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Annuities

Annuities are complex hybrid financial and insurance products that can offer investors a stream of income, tax deferment and a death benefit. When an investor purchases an annuity, they contribute money, which is invested in a series of sub-accounts in order to generate a positive rate of return. The sub-accounts of an annuity are generally invested in mutual funds, the selection of which will dictate the potential performance of the annuity. While there are benefits of annuities, they are often outweighed by the risks and expenses.

What Are The Most Common Annuities Sold To Investors

a. Variable Annuities

A variable annuity is a type of annuity contract, which offers investors growth potential based on the performance of sub-accounts. When investors contribute money to a variable annuity, the sub-accounts are invested in mutual funds that meet the customers’ risk profile. The more risk taken within the sub-accounts, the greater the potential for gains and losses. The performance of a variable annuity is not guaranteed, and Financial Advisors often fail to explain the risks of variable annuities are similar to those experienced in the stock market.

The most common type of variable annuity is structured to provide a deferred income benefit to the investor at some date certain in the future. Investors will often pay fees as per the annuity contract to add an income feature. This is known as an “income rider.” For example, if an investor plans to retire at age 65, he or she may elect to begin drawing income from the variable annuity at that time. The income payments received will ultimately reduce the principal value of the annuity.

Over time, the principal value of a variable annuity will appreciate or decline depending on the performance of the sub-accounts. When the investor begins to withdraw income, the formula for calculating the amount of income is correlated to the principal value of the annuity.

b. Fixed Annuities

A fixed annuity is a type of insurance contract that promises to pay an investor a fixed amount of interest, regardless of market performance. Unlike a variable annuity, investors can expect to receive a minimum rate of interest. Often times, the fixed interest rate is equal to or slightly above inflation.

There is an accumulation phase associated with fixed annuities, whereby investors allow the fixed annuity to earn interest for several years before withdrawing any income. After the accumulation phase, investors can withdraw up to 10% from the fixed annuity each year.

Fixed annuities are rigid and do not provide investors with the ability to withdraw larger amounts of money in the event of unforeseen expenses.

Much like a variable annuity, the income feature of a fixed annuity is often dictated by the principal value of the fixed annuity on the date the investor begins withdrawing income. Because fixed annuities generally deliver lower returns, investors can expect that the amount of income generated by fixed annuities will be lower.

FINRA Rule 2330 Protects Investors Against Unlawful Annuity Sales

Many financial advisors recommend annuities because they generate high sales commissions relative to other financial products. In order for clients to utilize many of the features offered by annuities, such as lifetime income, disability coverage and death benefits, “riders” are added to the annuity at excessive costs. Often times, the expenses associated with the annuities are greater than the returns generated each year. Because annuity contracts are complex, many clients do not understand the intricacies of the investment until it is too late.

For example, variable annuities may include high annual management fees, surrender charges, lock-up periods, and mortality charges. In addition, it is commonly misunderstood that variable annuities offer guaranteed investment returns. They do not. Many financial advisors fail to disclose that investment returns may be impacted by market conditions.

Unscrupulous financial advisors may also engage in annuity “switching,” which refers to the practice of selling one annuity and purchasing another. Often times the “switch” is justified by the financial advisor by suggesting that the annuity purchased has superior features when any such enhanced feature is actually outweighed by the cost of the “switch.” Brokers also tout so-called “bonus” payments made by annuity companies. However, the Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) have cautioned customers to be aware of “bonus credits” offered to financial advisors for selling certain variable annuity products because those bonuses are an illusion. The back-end fees offset the bonuses paid to investors over the term of an annuity.

FINRA Rule 2330 is designed to enhance compliance and supervision regarding annuity products to ensure that Financial Advisors disclose surrender charges, tax penalties, fees/costs, and market risk. Rule 2330 also requires that a principal of the member firm review and approve each annuity transaction. These added protections are designed to ensure that all annuity transactions are suitable and comply with FINRA’s suitability rule 2111.

The Wolper Law Firm has extensive experience handling claims involving annuities. If you believe that you were improperly sold a variable annuity, fixed annuity, single premium deferred annuity, please contact the Wolper Law Firm for a free consultation and case evaluation.

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]