Variable annuities have had a bad rap for some time. They are expensive, with brokers charging commissions between seven and ten percent of the amount invested. They are extremely difficult to understand, due to layers of opaque surrender charges and fees. And – because of tax deferrals – variable annuities are not appropriate for retirees, even though many brokers can’t resist the fat commissions for selling variable annuities to older investors.
A variable annuity is a kind of insurance product that offers a guaranteed future payout in return for paying into an account now, as was noted last week in the Wall Street Journal. Because the contract is “variable” and pegged to the return of a stock index like the S&P 500, “the payout can swell if investments in the account perform well over time,” according to the Journal’s Matthias Rieker.
“Brokers who sell them can earn big commissions and, according to investors’ lawyers, too often target people for whom they aren’t suitable, including many elderly investors,” Rieker reported. He cited one investor who was awarded $112,000 recently by an industry arbitration panel. The broker who sold all of the annuities had placed them into the clients tax-deferred IRA account, a strategy “that makes no sense” because it cancels out the annuities tax benefit, according to the attorney handling the arbitration claim.
Meanwhile, industry newspaper InvestmentNews last week also pointed to another potential hazard for variable annuity investors: clients are facing a “ticking time bomb” of potential forced annuitizations that will cancel out certain death benefits that are among the most attractive features of variable annuities.
“Buried within the fine print of variable annuity prospectuses, insurers detail the conditions under which they will distribute a client’s annuity in the form of a stream of payments,” reported Darla Mercado. Insurance companies “are now pushing to begin disbursement of the account as soon as possible. This has been particularly debilitating for clients who have death benefits that are significantly larger than their account values. What’s worse, is that there’s no way out of the contractual agreement.”
This is complicated stuff, but what remains easy to comprehend is that investing in variable annuities turns into bad news for plenty of brokerage clients. The Journal report noted that investor lawsuits stemming from variable annuities surged in 2012. The investor claims fell back in 2013, but still outpaced the number of investor claims involving stock and mutual fund lawsuits.
The best financial advisers tend to shy away from a quick easy sale of a variable annuity. The low rate of return, long surrender period with steep penalties for early withdrawal and fat commissions make such advisers nervous. If a broker approaches you with a variable annuity that sounds too good to be true, it probably is!
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.