Securities Arbitration Lawyers BlogSecurities Industry Watchdog Issues Investor Tips For Variable Annuities
Be prepared, the Securities Exchange Commission (SEC) warns investors, “to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.“ Investor education is the key to making informed investment decisions, but what questions should be asked? Investors must rely on their advisors because the variable annuity prospectus, frequently 100-plus pages, or more, is convoluted and not easily understood by the Average investor. The SEC recently issued an Investor Tip: Variable Annuities, What You Should Know publication to provide direction for investors.
Variable annuity contracts are considered by many investors complex which leads to their reliance upon the financial advisor who recommends the investment. The terms of the contract which investors should be familiar include:
- surrender period;
- surrender charge schedule;
- mortality and expense charges;
- management fees; and
- any rider costs.
Variable annuities have been criticized for high sales commissions paid to financial advisors than and other potential abuses. There are no reductions in management fees as the investment amounts increase, which can be found in fee-based managed accounts. Tax-qualified investment accounts such as Individual Retirement Accounts (IRA) are considered unsuitable for variable annuity investments because the tax treatment for IRAs are already tax deferred, resulting in extra costs for a redundant tax benefit.
Non-qualified variable annuities do provide tax deferral benefits which over time can result in substantially greater accumulations. For elderly or retired investors tax deferral benefits seem less likely with shorter investment time horizons and the need to make withdrawals to meet income needs. So why do so many financial advisors recommend that elderly and retired individuals invest in variable annuities?
The SEC publication takes special notice of bonus variable annuity products and potential pitfalls that you should be aware of before you replace your existing variable annuity contracts with a new one. Variable annuity products have back-end surrender charges which are deducted from your account if the contract is not held for the entire surrender period. To facilitate the replacement of old variable annuities with newer ones, bonus credits can be used to offset the surrender charges from an earlier cancellation. The SEC publication warns that financial advisors may fail to adequately explain how the insurance company recovers the bonus credit from your invested funds. The bonus credit is not a “free lunch” and the costs can be recovered by the new variable annuity contract through:Could it be the compensation they receive? Remember, financial advisors are paid by the company’s whose products they sell.
- Higher surrender charges;
- Longer surrender charges; and
- Higher ongoing mortality and expense charges.
Additionally, financial advisors and the brokerage firms they represent may be held accountable for any losses sustained in the account as a result of unsuitable allocation of the funds amongst the variable annuity sub account investment options.
The Silver Law Group has Martindale Hubbell “AV” Preeminent Peer Review™ rated lawyers committed to the advocacy of investor rights who suffered from unsuitable investment advice, including investment losses from variable annuity switching transactions. If you are interested in learning more about variable annuities or your legal rights, you are encouraged to contact our law firm for a free consultation. Our attorneys have significant experience representing investors in variable annuity claims. If you have questions about your legal rights, or have been the victim of investment fraud, please contact us, toll free at (855) 755-4799.