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.
According to FINRA, “the firm’s commissions from the sale of variable annuities comprised more than 40 percent of the firm’s total revenue yet Transamerica’s system for supervising variable annuity sales and exchanges was deficient, resulting in various sales practice violations.” FINRA continued, “Most significantly, the firm failed to detect that certain of its representatives made thousands of misstatements to customers in recommending variable annuity exchanges, understating the benefits of the existing variable annuity, and overstating the benefits of the new variable annuity.” In settling this matter, Transamerica Financial Advisors, Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
In other words, the brokers did a “bait and switch” on investors. They persuaded clients to sell one annuity to move their money into one of their high-fee products to generate a brokerage commission. In general, as an investor, you will pay higher fees on variable annuities in the form of “expense ratios,” which is what mutual fund managers charge every year as a percentage of assets in the funds. Then insurance companies will also levy “mortality and expense” fees for the insurance component of the annuities. On top of that, brokers will reap a sales commission, so you’re effectively dinged three times. Since some advisors also own and operate the funds within the annuities, they profit even more.
Brokerage firms are legally required by FINRA to monitor and supervise what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the vehicles sold. Investors can file FINRA arbitration complaints if these rules are broken.
Have you invested with brokers who have invested your money in variable annuities or high-risk investments? FINRA and the SEC have strict rules on disclosing risk profiles on all investments sold by brokers and investment advisers. If they fail to fully inform you of downside risk, you may have a case in arbitration. If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!