What is a Variable Annuity?
A variable annuity is an investment vehicle with two phases. The first phase, the accumulation phase, allows investments to be made in sub-accounts that operate in a way similar to mutual funds. These investments in the sub-accounts may be allocated to different types of mutual funds, such as an equity or bond mutual fund.
One of the many benefits of a variable annuity is a life insurance component that provides a death benefit to the beneficiary of the investor. This benefit though can usually be achieved in a much more cost effective way and the allure of the death benefit is used to draw in investors who may feel they lack adequate coverage.
Depending on market performance, the money in these sub-accounts will increase or decrease over time like other types of investments. However, one of the main problems with variable annuities is that they are illiquid products and may not be a suitable option for investors who need to access their money. The penalty for withdrawing funds early from a variable annuity is called the “surrender charge” and may be as much as 15-20%.
Variable Annuity Fraud
Variable annuities and equity-indexed annuities are products that are sold by brokers primarily because of the significant fees that are generated. Rarely are these products suitable, especially if recommended to an elderly investor or if a large amount is invested. The unseen commission, as high as 10%, is ultimately paid by the investor through annual fees or surrender charges if the investor withdraws funds from the variable annuity.
Because the common abuse surrounding variable annuities has become so rampant, regulators, such as FINRA and the SEC, have issued warnings to brokers and customers regarding the numerous negative consequences associated with these securities.
In addition to the life insurance component that exists with variable annuities, the investments may include various riders to provide specific minimum returns and protect against losses. However, because this type of investment is so complex, even brokers or their supervisors who oversee their sales may not fully understand what they are recommending.
Brokers and their supervisors may see these variable annuities as highly valuable because they provide them high commissions, thus incentivizing fraudulent sales that are not suitable for investors.
Other components of variable annuities that may encourage fraud include:
- Churning – A broker managing variable annuities investments may sell new investments or replacements to create extra commissions for his or herself and their firm.
- Unsuitability – Although brokers are supposed to recommend investments that are a good fit for their clients, they may recommend variable annuities even if they are not suitable in any way, resulting in fraud.
- Switching – A broker may advise their client to switch variable annuities with little explanation as to why or if it will help their client, or may make risky recommendations that hurt the investor’s bottom line.
How an Investment Fraud Lawyer Can Help with Variable Annuity Fraud
If you have a variable annuity and your broker isn’t giving you sufficient answers about the details of the account, an investment fraud lawyer can help. Attorneys like those at Oakes & Fosher understand the stressful situation you face when you put your faith (and investment) in someone who set up high expectations on your return, only to find that they may have taken advantage of it. Our attorneys work tirelessly to investigate your securities fraud claim and gather evidence regarding the fraud committed against you.