Variable Annuities

Variable annuities are a big business on Wall Street. According to a Think Advisor report, variable annuity sales totaled $104.7 billion in 2016. These investments are popular among financial advisors and brokers, as they typically are high-fee and high-cost investments that compensate dealers handsomely. Unfortunately, sometimes investors are unsuitably recommended to invest in these instruments and/or unsuitably recommended to sell one to purchase another for significant surrender costs.

A variable annuity is a contract entered into between an investor and an insurance company. The insurance company promises to make a lump-sum or periodic payment to the investor at a certain point in the future, usually when the investor retires. The variable annuity is then invested in a wide variety of areas, but usually in mutual funds.

A variable annuity has two phases: the accumulation phase and the payout phase. During the accumulation phase, the investor makes purchase payments which are allocated to whatever investment options he or she chooses. The money put into the variable annuity will either increase or decrease depending on how the chosen investment option performs. In the alternative, the investor has an option to allocate the purchase payments to a fixed account, which will guarantee a rate of return by using a fixed rate of interest.

During the payout phase, the investor begins receiving purchase payments back along with income and gains if the investment performed well. The investor can choose to receive a lump-sum payment or a stream of payments. Further, if a stream of payments is selected, the investor can either receive those payments over a fixed period of time or indefinitely. Again, the payout phase usually begins in retirement, but the investor can choose any time for payments to begin.

As previously stated, variable annuities carry high fees and pay substantial commissions to financial advisors. Additionally, there are greater costs and surrender charges incurred by investors, making this investment somewhat illiquid.

In a practice called variable annuity switching, financial advisors have a financial incentive to tout the benefits of a new variable annuity contract in comparison to an existing variable annuity in an attempt to replace the annuity. While the financial advisor reaps the fees and commissions of a new variable annuity, the investor pays significantly. This type of transaction, when the newly-purchased variable annuity has similar features and investment options, is prohibited by securities and insurance regulators unless the investor derives an economic benefit. A transaction like this is almost always unsuitable for the investor.

Sometimes the high fees and commissions associated with variable annuities are hidden, minimized or undisclosed, which is potentially a misrepresentation or omission of material fact.

Silver Law Group is experienced in assisting aggrieved investors who have been unsuitably sold variable annuities or been the victim of variable annuity switching. If you’ve suffered losses investing in variable annuities, you may be able to recover your losses through FINRA arbitration. Our attorneys will evaluate your case at no cost to you and, if we take your case, you pay nothing unless we secure a recovery. Contact our firm for a free consultation.