By Matthias Rieker
As markets improve and investors' damage claims against brokers
subside from the 2008 financial crisis, complaints about one
financial product are still gaining in relative volume: variable
annuities.
A Kansas City, Mo.-based lawyer who is handling several such
cases, Diane Nygaard, describes herself as "besieged" by investors
seeking help with claims. Brokers, she said, "will stand up in
front of a room and sell what they tell people are tax free, high
income, you-can't-lose-your-money investments...That's the
shtick."
In 2012, the variable annuity was the only class of security for
which arbitration claims increased, with 220 cases filed that year,
according to data from the Financial Industry Regulatory Authority
Inc. Last year, through November, 165 such cases were filed,
surpassed only by cases involving two very popular forms of
investment--common stock and mutual funds. It represented a 20%
decline in variable annuity cases from the same period in 2012, but
stock and mutual fund cases dropped at a faster rate.
A kind of insurance product, a variable annuity offers a
guaranteed future payout in return for paying into an account now,
and the payout can swell if investments in the account perform well
over time. Besides offering customers some security in terms of
future income, the arrangement often has tax advantages. But the
terms are complex and often hard for a customer to understand, and
the investor's money is usually tied up for many years, with hefty
surrender fees.
Brokers who sell them can earn big commissions and, according to
investors' lawyers, too often target people for whom they aren't
suitable, including many elderly customers.
Because the product has many critics, some brokers even avoid
using the product's formal name when pitching it to clients, said
Ms. Nygaard, who is with the firm Kenner Schmitt Nygaard LLC. "The
word annuity is not used, because the word annuity is poison," she
said.
Finra, which regulates the brokerage industry and manages the
arbitration forum where customer disputes are heard, said it is
aware of the issue.
Variable annuities remain "very much a focus," Finra Chairman
and Chief Executive Richard Ketchum said in an interview last week.
"Annuities continue to get more complex" and the risks in selling
them to senior investors remain substantial, he added.
Robert Cox was one of those investors who demanded his money
back. In October an arbitration panel awarded him $111,824, forcing
Ameriprise Financial Services Inc. (AMP) to relinquish his variable
annuity at no cost and return fees tied to the investment. The
company couldn't be immediately reach for comment.
Ms. Nygaard, who represented him, said that almost all of the
annuities sold by Mr. Cox's broker were placed into IRA accounts.
"That makes no sense," because that cancels out the annuities' tax
benefit, she said.
Joseph Spiegel, a lawyer in Ann Arbor, Mich., said he couldn't
even determine exactly how much money one of his clients,
69-year-old Patricia Shaw, lost in her retirement account due to
her investment in the annuity, because the statements were too
"obtuse." The product is "fraught with difficult-to-understand
bells and whistles" he said.
Ms. Shaw settled a lawsuit against the insurance company,
National Western Life Insurance Co. (NWLI), and a Finra arbitration
panel ordered her broker in December to pay her $15,000 in
compensation. National Western didn't return a phone call seeking
comment.
For brokers, defending a sale of a variable annuity in an
arbitration hearing can be difficult, said David Richan, a partner
with law firm Baritz & Colman LLP in New York, who represents
brokers. "Some arbitration panels don't like them from the get-go,"
because of their complexity, he said. Panels often "can't see how a
client could possibly have understood them."
Cathy Weatherford, the chief executive of the Insured Retirement
Institute, an annuities trade group, said in an email statement
that variable annuities, along with fixed annuities, "are the only
offering on the market that can provide tax-deferred retirement
savings, upside growth with downside protection, and guaranteed
income throughout one's lifetime." She said nine in 10 annuity
owners are at least somewhat satisfied with their annuity-based
investment.
Many lawyers suspect the high commissions insurance companies
pay brokers to sell the product are the main reasons why too many
of them are sold to the wrong customers. Commissions can be as high
as 7% or even 10% of the money invested.
Michael Fein, president of CIC Wealth Management, a Baltimore
financial advisory firm, believes variable annuities "have a place"
in retirement planning and can be useful, particularly for clients
in high tax brackets who have maxed out their 401(k) plans. But he
worries about the complexity, saying "there are too many moving
parts."
"Variable annuities have these really thick prospectuses," he
said. "Why are there so many problems with these things? Because
the people who represent them don't understand what they are
representing."
Write to Matthias Rieker at matthias.rieker@dowjones.com
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