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 Fargo “failed 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.”
The Wells Fargo case was extremely costly for its clients: FINRA stated “one former representative recommended that a customer liquidate a variable annuity with a surrender value of $126,681 — which caused the customer to pay a surrender fee of $5,070. That former representative, who FINRA did not identify, then used the proceeds to purchase Class A mutual funds with upfront sales charges totaling $5,531.” The company neither admitted nor denied the charges and has since implemented a “switch alert.”
“Firms must have a reasonable supervisory system in place to detect potentially unsuitable switches. Wells Fargo failed to meet this standard,” said Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement. FINRA has specific rules (Rule 2330) that apply to variable annuity sales. The regulator wants to ensure that that clients are protected from inappropriate marketing. These vehicles may be highly unsuitable for some investors. Variable annuities are popular products for retirement savers, but they should be vetted carefully. They combine mutual funds in a number of packages, although they carry many confusing provisions. Brokers and insurers aggressively sell them because they generate generous commissions and fees. Last year, individual annuity sales topped $241 billion.
“Prior to recommending the purchase or exchange of a deferred variable annuity, a registered representative must make reasonable efforts to determine the customer’s age, annual income, investment experience, investment objectives, investment time horizon, existing assets, and risk tolerance,” FINRA states in its rules for these products.
Have you invested with brokers who have sold you complicated investment vehicles such as variable annuities? FINRA and the SEC have strict rules on disclosing risk profiles on all investments sold by brokers and investment advisers. Firms are also 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.
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!