The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called Should You Exchange Your Variable Annuity. The article explains what a variable annuity is, reasons investors should or should not make a section 1035 exchange, what investors should look out for and what regulators do to protect investors.
An annuity is a contract between an investor and an insurance company. The investor buys the annuity and the company promises to make periodic payments to the investor. There are three types of annuities, fixed, variable and equity-indexed. Fixed annuities are guaranteed a payout, variable annuities payouts depend on the investments chosen and equity-indexed annuities payouts vary, but typically not as much as a variable annuity.
Variable annuities are securities registered with the Securities and Exchange Commission (SEC) and their sales are regulated by the SEC and FINRA. These annuities may impose numerous fees when you invest in them, including surrender charges, mortality and expense risk charges, administrative fees, underlying fund expenses and charges for special features.
An investor might choose to make a Section 1035 Exchange because of new developments in annuity features, including an increase in investment options, less expensive variable annuity contracts, and enhancement of death and living benefits.
However, Section 1035 Exchanges are not always a good idea for investors. FINRA listed the following reasons why investors should not take part in the exchanges:
1) The credits offered are usually offset by the insurance company adding other charges.
2) Contract provisions, such as surrender charges, expire with an existing contract. New charges could be imposed with a new contract or may increase the period of time for which the surrender charge applies.
3) There could be higher charges, like annual fees for the contract.
4) The costly features might not benefit the investor.
5) The broker usually gets paid a higher commission for a variable annuity, compared to the sale of a stock, bond or mutual fund.
Prior to making a Section 1035 Exchange an investor should learn all the facts to determine if the exchange will benefit them. An investor should only exchange their investment when it benefits the investor, not just the financial advisor.
Financial Advisors and Insurance Agents must provide all information to the investor. The advisor or agent should offer the exchange only if it is determined that it could benefit the investor after conducting a review of the investor’s personal and financial situation and needs, tolerance for risk and financial ability to pay for the contract. This suitability obligation is based on FINRA Rules.
Several states and brokerage firms require forms to reflect customer acknowledgement of a replacement transaction. Such forms should provide a comparison of features and costs of an existing contract to the proposed contract and detail what is needed to make the exchange.
FINRA and the SEC have conducted special sales practice examinations that focus on the sales of variable contracts, annuities and life insurance products. The results indicated that some advisors and agents recommended unsuitable products for their customers and the firms did not properly supervise their employees to prevent the unsuitable recommendations.
Furthermore, FINRA points out that unsuitable sales of variable contracts are routinely investigated. Therefore, it is important for the investor to do research and protect their assets.
If you and have suffered investment losses, please contact the Hanley Law to explore your legal options. The Hanley Law is dedicated to helping investors who have been victims of securities fraud. If you have lost money as a result of securities fraud, you may be able to recover your financial losses. Contact us today toll free at (239) 649-0050 for a free initial consultation.