Investment Fraud
Variable Annuities Sales Practices: Fraud Investigations
Investigation of Sales Practices in the Variable Annuity
Industry
Variable annuities are a combination of insurance, stock and bond funds virtually
identical to mutual funds offered by insurance companies which are often
sold by brokerage companies for commissions. It has been widely reported
that Mississippi Secretary of State, Eric Clark, and other agencies are
investigating trading practices in the variable annuity industry in Mississippi.
Brokerage companies that recommend variable annuity contracts to customers
without determining the suitability of the transactions may be acting in
their own economic self-interest at the expense of their customers. These
exchanges, known as "switching," can and do generate millions
of dollars in commissions for the brokerage companies, and cost investors
substantial sums in surrender fees.
What Are Variable Annuity Products and Surrender Fees?
A variable annuity is a contract between an investor and an insurance
company, under which the insurer agrees to make periodic payments to the
investor, beginning either immediately or at some future date. An investor
purchases a variable annuity contract often through a brokerage company
by making either a single purchase payment or a series of purchase payments.
Payments made by a variable annuity fluctuate depending on the performance
of investments in which the insurance company has assigned the principal.
(Unlike a fixed annuity wherein the payments to investors are set at a
specific amount.) The investment vehicles chosen for variable annuities
are typically mutual funds that invest in stocks, bonds, money market
instruments, or some combination of the three.
A variable annuity has two phases: an accumulation phase and a payout
phase. During the accumulation phase, the investor makes payments to the
insurance company, which are then invested. At the beginning of the payout
phase, the investors may receive their purchase payments plus investment
income and gains (if any) as a lump-sum payment, or they may choose to
receive them at regular intervals (generally monthly).
The period of time between the accumulation phase and the payout phase
is known as the surrender period. Significant fee and tax expenses usually
occur for withdrawals from an annuity during the surrender period.
Criticism of Variable Annuity Sales Practices
The sale of variable annuity products often involves the collection
of sales commissions much higher than sales commissions for related investment
products. The National Association of Securities Dealers (NASD) has reported
that they have detected ?instances of abusive sales practices and suitability
problems with variable annuities.?
The main abuses alleged by regulators include churning (the unnecessary
replacement of old variable annuities with new ones), non-disclosure of
investment risk, the sale of variable products to older and retired customers
who should be deemed inappropriate investors for this type investment
product, and the incomplete or false disclosure of tax benefits.
It has also been alleged that certain brokerage companies selling variable
annuities have defrauded customers by touting variable annuity products
from one insurance company over another, even when the products were virtually
identical, in order to generate higher commissions, surrender fees and
obtain a percentage of the fees collected from customers who purchased
the new products.
Contact Lumpkin & Reeves, PLLC
Investors in variable annuity products who wish to report their experiences,
and any potential misconduct by their brokerage company, its employees and/or
agents are welcome to contact Lumpkin & Reeves without cost or obligation
at our toll free number: 1-877-377-5152.
