Variable Annuities on FINRA 2013 Product ‘Watch List’

In 2012, 220 variable annuity claims were filed by investors with the Financial Industry Regulatory Authority (FINRA) – an 8% increase over the prior year.

The increase in claims reflects an ongoing issue of contention that exists between many retail investors who invest in variable annuities and the brokerage firms that tout them. On one hand, variable annuities yield high commissions for the financial advisors. On the other hand, many investors are often unaware of the expenses, complexity and risks associated with variable annuities.

Earlier this year, FINRA included variable annuities on its 2013 list of regulatory and examination priorities. Among other things, FINRA stated the followed about variable annuity products:

“… long holding periods in conjunction with significant surrender charges can make [variable annuities] unsuitable for investors who have near-term liquidity needs. In addition, high fees and expenses above typical subaccount fees reduce performance, and high commissions make the product a target for switching. Moreover, consolidation in insurance companies offering variable annuities may provide an inappropriate incentive for brokers to recommend exchanges. Where the insurance company offers to buy back the product or increase the account value to forgo product guarantees, it may also present both brokers and investors with a less-than-clear picture of the financial benefit to the investor as well as the challenge of finding a similar product with the features included in the prior product.

“Our examiners will focus on the suitability of recommendations, the brokers’ level of product specific knowledge, the level of due diligence in assessing the risk tolerance and liquidity needs of the customer when making investment recommendations, the manner in which material risk exposures are disclosed to customers and the impact on broker compensation associated with competing investment alternatives.”

The bottom line: The marketing efforts used by some variable annuity sellers deserve continued scrutiny – especially when the elderly are targeted and the scare tactics used claim a variable annuity provides protection from lawsuits or seizure of their assets.

While variable annuities can serve as appropriate investment vehicles under the right circumstances and provide several benefits – particularly for investors seeking predictable income streams, tax deferral for investment gains and flexible investment choices – investors also need to be aware of the restrictive features of variable annuities, understand that substantial taxes and charges may apply for early withdrawals, and always guard against fear-inducing sales tactics.