Variable annuities are a hybrid investment with features of securities and insurance.
Variable annuities are unsuitable for many investors.
Although they can help provide a fixed income later in life, variable annuities have restrictive, complex, and confusing features that make them inappropriate for many investors. They are also a high-commission investment product, which can lead to aggressive broker sales tactics.
Variable annuities are a leading cause of FINRA investor complaints. If you suffered investment losses from variable annuities and feel that their risks were not properly explained to you, your losses may be recoverable.
Variable Annuity Features
Typical features of variable annuities include:
- Tax-deferred growth
- A death benefit
- Periodic payment options that can provide guaranteed lifetime income
When an investor buys a variable annuity, they make either a lump sum payment or a series of payments that are invested into sub-accounts (usually mutual funds). In return, the investor is promised a future benefit. The benefit payments can either begin right away (immediate annuity) or be delayed to the future (deferred annuity).
However, as the name “variable annuity” implies, the investment’s rate of return is not fixed. Rather, it varies depending on the performance of the sub-accounts.
Disadvantages of Variable Annuities
Potential drawbacks of variable annuities are:
- The investor will not achieve any gains—and may even lose money—since the rate of return is performance-based.
- A lack of liquidity.
- Fees and expenses such as surrender charges, sales charges, early withdrawal tax penalties, mortality and expense risk charges, and charges for special features such as guaranteed minimum income and principal protection.
While variable annuities have features similar to an Individual Retirement Account (IRA), IRAs offer more tax benefits. Investors are often better off maxing out their IRA contributions before they consider a variable annuity.
Brokers and Firms Must Follow Proper Sales Practices
The Financial Industry Regulatory Authority (FINRA) has specific rules governing the sales of variable annuities.
When recommending a variable annuity to an investor, a broker must inform the customer of the investment’s risks and features, including things like potential tax penalties, market risk, and fees and costs.
Brokers may be responsible for investment losses.
Brokers must also understand the customer’s investment profile and have reason to believe that a variable annuity is suitable for a particular investor. As a secondary precaution against unsuitability, a principal broker with the firm must review and approve the customer’s variable annuity application before sending it to the issuing insurance company.
If these steps are not followed—and the client ends up losing money on the investment—the brokerage firm may ultimately be held responsible for the client’s losses under FINRA’s failure to supervise provisions.
Discuss Your Investment Losses With a Variable Annuities Attorney
Variable annuities should only be recommended to investors who meet certain criteria, and then only if the investment’s risks are properly explained.
If you lost money on a variable annuity that may have been improperly explained to you, discuss your possible investment loss claim with the Business Trial Group.