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Variable Annuity Switching

Variable annuity switching is a prevalent abuse among seniors and individuals planning for retirement. The recommended purchase or exchange of a variable annuity requires that a brokerage firm and its financial advisors must make a reasonable inquiry as to a client’s situation before making a recommendation to switch variable annuity contracts. Variable annuity switching violations are detailed in FINRA rules and regulations by (FINRA Rule 2330). The factors that a brokerage firm and their financial advisor should consider, at a minimum, before making a recommendation include:

  • age;
  • annual income;
  • financial situation and needs;
  • investment experience;
  • investment objectives;
  • intended use of variable annuity;
  • investment time horizon;
  • existing assets;
  • liquid assets;
  • risk tolerance, and
  • tax status.

The recommended replacement (or switch) of a variable annuity contracts should consider the following factors to determine the suitability of the transaction:

  • any surrender charges and/or bonuses received;
  • loss of existing benefits (living or death);
  • any increased annual contract costs;
  • any increases in the surrender charge period;
  • any product enhancements and improvements obtained;
  • customer has replaced another variable annuity in preceding 36 months; and
  • funded in individual retirement accounts.

There has been significant growth in the number and amount of variable annuities contracts issued by insurance companies and represent a substantial portion of the retirement assets held by individual investors. The growth in this investment category has been attributed to many factors, including the high compensation paid to financial advisors who recommend their purchase. Variable annuity purchases are not subject to sales breakpoint discounts provided by mutual fund families. In some instances, a conflict of interest based on higher compensation paid to brokerage firms and financial advisors can explain why variable annuities are recommended as funding vehicles for Individual Retirement Accounts (IRA) as compared to mutual funds which provide sales volume discounts to investors. A variable annuity held in a tax deferred account, such as an IRA simply, may add an additional layer of costs with no additional tax benefits. These factors lead many in the securities industry, including FINRA arbitrators, to conclude that variable annuities are unsuitable for retirement accounts.

Annuity Replacement: Perform Cost/Benefit Analysis

There are surrender charges and greater costs associated with a variable annuity that are a function of the compensation paid to a brokerage firms and financial advisors. However, enhancements in variable annuity contracts such as certain living and death benefits provide contract holders with substantial economic benefits. The living benefits provided with enhanced policy contract provisions such as the ability to withdraw lifetime income may make the replacement suitable if no surrender charges are incurred. These living benefits are considered a valuable benefit not available through alternative means. Due to the complexities of variable annuities, complete disclosure of all relevant benefits and costs need to be disclosed to investors.

Bonus Variable Annuity Contracts

Recent developments in the competitive arena for variable annuity contract funds have led to the innovation of bonus annuity products that have resulted in significant abuses. The annuity bonus is designed to provide an offset against any surrender charges incurred from the surrender of an annuity contract with the intention to replace the contract with a new “improved” variable annuity contract. The recommendation to sell an annuity and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer. There are important factors to consider which require the disclosure all relevant facts related to the replacement transaction. For instance, the bonus can result in higher ongoing contract costs, an extended surrender charge period and the loss of contractual living and death benefits. These costs are often minimized or not disclosed which result in a fraudulent misrepresentation when the motive of the financial advisor’s compensation is taken into consideration.

Unsuitable Subaccount Asset Allocation

FINRA sales practice rules concerning the recommended purchase or replacement of an annuity requires that, at the time of investment, a brokerage firm and their financial advisor are responsible for making a suitable allocation of the subaccount investments inside the new variable annuity contract. This requirement holds the financial advisor and brokerage firm for any losses that were the result of an unsuitable allocation into the subaccount investment options for the variable annuity. Investors who purchased or exchanged a variable annuity near retirement age are reasonable to expect that the investment allocations recommended by the financial advisor are suitable for them. The Silver Law Group can help you determine whether an investment loss is the result of a brokerage firm and their financial advisor’s violation of variable annuity switching rules in an investment account. If an investor suffers losses as a result of variable annuity switching they may be able recover their losses in a FINRA arbitration claim.


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