NEW YORK (MainStreet) — Annuities can be a great financial vehicle, providing a lifetime income stream with little risk is a worthwhile goal. But, as with any investment vehicle, risks, costs and hidden expenses should always be a concern. And annuities have been abused by deceptive sales practices for years. It’s a problem that doesn’t seem to be going away.
These insurance products come in two primary forms: fixed and variable. Variable annuities have mutual fund-like investments built-in and aim to provide returns similar to the stock market. Fixed annuities are more like interest-bearing instruments, paying a set-percentage rate return for a specified time.
Variable annuities are popular with investors for their potential for additional upside gains – and with financial advisors because of their generous commissions. In fact, I remember a speaker at an investment sales conference saying that he had reached a career crisis when he realized that there was “a limit to the number of variable annuities you can sell and still get into heaven.”
One of the most frequent strategies brokers use is the recommendation of an annuity swap – known as a “1035 exchange.” The pitch is: take your old annuity and upgrade it – switch it for this new and improved, high-performance variable annuity.
The problem is many of these swaps incur “surrender charges.” The fees have been so abused that regulators have been piling on fines to investment firms who aren’t properly supervising their brokers in such sales. Senior citizens are often the victim of the aggressive marketing tactics.
In June, LPL Financial was hit with a $2 million fine by the Illinois Securities Department -- and ordered to pay an additional $820,000 in restitution for failure to maintain accurate and complete records on such transactions. Early this month, the same firm was slapped by the Massachusetts Secretary of State securities division with another sanction and ordered to reimburse senior investors more than $500,000 in unfair surrender charges.
The Securities and Exchange Commission (SEC) and FINRA, the self-regulatory agency of the securities industry, have warned investors for years about variable annuity exchanges, saying such moves can trigger not only excessive fees but also taxes and penalties as well as additional sales charges and expenses.
In searching for an investment that provides a secure income stream for life – with the potential for market appreciation – it’s a good idea to make sure it doesn’t sink your portfolio and leave you knee-deep in fees.
--Written by Hal M. Bundrick for MainStreet