|
|
|
 |  |
 |
 |
|
    
Subscribe | |
|
|
Posted by: Robert Hutchinson A major source of abuse by some financial advisors is in the sale of variable annuities, particularly to the retired, soon to be retired, and the elderly. To compare, let's start by looking at a typical straight annuity, which is a contract by an insurance company to pay a certain amount of money, usually monthly, at a set rate of return. If the insurance company is financially solid, then the risk involved is minimal. On the other hand, a variable annuity does not have a set rate of return, but instead is based on the investment results in the stock market - so the customer rides the highs and the lows of the market. Rather than having the investment protected against major risk, the buyer is exposed to what the market returns. The return on investment occurs only when the market goes up. Worst of all, the investor or retired person can suffer severe losses when the market takes a downturn. Then there are the fees, which are often as much as 2%, ten times more that a .02% cost of an index mutual fund, which over a period time can reduce principal by tens of thousands of dollars The problem is further compounded if the annuity is switched from one company to another, since there is typically a stiff penalty for doing so. Often the sales pitch is that under Section 1035 of the Internal Revenue Code the switches are not taxable. That is true as far as it goes, but it's not the whole story. Penalties are typically imposed by the prior variable annuity contract. For example, the securities industry's so-called self regulating organization or "SRO," which is the National Association of Securities Dealers (NASD) filed an action on January 14, 2004 against Waddell & Reed for 6,700 variable annuity exchanges without, it alleged, any determination of either suitability or financial appropriateness. Why all the fuss? The surrender penalties amounted to $10 million and the commissions amounted to $37 million! The company has denied any wrongdoing. Surrender charges, usually chargeable over a long period of time - 8 to 15 years - also take a big bite. For example, consider a Complaint filed in 2005 by the Massachusetts Attorney General against Investors Capital Corporation, alleging surrender fees of $175,000 on combined policies of $700,000. Tax angles are often oversold, under explained, and used in a way that actually puts the investor in a worse tax position. For example, there are "advisors" who tell people to "take advantage" of the tax shelter part of the variable annuity, when the person already has room to contribute to his or her 401(k) or IRA, which are already tax-sheltered; and many purposely fail to point out that, unlike a 401(k) or an IRA, a payment for an annuity cannot be used to reduce their taxable income. In this way, even the "tax advantages" are turned into tax disadvantages. What is the driving force of these sales? The Waddell & Reed case certainly gives a clue. Let's take another example. This one is taken from a complaint filed by the Missouri Securities Division, Case No. AP-06-155, where it was alleged that the sale of variable annuities in the amount of $315,000, after various switches, generated commissions of $92,177; and in another case the initial amount was $450,000 with various switches ringing up commissions to $70,488! So the answer is very clear and very simple: huge sales commissions paid by the insurance companies. These fat commissions are far more than could be made if other, more suitable products were sold. Typically, the sales pitch is that this is a way to get some "upside" return, while downplaying or ignoring the significant stock market risks, fees and penalties. The bottom line is that variable annuities are risky and are not suitable for most people. Even when they are suitable, only a small per cent of investor's total portfolio or nest egg should be invested in it. Where the abuse comes in is when these operators sell these things to people who shouldn't be buying them in the first place, and then load them up with the product. In the most extreme cases, sales people convince people, usually the elderly, into mortgaging their free and clear houses to buy these things. Clearly, these sales people are looking out only for themselves, and not the investor. Long story short: The sales person and the insurance company win, the customer loses. Copyright 2006 by Robert W. Hutchinson |
NewsSecurities
[07/02] World stocks down ahead of key US jobs data Securities Litigation
[02/25] Topics
AIG: Arrogant, Incompetent, and Greedy Recent UpdatesOctober 23, 2008 October 03, 2008 July 09, 2008 January 02, 2007 December 22, 2006 ArchivesWeb ResourcesHutchinson Law Firm LLC |
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
Copyright © 2009 by Hutchinson Law Firm LLC. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.
