Some people choose to put their money in a variable annuity because they want to earn more during strong markets than they otherwise would have if they bought a fixed annuity. There are times when a variable annuity can be a valuable part of a portfolio.
However, these products are not always right for everyone, and they are often sold by brokers who are out to make money for themselves.
If you have lost money to a potential variable annuity scam, you can take legal action against your broker. Contact the law firm of Rikard & Protopapas to speak with our investment fraud lawyers.
What Is a Variable Annuity?
A variable annuity is a contract between you and the insurance company. The insurance company takes money from you right now, or in a series of payments. In exchange, the insurance company gives you:
- Payments over the life of the contract, which can be a set period of time or the lifetime of the annuitant
- A death benefit once the annuitant passes away
Variable annuities have more risk than a fixed annuity. If you have purchased a fixed annuity, you will receive a series of fixed payments that are guaranteed over the life of the contract. Your payment is set, no matter what, even if the insurance company loses money when they invest your money. With a variable annuity, you can actually lose money over the course of the contract, depending on the investment performance.
The reason why it is called a variable annuity is that the payment to you can change over the lifetime of the contract. You can choose how the money is invested. You can choose between mutual funds, bonds and even some money market instruments. Your returns depend on how your investments perform.
The insurance company makes money by levying a variety of fees, including:
- Administrative fees
- Investment expense fees
- Mortality and expense risk fees
- Surrender charges if you make premature withdrawals
While variable annuities suit some people’s needs, they may not suit others. Insurance companies make a lot of money from variable annuities because of all the fees that they take.
The salesperson may be incentivized to recommend variable annuities because they receive a higher commission, regardless of whether the product is suitable for the customer.
Cons of Variable Annuity Products
Some of the drawbacks of variable annuities include:
- Variable annuities may not give you the returns that you think because of the fees
- You may not receive the payments that you are expecting, especially in rough markets
- You will have a difficult time accessing your money before retirement because of surrender fees
- You could receive less money than you would from a fixed annuity
- Many variable annuities can be complex and beyond the understanding of an average investor
- Variable annuities could mean that you have a high tax burden in the future
Variable Annuity Sales Are Rife with Misconduct
Because of the complexities and potentially high fees of variable annuities, these products have a high potential for fraud. Brokers can earn a fee of 6-8% every time that a customer purchases an annuity.
FINRA has a specific rule that applies to the sale of deferred variable annuities, which establishes sales practice standards regarding recommended purchases and exchanges of these products. Firms are required to have written policies and procedures when its representatives recommend transactions in deferred variable annuities. One of the main requirements is that the representative fully discloses fees and surrender charges to the client.
Clients may have trusted an investment adviser who recommended that they purchase a variable annuity. While these products can sometimes be beneficial for the client, other times, the client is paying high fees, while the registered representative is being paid significantly.
Common Types of Variable Annuity Fraud
Seniors may be even more vulnerable to variable annuity fraud because they may have less capacity to understand the investment and the financial ramifications. One study from the Certified Financial Planner Board of Standards found that senior citizen victims of variable annuity fraud lose an average of $140,000.
Here are some examples of fraud in variable annuity contracts:
- Salespersons may persuade seniors who may not have a long lifespan to place their money in a product that locks up their money for a long time, and the representative may be able to keep the money when the senior passes away.
- Brokers could have you trade one variable annuity for another, incurring transaction fees that go into their pocket.
- Brokers could recommend that you switch your annuity to another company, so they can earn an extra commission.
- A representative can recommend a variable annuity to you when it is not suitable for your specific situation. Suitability is a client-specific standard that requires the broker to analyze the customer’s own situation before making a recommendation. What may be suitable for one client may not be suitable for another.
How Rikard & Protopapas Can Help You
If you’ve been taken advantage of by variable annuity fraud, you first need to know exactly what happened and why you lost money. Our lawyers can help get to the bottom of your situation and pinpoint the cause of your losses.
Then, we can help you take action. You can file for arbitration. If you win, you can recoup some or all of what you lost. First, you need to make the case that your losses were the result of the broker’s improper conduct.
You may not feel as if you have the power to do anything about what the broker did. When the facts and law are on your side, you can.
Contact a Variable Annuity Fraud Lawyer Today
It is not always easy to take on an investment firm, especially when you are uncertain about the law. The attorneys at Rikard & Protopapas are highly knowledgeable about federal securities laws and the rules of regulatory organizations like FINRA. You can speak with an investment fraud attorney to learn more about your legal rights and any pathway to financial recovery. Call us today at (803)-805-7546 or contact us online to speak with a lawyer.