Variable Annuity Switching

Some brokers and/or insurance agents improperly recommend that a customer switch or trade annuities in order to generate a commission. It is most commonly used to take advantage of seniors and individuals planning for retirement but not always in the client’s best interest. While variable annuity switching is not per se fraudulent, sometimes there is no legitimate reason for doing so.

According to the Financial Industry Regulatory Authority (FINRA), a brokerage firm and its financial advisors must make a reasonable inquiry as to a client’s financial profile to ascertain whether or not “switching” is suitable for the customer. Variable annuity switching violations are detailed in FINRA rules and regulations, specifically, FINRA Rule 2330. Factors that brokerage firms and their financial advisors should consider prior to making a recommendation to switch variable annuities include but are not limited to:

• age;
• annual income;
• financial situation and needs;
• investment experience;
• investment objectives;
• intended use of variable annuity;
• investment time horizon;
• existing assets;
• liquid assets;
• risk tolerance; and
• tax status.

Further, the financial advisor recommending replacing or switching a variable annuity should consider the following factors to determine the suitability of the transaction:

• any surrender charges and/or bonuses received;
• loss of existing living/death benefits;
• any increased annual costs;
• any increases in the surrender charge period;
• any product enhancements and improvements obtained;
• whether or not a variable annuity has been replaced in the past 36 months; and
• funded in individual retirement accounts.

The sale of variable annuities has seen significant growth in recent years and can represent a substantial portion of the retirement assets held by individual investors. This growth has been attributed to a variety of factors, including the high fees and compensation variable annuities offer to brokers. This presents issues when determining suitability for investors. For instance, a conflict of interest can explain why brokerage firms and financial advisors recommend higher compensation variable annuities over mutual funds, which provide sales volume discounts to investors. Additionally, some brokers recommend switching for the sole purpose of generating compensation on the switch.

A variable annuity held in a tax-deferred account, such as an IRA, may add additional costs with no additional tax benefits. These factors and activities have lead many in the securities industry to believe that these variable annuities are unsuitable for many retirement accounts.

There are surrender charges and greater costs associated with a variable annuity which are a function of the compensation paid to a brokerage firm and financial advisor. However, enhancements in variable annuities such as various living and death benefits can provide variable annuity holders with economic benefits. The living benefits provided by enhanced policy contract provisions such as the ability to withdraw lifetime income may make the replacement suitable if no surrender charges are incurred. These living benefits are considered a valuable benefit not available through alternative means. Due to the complexities of variable annuities, complete disclosure of all relevant benefits and costs must be disclosed to investors.

Recent developments in the competitive arena for variable annuity contract funds have led to the innovation of bonus annuity products that have resulted in significant abuses. The variable annuity bonus was created to provide an offset against any surrender charges incurred when the variable annuity was sold with the intention to replace the contract with a new “improved” variable annuity contract. Prior to recommending a customer sell his or her variable annuity and replacing it with another, the variable annuity seller must ascertain the suitability of such a transaction. There are important factors to consider which require the disclosure of all relevant facts related to the replacement transaction, as this switching can result in significant costs for the customer. For instance, the bonus can result in higher ongoing contract costs, an extended surrender charge period and the loss of contractual living and death benefits. Costs such as these are often pushed aside, diminished or not disclosed, which can result in fraudulent misrepresentation.

FINRA’s variable annuities sales practice rules require that, at the time of investment, a brokerage firm and its financial advisor must make a suitable allocation of the subaccounts’ investments inside the new variable annuity contract. This requirement makes the financial advisor and brokerage firm liable for losses that were the result of an unsuitable allocation into the subaccounts’ investment options for the variable annuity.

Silver Law Group and its attorneys have extensive experience seeking and recovering losses related to variable annuity switching. Our firm can help you determine whether an investment loss is the result of a brokerage firm and their financial advisor’s violation of variable annuity switching rules in an investment account.

If your broker and/or brokerage firm switched you from one variable annuity to another and you’ve suffered losses as a result, 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.