Articles Tagged with variable annuities

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with broker-advisors who’ve recommended variable annuities. There’s little question that when broker-advisors peddle variable annuities to clients that in most cases it’s in the best interests of brokers, not customers.

Variable annuities, or “variables,” are complex investments that combine mutual funds within a “wrapper” of an insurance policy. Beneficiaries will be paid a death benefit when the holder of the annuity dies. In the interim, an investor’s capital is invested in an array of mutual funds that can invest in bonds and stocks.

When variable annuities are combined with other insurance policies, the broker’s pitch is that you can tap funds at any time. But the truth is that you’re paying onerous expenses in this set-up. Such arrangements can run afoul of securities regulations. When variable annuities are paired with a whole-life insurance policy, it could constitute an “unsuitable investment strategy,” according to FINRA, the main U.S. securities industry regulator. FINRA recently reached a $1.3 million settlement with a broker-dealer owned by Ohio National Financial Services (O.N. Equity Sales Company) for selling this package to clients.

Stoltmann Law Offices, P.C., a boutique Chicago-based law firm that offers representation nationwide to investors, has been fighting brokerage firms and investment firms for decades over variable annuities and insurance products.  Variable annuities, equity-indexed annuities, whole life insurance, variable life insurance, whatever they are called, and the names can get really complicated, these insurance products are designed to do two things.  First, they are designed to move money from your pocket to the insurance company.  Second, they are designed to pay handsome commissions to the salesmen who solicit clients to invest or purchase these annuity and insurance products.

Recently, FINRA, which is the regulatory body responsible for policing the brokerage/investment markets, fined O.N. Equity Sales Company, out of Cincinnati, Ohio, for failing to supervise and surveil the sale and switching of annuities and insurance policies by their clients.  FINRA penalized ON Equity $275,000 and ordered the firm to pay restitution to aggrieved investors in the amount of $1,001,146.86.  FINRA’s investigation found that O.N. Equity (ONESCO) failed to establish, maintain, and enforce a supervisory system reasonably designed to supervise the sale of variable annuities. Because of ONESCO’s failures, the firm failed to detect and deter sales practice abuses by Richard Wesselt. In a parallel action, Wesselt consented to a permanent bar from the securities industry as a result of his misconduct. According to the FINRA action, he violated FINRA Rule 2111 (suitability), in connection with the recommendation to 78 investors to purchase variable annuities, that were inconsistent with the customers’ investment profiles, risk tolerance, liquidity needs, and time horizon.  Using what he called his “Infinite Banking” strategy, he pursued investors to liquidate their retirement accounts, including 401(k)s or IRAs, and use the  proceeds to buy variable annuities, and then liquidate the variable annuities to build cash value in whole life insurance policies. Wesselt was ONESCO’s highest producer in 2016 – big surprise given his proclivity to sell high commission products like variable annuities and life insurance policies.

If a financial advisor ever recommends the liquidation of mutual funds or other securities in an IRA or 401(k) account in order to buy a variable annuity, stop what you are doing and start looking for a new financial advisor.  The main attraction to variable annuities has always been that the money grows tax-deferred like an IRA.  By investing IRA funds in a variable annuity, that benefit is irrelevant. Instead, what you are doing is agreeing to pay your broker a huge 5%+ up front commission and the insurance company 3%-4% of your money per year in various fees and charges.  Variable annuities also charge huge surrender fees for money withdrawn in the first several years, although some offer a 10% withdrawal without penalty. Lastly, the mutual fund options for variable annuity sub-accounts are greatly reduced versus what an investor can invest in through a traditional IRA.  Variable annuities are rarely suitable for any investor. Unless you check the following boxes, variable annuities are not for you: 1) you maximize your tax-deferred retirement savings every year, i.e., you are contributing the max amount to your 401Ks and IRAs; 2) You actually need life insurance; and 3) you are young enough that you don’t need the money invested in the annuity for at least ten years.  Few people check these boxes, and yet according to reports, there is almost $2 trillion dollars locked away in these products, with more than $35 billion in sales in 2020.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with broker-advisors who’ve sold their clients variable annuities. One thing we see constantly in our practice is older investors who’ve been sold variable annuities that are onerously expensive and nearly always fail to live up to expectations. Variable annuities are investment products that offer restrictive access to mutual funds with an insurance wrapper. They are expensive to buy and carry ongoing fees and expenses that eat away at investor return. They also offer a tax incentive that brokers love to use as a sales point that in reality provides no benefit to most investors.

The main reason why variable annuities are usually poor investments is that they charge several layers of fees to investors. Everyone gets a cut from the insurance company to mutual fund managers. It’s very difficult for anyone outside of the middlemen to make money. Brokers and their advisory firms, however, sell them aggressively because the insurance companies that pilfer annuities pay out huge commissions to the salesmen who sell them.

Broker-advisors are perennially being cited for variable annuity marketing abuses. Transamerica Financial Advisors was recently fined $8.8 million by FINRA for “failing to supervise its registered representatives’ (brokers) recommendations for three different products,” which included annuities. The firm was ordered to pay more than $4 million in restitution.  The FINRA settlement cited Transamerica’s failure to monitor transactions that involved clients switching from other investments to annuities, which generated millions in commissions and fees for the firms. This is an egregious practice in the brokerage industry that mostly focuses on older and retired investors.

Stoltmann Law Offices, P.C. is a Chicago-based securities, investor protection, and consumer rights law firm that offers victims representation on a contingency fee basis nationwide. We’ve represented investors who’ve suffered losses in connection with the recommendation to invest in variable annuity products.

One strategy that unscrupulous brokers employ is to switch clients out of variable annuities into other insurance products or mutual funds. This move, of course, generates even more commissions, but may not be in the best interest of their customers. With variable annuities, investors who cash out of them within a short period of time also may incur high “surrender” fees, which are onerous. Variable annuities – the more complex and costly version of low-cost fixed annuities – are often oversold by brokers and advisors. Due to high “surrender” fees, they may lock in investors for a certain period of time. Then they may be paying even more commissions and fees in new investments.

Such practices hurt investors and have caught the attention of FINRA, the securities industry regulator. FINRA recently fined Wells Fargo Advisors Financial Network and Clearing Services more than $2 million for switching 100 clients from annuities to other products.  The regulator found that from January 2011 through August 2016, Wells Fargofailed to supervise the suitability of recommendations that customers sell a variable annuity and use the proceeds to purchase investment company products, such as mutual funds or unit investment trusts.”

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with unscrupulous investment brokers selling risky variable annuities.

Variable annuities are hybrid products that combine mutual funds within an annuity “wrapper.” As a retirement savings vehicle, you can invest in a variety of stock, bond and other funds that compound earnings tax free. Unlike “fixed” annuities, which pay a set rate of return and a guaranteed monthly payment, variables are not focused on guaranteed income and performance is based on market returns, so you could lose money. Both products provide a death “benefit,” that is, a lump-sum payment to survivors when the annuity holder dies.

The main reason variable annuities are often a bad deal for retirement investors is they are extremely expensive to own. In addition to sales commissions, mutual fund managers levy fees. There are also insurance-related expenses, riders, and other fees that act as a drag on return. Brokers often tout the tax “benefit” of owning a variable annuity, but then sell then to investors in their IRAs, which is a huge problem.

Were you victimized by financial advisor William A. Glaser, formerly a broker with National Planning Corp, in purchasing Everett Builders LLC related investments?  If so, those investment losses are potentially recoverable against National Planning Corp.  The firm was required to reasonably supervise Glaser’s activities while affiliated with the firm.  Usually there are red flags that should have alerted the firm to his conduct.

A former infirm U.S. Navy veteran lost more than $400,000 after Glaser convinced him to lend his life savings to a home builder involved in a criminal investigation by federal authorities. Glaser had convinced the veteran to sell annuities he owned and rack up $45,000 in surrender charges to invest in two promissory notes with Everett Builders LLC, a company run by Paul Everett Creager. Glaser allegedly had the client liquidate two variable annuities in 2016, costing him $19,000 in surrender charges in order to invest $235,000 in a promissory note with him. The client never reclaimed $263,000, which he was supposed to. Then, in November 2016, Creager had the client sell another annuity, which cost him $23,993 in surrender charges. In all, the client lost $361,000 in the promissory notes and $45,632 in surrender charges and fees.

We’ve represented dozens of Ameriprise (formerly known as American Express)and other brokerage firm clients in arbitration claims for unsuitable investment recommendations in variable annuities. Variable annuity sales have been a major source of arbitration claims and lawsuits against the firm and other brokerage firms as well in the last 10 years.

Few products pay as well as variable annuities do. Huge commissions often provide a compelling incentive for financial advisors to jam a variable annuity into a client’s account even when it might not be appropriate. Huge surrender charges and unsuitable, high risk sub-accounts many times lead to financial ruin for the victims who were recommended a variable annuity. Especially problematic are sales where significant concentrations of the client’s portfolio are in a variable annuity.

Ameriprise was recently drilled in a FINRA arbitration claim for variable annuity sales. A Minnesota client was recently awarded $470,000 for sales abuses by an Ameriprise financial advisor? Why? Variable annuity sales. The client was awarded part of his losses, attorney fees and sanctions.

According to Financial Advisor Magazine, the Financial Industry Regulatory Authority (FINRA) is again targeting those firms that engage in “excessive and short-term trading of long-term products,” including variable annuities (VAs). With brokers continuing to tout these long-term investment vehicles as short-term ones, in order to generate larger, back-end fees for themselves, many customers are being forced to pay commissions and fees that they would not necessarily, otherwise. This is also against securities rules and regulations. VAs are long-term products and should not be held for less than five years. If a VA is held for less than five years, chances are, the broker and/or investment firm is not doing its due diligence on the investment vehicle and could be taking advantage of the customer. Below, Andrew Stoltmann discusses some of these issues with FA Magazine today at the link below:

http://www.fa-mag.com/news/finra-targets-va-sales–again-30734.html

CNBC
FOX Business
The Wall Street Journal
Bloomberg
CBS
FOX News Channel
USA Today
abc NEWS
DATELINE
npr
Contact Information