A headline like that would get any investor's attention. It didn't surprise the Commissioner of Fundpolice.com. Annuities are a complex investment product that is too often sold to the wrong people. This story is extensive, so we try and break it down in quick segments for you.
There are several types of Annuities. The list includes Variable, Equity Indexed, Pure Life, Joint and Last Survivor, Life with Refund Features, and Term Certain. Some people think the variation means that one is better than the other. They would be wrong. Overall, most Annuities are unsuitable for most investors. How they are pitched convince most otherwise.
Annuity programs remind us of the seven dwarfs from Snow White. All of the dwarfs have relatively the same appearance, a distinguishing name that references a personality trait, and are, of course, fictitious characters. Annuities have the same relative foundation for collecting commission fees, a distinguishing name that can appeal to a specific type of investor, and fictitious benefits for investors. In the recent years of the bear market, brokers were looking for ways to keep their incomes at the same level as they were when the stock market was doing better. Annuities were their answer. The commissions brokers make on annuities are higher than most products they can sell. This incentive drives them to sell investors a product that may not be suitable for them.
Don't bite into that poisoned apple! Jerry Wade, Commissioner of Fundpolice has written a Special Report on Annuities. This report reveals the hidden truths about annuities and gives you several great resources on where to find more information on annuity risks. Email us if you would like a full copy of this report.
Listed below are some excerpts from "Special Report- Annuities":
The fictitious parts about annuities are the promises they make:
Invest $100,000 and receive a $5,000 bonus credit into your account
Avoid initial sales charges and save taxes via tax deferral
Achieve positive stock market returns and avoid the bad years
Lock in your account value each year so that it never goes down
Basic economics reveals that the annuity company can't afford to pay you a 5% bonus, pay the agent a 5-10% commission, send the agent on an all expense paid trip and eventually pay you the return of the stock market with no risk - something's got to give.
By avoiding an initial sales charge and taking the "bait" on the free bonus money you lock yourself into a 5-15 year surrender table and up to 2-4% annual products fees that are buried deep inside the prospectus.
The promise of achieving stock market returns without stock market risk is a misleading pitch that has unrevealed and misunderstood flaws.
There are more websites out there that will help you learn more about annuities and the risks involved with investing in them:
Take a look at the stories we’ve listed on this page.You can read more about problems with Annuities below:NASD Issues New Guidelines to Fort Misleading EIA Marketing NASD, 8/1/05 The NASD issued a notice to its members regarding their responsibility to supervise the sale by their associated persons of equity-indexed annuities (EIAs) that are not registered under federal securities laws. The NASD is mainly concerned about the manner in which associated persons are marketing and selling unregistered EIAs. Some sales materials for unregistered EIAs have been found to not fully describe the features and risks of the product. These annuities may be appropriate for some, but are not suitable for all investors. www.nasd.com An Annuity for Grandma? Say It Isn’t So Wall Street Journal, 3/06/05 Elderly investors are continuously sold annuities and products that are unsuitable for their needs. Commissions are typically high priorities for salesman over the interest of the investor when it comes to Annuities, specifically variable and deferred annuities. Annuities can be complex, confusing, and misleading to investors who are looking for a stable source of income in their later years. www.wallstreetjournal.com NASD to Take Hard Look at Sales Contests Money Management Executive, 3/23/05 The NASD is reviewing its policy on sales contests. Contests are commonly used to promote sales but only non-cash rewards are allowed. The current rule allows contests only if they are based on the total production of all securities or all of one type of security. Favoritism towards a company’s brand is not allowed. Annuities are a concern for consumer advocates because they argue that the product is inappropriately sold to senior citizens to inflate sales thus creating a conflict of interest. www.mmexecutive.com Annuity Woes Multiply Research Magazine, 03/01/05 The NASD filed a complaint against Morgan Stanley and an advisor who sold an elderly client an annuity to earn a "secret" compensation from the underwriting insurance company. Variable annuities are quickly becoming the industry's latest public scandal. The investor claims he lost $50,000 and is asking for $500,000 in damages. An additional class action suit has been opened against Morgan Stanley, LPL and Merrill Lynch accusing them of failing to disclose their relationships with annuity vendors. www.researchmagazine.com Massachusetts Regulator on the Annuity Sales Prowl Money Management Executive, 2/22/05 15 banks and broker/dealers have been subpoenaed because of customer complaints regarding their sales of Variable Annuities. The Massachusetts Securities Division is investigating allegations that advisors were selling aging seniors improper investments in order to receive steep commissions. Annuities were not appropriate for seniors because of high market risk, high fees and surrender charges, and did not allow access to cash that seniors need immediately for expenses such as nursing home costs. www.mmexecutive.com Elder Abuse Investment News, 2/21/05 The securities division of the Commonwealth of Massachusetts subpoenaed 12 banks and brokerage firms for information about their sale of variable annuities to seniors over the age of 75. William Galvin, the secretary of the commonwealth, said the problem was "snowballing" as the number of elderly who are sold improper investment products is on the rise. The National Association for Variable Annuities defended the practice with their claim that people are living longer, so selling them annuities that won't mature for 10-15 years is not inappropriate for their changing needs. www.investmentnews.com
Massachusetts Regulator Seeks Variable Annuities Fraud by Bank Investment News, 2/14/05 The Citizens Investment Services Corp. targeted elderly clients who owned maturing CODs by selling them annuities that would not pay out until after they had died. Massachusett's Secretary of the Commonwealth, William Galvin, said the bank's practices were "unethical and dishonest" for selling seniors improper investments. www.investmentnews.com
Senior Citizens Slam Deferred Annuities Investment News, 2/14/05 Annuities were sold to investors who would not collect payments until after they had died. Midland National Life Insurance is facing a class action suit from seniors who were sold improper investment products. Deferred annuities were sold to them that would not mature until well past their expected lifespan. www.investmentnews.com Schwab Accused of Elder Abuse in VA Sales Money Management Executive, 2/03/05 The brokerage company was accused of selling improper investment products to a retiree. The retired woman was sold investment products to finance her retirement, but did not have access those funds for income because they were annuities. Schwab said the claim didn’t have any merit. Several Annuities lawsuits have been issued in recent weeks against various companies. www.mmexecutive.com LPL Sued in Class Action Over VA Sales Investment News, 1/31/05 A class action suit has been filed against Linsco/Private Ledger for they way they sold Variable Annuities. The suit claims that since 1990, LPL has “made false and misleading statements, and omitted material facts, concerning its undisclosed financial interests with third-party suppliers of annuity contracts.” Third parties paid LPL to direct business to them without the customers’ knowledge of the arrangements. www.investmentnews.com LPL, Morgan Hit with Class-Action Annuity Lawsuit Money Management Executive, 1/31/05 Morgan Stanley and Linsco/Private Ledger failed to disclose fee arrangements they had made with companies. Consumers were unaware that Morgan and LPL were giving preferential treatment to Variable Annuity companies who paid them to produce customers for the annuity companies. www.mmexecutive.com Spitzer Investigates Timing in Hartford Annuities Money Management Executive, 1/28/05 Elliot Spitzer is looking into whether or not improper trading occurred in annuity funds. He is also investigating the company’s disclosure of directed brokerage for annuity sales. Investors were possibly sold products without knowing that Harford was collecting commissions for selling preferred annuities. www.mmexecutive.com Morgan Stanley Sued Over Annuities Forbes Magazine, 1/21/05 A class-action Lawsuit has been taken against the company because of secret payments it received and offered to brokers as incentives to sell variable annuities. This information was not disclosed to investors and is considered abusive. The company denied any wrongdoing. www.forbes.com 12b-1 Fees, Annuities Seen as Targets of Continuing Reform Money Management Executive, 12/28/04 Variable Annuities are expected to be the new focus of regulatory reform in ’05. As the scandals continue to unfold from the industry, new avenues reveal more problems. 12(b)-1 fees will also be attacked by shareholders and boards because they pay for commissions, rather than raise money to create economies of scale and eventually disappear. Transparency of fees will also be more available to investors. www.mmexecutive.com Advisors’ Favorite Annuities Research Magazine, 12/01/04 Advisors are concerned about the details of an annuity when offering the product to their clients. Variables such as surrender fees, good customer service from the provider, and solid investment performance are important to advisors. Guarantees for the annuities are also important to advisors because it contributes to the size of their large commissions. http://www.researchmagazine.com/articles/pdf/rl04_f_annuities.pdf
