VALIC Financial Advisors, Inc. Fined $1.75 Million
The Financial Industry Regulatory Authority (FINRA) has fined VALIC Financial Advisors, Inc., a Houston-based broker-dealer, $1.75 million. VALIC Financial Advisors consented to the entirety of FINRA’s findings when settling the matter, but neither admitted nor denied the charges.
According to FINRA, VALIC failed to identify and address certain conflicts of interest present in the firm’s compensation policy relating to the recommendation and sales of certain variable annuities to customers. FINRA stated that there was limited or no compensation for brokers or the firm when proceeds were transferred from a VALIC variable annuity, but the firm’s policy was that compensation was paid when those proceeds were rolled into the firm’s managed investment program or its fixed index annuity.
During the period of time when the firm failed to address these conflicts of interest, FINRA said that there was a large amount of growth in the sales of these incentivized products. FINRA’s investigation showed that sales of the proprietary fixed index annuity increased by more than 610 percent in the seven months following its addition to the compensation policy and they found that a significant volume of assets moves to the advisory platform from VALIC variable annuities during 2012 and 2013. FINRA’s Executive Vice President and Chief of Enforcement commented on the findings:
“The conflict of interest inherent in VFA’s compensation policy was not identified or monitored. Compensation policies that reward representatives for moving customers from one complex proprietary product to other potentially higher cost products must include monitoring and supervision that ensure that the representatives are not putting their own financial interests ahead of their obligation to their customer.”
VALIC Financial Advisors also reportedly failed to:
Enforce procedures related to the review of variable annuities transactions exceeding customer concentration levels.
Enforce procedures relating to reviewing required variable annuity disclosure forms.
Provide the principals who reviewed variable annuity transactions with enough information regarding the customer’s other assets.
Maintain systems and procedures needed to properly supervise certain components of individual variable annuity sales.
Investing for retirement is important, but it’s not always easy to know what your best option is. If you’ve chosen a variable annuity (VA), it’s especially important to investigate your investment options.
MetLife Securities, Inc. (MSI) was recently fined $25 million by the Financial Industry Regulatory Authority (FINRA) for allegedly making misrepresentations and omissions on VA replacement applications for tens of thousands of customers.
Replacing one VA with another involves a comparison of the features of each security, and VA replacements are subject to regulatory requirements to ensure complete and accurate cost comparisons by a firm’s representatives.
FINRA alleged that MSI misrepresented at least one material fact about the costs and guarantees of customer’s previous VA contracts in 72% of the firm approved VA replacement applications. According to FINRA, MSI allegedly:
Represented to customers that their recommended VA was less expensive than their existing VA, when that was not true.
Failed to disclose to customers that their proposed VA replacement would reduce or eliminate important features in their current VA, like death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider.
Understated the value of customers’ existing death benefits in mandated disclosures.
What is a Variable Annuity?
Generally, a VA is a tax-deferred retirement vehicle that allows you to choose from a selection of investments to be paid back in retirement. The amount paid back is determined by the performance of the chosen investments, compared to a fixed annuity, which provides a guaranteed payout.
VAs may include a variety of fees when you invest in them, including surrender charges which you owe if you withdraw money from the annuity before a specified period; underlying fund expenses which relate to investment options; administrative fees for recordkeeping and other administrative expenses; mortality and expense risk charges which are charged by the insurance company for the insurance risk it takes with the contract; and charges for special features like an increased death benefit or guaranteed minimum income benefit.
Should I Exchange my Variable Annuity?
Because of the growth potential, VAs are more likely than a fixed annuity to outpace inflation, and can be a way to boost savings for retirement. Taking full advantage of the potential a VA provides requires due diligence and comparing such things as fund strategy, investment risk, diversification, and other important factors.
Cost: determining whether the new VA is indeed less expensive likely requires a side-by-side analysis, and is ideally done with the cooperation of your sales representative.
Benefits: various benefits of the new VA may be more robust or better suited to your needs, like enhanced death and living benefits that will help you achieve a financial goal.
What to Look Out for When Exchanging
Be careful when considering replacement VAs, and be on the lookout for deceptive offers:
When “bonus” or “premium” payments are offered as major or primary enticements to make an exchange it may sound like a good deal, but VAs with bonus credits may have higher expenses that offset any gain.
If you think you might need money from the VA in the short term, consider the surrender charges. Withdrawing too much money early, or deciding to sell your VA could end up being more expensive than you’re prepared for. Know when the surrender charges expire with your current VA, and consider how comfortable you are with a potentially longer surrender charge period. You are generally allowed to withdraw 10% of your contract value each year free of surrender charges, but you may be charged 6% or more on withdrawals beyond that.
Pay attention to new features in your replacement VA that you may not need, because they can unnecessarily increase the cost.
Troubles of Using IRA Money to Buy Variable Annuities
Have you been pitched the idea of buying a variable annuity by your broker or financial advisor? Were you asked to use money inside an IRA? It is important to understand that this is a risky investment for a number of reasons. Not only does it cost a lot of money, but brokers may charge high commission fees in order to benefit themselves. These are often promised as investments that are tax-deferred. This is used by brokers to convince retirees who already have their money in a tax-deferred IRA to invest their funds in variable annuities.
Watch As Attorney David Meyer Explains Using Retirement Money to Purchase Annuities
Unfortunately, not all brokers or brokerage firms understand the complex nature of variable annuities and the investors they pitch to are often not right for these types of investments. If brokers are unsure of the way variable annuities work and may not have even read the policies themselves. The benefits are not worth the investment for so many investors and the brokers may not even be aware of this fact.
With the various expenses, return on investment, and risks involved, it is advisable that you stay away from this type of investment. If you do feel that it is worth the investment, you should do proper research to make sure it is absolutely right for you. If your broker is trying to push variable annuities on you but cannot answer any questions you may have about the investment, you should discuss this option with another broker or brokerage firm to determine if it is right for you.
Call Meyer Wilson today if you are a retiree who has lost money due to a broker convincing you to buy variable annuities using your IRA money. Our securities lawyers work to help our clients recover losses they may have suffered from the bad advice of a broker. We offer free consultations so you can discuss your case with us without any concern.
Nationwide to Pay $8 Million Over Variable Annuity Failures
Nationwide Life Insurance will pay an $8 million penalty to the U.S. Securities and Exchange Commission over variable annuity and life insurance policy errors.
Nationwide Life Insurance Co., based out of Columbus, Ohio, agreed to pay $8 million over what the SEC says were deliberate delays in the receipt of variable annuity and life insurance policy orders which resulted in the failure to price policies in a timely manner.
The SEC says that during a 16-year span from October 1995 through September 2011, Nationwide instructed its mail couriers to avoid picking up orders until the end of the trading day (after 4:00 p.m. Eastern) even though many orders were received early in the morning. This delay allegedly violated Rule 22c-1, which requires that all orders received prior to 4:00 p.m. must be valued at the current day’s price, while orders received after 4:00 p.m. must be valued at the next day’s price.
The SEC also found that Nationwide actually complained to the post office on several occasions that due to a mix up of regular mail with variable orders, some of the orders were delivered prior to 4pm.
Afterward, according to the SEC's complaint, Nationwide met with post office employees and “stressed that it needed 'late delivery' of variable contract mail 'due to regulations that require Nationwide to process any mail received by 4 p.m. the same day.'”
Some of the couriers deliberately delayed their arrivals at the carrier's home office by making pit stops to get gas or buy food, according to the SEC's complaint.
Upon settling the SEC’s claims, Nationwide issued a statement stating that there was no allegation that Nationwide directly profited from the rule violations or benefitted certain investors over others.
Since 1999, the investment fraud attorneys at Meyer Wilson have been helping investors recover their losses caused by investment fraud and misconduct. Failures of financial institutions to supervise their brokers and internal procedures could spell harm for the investor. Contact us today and we can provide a free evaluation of your case and inform you of your legal rights and options.
Variable Annuities - Very Expensive Mutual Funds That Are Nearly Impossible to Understand
The variable annuity is one of the insurance industry's most popular products. Insurers and brokers have long pitched variable annuities as a retirement-savings vehicle for people who max out their 401(k)s or IRAs. At the end of 2013, the total amount U.S. investors had placed in variable annuities was an astounding $1.8 trillion.
A variable annuity combines a death benefit and mutual-fund investing. But what your life insurance agent or financial advisor may not tell you is that they receive large commissions for selling them, giving them a significant financial interest in the sale. Additionally, annual expense ratios for variable annuities can reach as high as 3% of the invested assets. This means that you need to achieve an annual return of 3% just to break even. That is far more than most people would pay in a traditional retirement plan or mutual fund. That is a lot to pay for an insurance component that many people do not even need, or much more expensive than a term life insurance alternative.
Variable annuity contracts are also very difficult to understand and most advisors who sell them and consumers who buy them don't understand the complexities. Just try to read the annuity contract before you buy it – it's mind boggling. My view is that you should never buy something you don't understand.
There is more. Investors who withdraw money earlier than they had planned often face high surrender charges. Withdrawals from an annuity during the first ten years of the contract can be assessed fees of as high as eight percent, or even higher. And some savers who have begun living off the investments from variable annuities have complained their tax bills on the withdrawals were higher than they expected.
Variable annuities are often riddled with opaque terms and conditions, high annual fees, hefty surrender charges, and illusory tax benefits. Many investors find out too late that that they would have been much better served if their financial advisor had steered them toward other, more transparent, lower-cost investment alternatives.
Warning From Former Broker About Variable Annuities
By Chad M. Kohler, Esq.
"A guaranteed income for life" sounds like a pretty good proposition to most investors.
When I was a stockbroker, I heard countless sales pitches from variable annuity wholesalers who would come into my branch office and tout promises of "guaranteed lifetime income" as the reason why a variable annuity should be part of practically every investor's portfolio.
Smooth sales pitches aside, variable annuity contracts are often riddled with opaque terms and conditions, high annual fees, hefty surrender charges, and illusory tax benefits. Many investors find out too late that that they would have been much better served if their financial advisor had steered them toward other, more transparent, lower-cost investment alternatives.
Some investors are fighting back. Data from the Financial Industry Regulatory Authority (FINRA) shows a substantial spike in customer complaints relating to variable annuities, according to The Wall Street Journal. FINRA regulates brokerage firms and oversees the mandatory arbitration process through which most customer disputes are decided. The cases at our investment fraud law firm reflect this increase in claims relating to variable annuities.
In my experience, the typical customer purchasing a variable annuity really has no idea what they're actually buying. Sadly, the broker selling the variable annuity often doesn't understand the product much better.
The Securities & Exchange Commission (SEC) recently issued an Investor Bulletin, "Variable Annuities – An Introduction." It serves as a useful primer for investors who are considering buying a variable annuity.
Here are some basic facts about variable annuities that every investor needs to consider.
Variable Annuities Are Complicated Investment Products
If your financial advisor is pitching a variable annuity, there's a good chance you've been given a glossy brochure with pictures of happy-faced retirees enjoying their golden years. The brochure may look nice, but it probably provides only a cursory explanation of the variable annuity that is being sold.
With clever marketing, it's easy to be lulled into thinking that a variable annuity provides a safe, simple solution for your retirement income needs. Don't be fooled: variable annuities are incredibly complicated investment products.
At its most basic level, a variable annuity is a contract between an investor and an insurance company in which the insurance company agrees to make periodic payments to the investor. The payments may begin right away (an immediate annuity) or at some later time (a deferred annuity). What makes the annuity variable is that the value of the annuity (including future periodic payments) will vary depending upon how investments inside the annuity perform. These investments are typically mutual funds that are tied to stocks, bonds, and cash equivalents, or some combination of the three.
By far the most confusing part for most investors (and most brokers, if they're being honest) is grappling with the intricacies of various riders that promise guaranteed "living benefits" with minimum "roll ups" and periodic "step ups." There are a lot of moving parts to these contracts, and they "continue to get more complex," as Richard Ketchum, FINRA Chairman and CEO, recently told The Wall Street Journal.
Investors are often caught off guard by what is buried in the fine print. According to Money Magazine, many investors have been surprised recently to learn about contract terms allowing the insurance company to hike fees and restrict investment options.
The bottom line: before you buy a variable annuity, make sure you understand how it works. The best way to do this is to carefully read the variable annuity prospectus, which describes the annuity's features in detail. Don't be afraid to ask your financial advisor questions, and if you're in doubt, get a second opinion.
Variable Annuities Are Often Expensive and Not Worth the Costs
There's no such thing as a free lunch, and the bells and whistles that are part of most variable annuity contracts come with a hefty price. When you start adding it all up, the expenses can easily bite off 3% or more of your account value per year. This means you need to achieve an annual return of 3% just to break even. Put another way, if the investments inside your variable annuity grow by 5% annually, then the return that your annuity is actually credited after expenses is a meager 2%.
I've talked to many investors who can't understand why their variable annuities have remained stagnant in recent years even as the stock market has done well. More often than not, the culprit is the hefty expenses the investor is paying. In many cases the investor finds that they would have been better off sticking with a traditional investment account holding a diversified mix of equities and fixed income.
In addition to annual expenses, investors also need to be aware of surrender penalties, which apply to withdrawals made within a specified time period after the annuity is purchased. The penalty period is usually six to eight years, but some contracts go out 10 years or more. The penalty assessed is a percentage of the amount withdrawn and generally declines over time. For example, a 7% surrender penalty might apply to withdrawals made in the first contract year, 6% in the second year, and so on. For investors who tie up all of their assets in a variable annuity and find themselves cash-strapped only a few years into the contract, surrender penalties can take a heavy toll.
Tax Deferral Is Rarely a Justification for Purchasing a Variable Annuity
An often hyped benefit of a variable annuity is tax deferral. Tax deferral means that the investments inside the annuity grow tax free and taxes on gains are paid only as money is withdrawn. But other investment vehicles (most notably IRAs and 401(k) plans) already offer tax-deferred growth. For most investors who are not yet retired, it makes no sense at all to invest in a variable annuity unless you are already maxing out the allowable contributions to all of your retirement accounts.
Even then, the supposed tax-deferral benefits of a variable annuity might be misleading. This is because investment gains in a variable annuity are taxed at your highest marginal income tax rate. By contrast, investment gains in a traditional brokerage account are taxed at the lower capital gains tax rate. According to a study cited by Forbes, even individuals in a 36% marginal tax bracket "will never come out ahead by investing in a variable annuitydue to the prolonged drag of fees and tax issues."
Moreover, for retirees who are considering investing in a variable annuity in their IRAs or other qualified retirement plans, it is important to understand that the variable annuity will not provide any additional tax benefits. For these investors, a variable annuity only makes sense if the annuity's other benefits, such as lifetime income payments, are worth the cost. As noted above, for many investors, the costs outweigh the benefits.
About Meyer Wilson
The team of investment fraud attorneys at Meyer Wilson has successfully represented nearly 1,000 individual investors from across the country who have suffered financial harm at the hands of stockbrokers, brokerage firms and insurance companies. We have won verdicts, arbitration awards and settlements of hundreds of millions of dollars for our clients. If you believe you have a case involving investment misconduct our firm can help. Meyer Wilson represents clients nationwide from offices in Ohio and California.