuities are riddled with fees, penalties, and charges – to such an extent, in fact, that even the U.S. Securities and Exchange Commission (SEC), which regulates both FINRA and the broader financial industry, issues the following words of warning, prominently highlighted on the first page of the SEC’s Investor Bulletin “Variable Annuities: An Introduction”:
“Caution! You could lose money. Variable annuities involve investment risks, just like mutual funds. If the investment choices you selected for the variable annuity perform poorly, you could lose money.”
The same bulletin also directs a warning specifically at elderly investors, pointing out that, due to the early withdrawal penalties referenced above, variable annuities – despite promising retirement income – are in fact “long-term investments” meant to sit untouched for years.
Despite these many caveats, brokers and insurance agents frequently push variable annuity products on unwary investors, not because they benefit the investors, but because they generate high commissions. The result is that, in all too many cases, a broker knowingly enriches himself or herself at the investor’s expense.
If you have found yourself in this situation, or if your parents were targeted in an annuity scam, you may have an opportunity to recover financial compensation by filing a claim with a regulatory body known as the Financial Industry Regulatory Authority, or FINRA. FINRA, like the financial market itself, is regulated by the SEC – the same agency which issued the strong words of caution above. The function of FINRA is twofold:
- To investigate investor claims of securities fraud, including variable annuity investment fraud, trade churning (trading excessively to earn commissions), unsuitable investments, and omission (failure to disclose key information)
- To punish individuals who commit fraud, while compensating the victims for their financial losses
FINRA arbitration hearings are similar to other types of court hearings, but take place before an arbitrator (or panel of arbitrators) rather than a judge. As in a trial, both parties – investor and broker – may present evidence to support their claims. After reviewing the evidence, the arbitrator or arbitrators render a decision, potentially awarding damages to the investor.
FINRA Arbitration Lawyers Handling Variable Annuity Fraud Claims
FINRA arbitration gives fraud victims the opportunity to tell their stories, hold scammers accountable, and restore the losses they have sustained. However, the complexity of the arbitration process makes it important to have an experienced attorney – particularly since the other party will have representation of its own.
At Epperson & Greenidge, LLP, we are experienced FINRA claims lawyers who are dedicated to protecting seniors and other investors from abuses of financial regulations. If an investment advisor or brokerage firm acted without your permission, gave you misleading information, or conducted excessive transactions to earn commissions, you may have grounds to file a FINRA claim and pursue compensation. We are here to help. For a free consultation, contact us online, or call Epperson & Greenidge at (877) 445-9261 today.