Annuities can be financially dangerous and unsuitable for senior citizens and retirees. An annuity may also be problematic for a conservative investor, especially if it’s invested in a risky fashion. If you lost money or got your savings locked up inside an annuity, you may be the victim of annuity fraud.
The Financial Industry Regulatory Authority (FINRA) severely punishes stockbrokers and investment advisors for committing annuity fraud.Annuity fraud is one of the most rampant and widespread forms of stock market fraud on Wall Street today.
In some cases, a stockbroker will lock up a senior citizen’s life savings in an annuity for longer than his or her life expectancy. In other cases, a variable annuity will result in the complete decimation of an investor’s retirement assets. In the most egregious cases, a broker will engage in annuity switching, i.e., exchanging one unsuitable annuity for another to generate commissions and fees for himself.
State and Federal Securities laws prohibit stockbrokers, insurance agents, and brokerage firms from inappropriately recommending annuities to investors. In fact, victims of annuity fraud can take legal action under those laws and pursue a claim to receive full or partial compensation for their financial damages.
Don’t let your investment advisor fool you. Annuities are insurance products that pay extremely high commissions to the brokers who sell them. That’s why insurance agents, in addition to your neighborhood stockbroker, may try to manipulate you into buying one. In fact, many retirees get sold highly inappropriate and unsuitable annuities simply because a corrupt stockbroker wants to fill his pockets with cash.
To better understand what a variable annuity is, it might help to think of it like a big safe or lockbox. The things you put inside the safe could rise or fall in value, and once you put something in, you can’t take it out for a certain number of years, so you’d better not plan on needing it.
Different annuities have different terms. Some might lock your money up for nine years, others for 13, and others still more. There is a reward for locking up your money like this, though, and that’s why annuities are sometimes suitable for younger people who don’t need their money right away. You’ll be sheltered from paying taxes while your money is inside the annuity. This could be a benefit for some, but for others, it isn’t.
There are two different kinds of annuities:
- Fixed-rate Annuities: A fixed-rate annuity guarantees a certain level of payment at the end of the term. They’re the safest kind of annuity; however, they still lock away your money, making fixed-rate annuities unsuitable for a lot of senior citizens, retirees and other kinds of investors who want or need complete access to their assets.
- Variable Annuities: A variable annuity rises and falls in response to market influences. In the event of an economic downturn, or if a variable annuity is invested in extremely speculative mutual funds, it could lose a massive percentage of its value. Variable annuities also lock away your assets for a given period of time.
Annuities contain investments inside them. A variable annuity, for example, will be allocated with different kinds of mutual funds. The funds selected will determine how much risk the variable annuity is exposed to. Highly conservative bond funds, for example, could help protect the annuity from investment declines. Speculative stock funds, on the other hand, would subject the annuity to significantly higher levels of risk.
If you bought an annuity and suffered investment losses because of it, or if your money got locked up inside an annuity when you needed to have access to it, you could be the victim of annuity fraud.
Here’s How it Happens
Whenever a product offers a high commission to the salespeople who sell it, you will have dishonest salespeople fraudulently pitching that product to consumers who could be harmed by purchasing it. With annuities, it’s very simple. The more money a stockbroker convinces you to lock up inside it, the more money he gets paid.
Since senior citizens usually have the most liquid assets available for investment, they often fall prey to the manipulative tactics of corrupt brokers trying to sell annuities. In some cases, seniors get their money locked away for decades and, at times, even longer than their life expectancy.
Here are some of the most common ways that annuity fraud cases happen:
- Misrepresentation/Omission: The misrepresentation or omission of information relating to an annuity is a very big problem in most annuity fraud claims. Stockbrokers often don’t explain the nature of the investment. Many investors aren’t informed that their variable annuity could rise and fall in value and lose a large percentage its value. In other instances, investors don’t know their money is being locked away and they won’t have full access to it without paying enormous fees.
- High-Risk Mutual Funds: Commonly, annuity investors are surprised to discover that their annuity has investments (usually different mutual funds) inside it. Investment advisors will sometimes invest an annuity into high risk and unsuitable mutual funds, leaving a conservative investor exposed to stock market losses. Often, investors don’t know they can reinvest their annuity into safer funds to curb investment declines.
- Liquidity Problems: Because annuities lock away your money for years on end, this kind of investment is unsuitable for a lot of investors. For this reason, an annuity is extremely unsuitable for most retirees.
- Annuity Switching: Annuity switching is the most egregious form of annuity fraud. Some investment advisors will recommend their customer switch from one annuity to a new one, causing the investor to pay the early withdrawal fees to remove their money from the first annuity. Sometimes, an annuity will be close to its maturity date, and an advisor will recommend reinvestment into a new one when it’s inappropriate. Annuity switching usually provides zero benefits to the investor while forcing him to pay massive and unnecessary fees.
Are Annuities Suitable For Anyone?
Annuities can be a good option for younger investors who want to save and invest a lot of money for retirement while deferring their tax liabilities. For example, Individual Retirement Accounts (IRAs) have contribution limits, but annuities have no set limit to how much an investor can invest each year. In this regard, an annuity can serve as a tax shelter for younger investors. The life insurance component of annuities and the potential for creating a steady income stream in the future can also be attractive features for younger investors.
Because of these benefits, annuities are sometimes suitable for a late middle-aged investor looking to maximize his investments before retiring. A 15-year annuity, for example, would be perfectly timed for a healthy and employed 50-year-old planning to retire at 65.
In contrast, if a 75-year-old buys a 15-year annuity, he’ll be 90 years old before he can withdrawal all his money without getting hit by surrender fees. Add in the market risks associated with a variable annuity and it’s easy to see why these complex insurance products just don’t make sense for retirees. They lock up your money when you need access to it most.
Many investment experts argue that annuities are nothing more than fee bloated and highly illiquid insurance products and that even for younger investors, the same benefits of annuities can be achieved much cheaper through other kinds of investment strategies.
How Much Do Stockbrokers Make in Commissions For Selling Annuities?
With regard to seniors and retirees, every stockbroker knows that older investors need complete access to their savings and can’t afford the risk of investment declines. Nevertheless, stockbrokers earn so much money in commissions from selling annuities, they’ll say just about anything to get you to buy one.
If it’s a $500,000 annuity, your broker might pocket $25,000 cash instantly, just for making the sale. These giant bonuses are why stockbrokers focus on misrepresenting the positives rather than disclosing the negatives when fraudulently selling an annuity to senior citizens. Dishonest stockbrokers leave their customers completely in the dark regarding how completely inappropriate annuities are, causing financial devastation to consumers just to fill their pockets own with cash.
Do you suspect that your investment advisor sold you an annuity when it was inappropriate to do so?
Know Your Rights
The Financial Industry Regulatory Authority (FINRA), which holds stockbrokers and brokerage firms accountable for unsuitable investment advice and fraud, sternly punishes investment advisors and brokerage firms for unsuitable and fraudulent annuity sales.
When an investor files a claim for annuity fraud, the unsuitability of the investment advice is a major issue, therefore FINRA Rule 2111 and FINRA Rule 2090 will apply to most annuity claims. Click here to read more about the doctrine of suitability, and unsuitability claims in general.
Try and Get Your Money Back
If you lost money because your stockbroker manipulated you into buying an annuity, or because he failed to disclose the true risks involved with a variable annuity, you can make a claim for damages or try and get your money released from the annuity without surrender fees.
The financial injuries resulting from investment fraud can be crippling, but the realization that your stockbroker neglected your account or purposefully lied to you can be overwhelming. If you have fallen victim to this kind of fraud, it’s important to remember this is not your fault!
Pursuing a stock fraud claim will teach big banks and Wall Street brokerage firms that it’s unacceptable to prey upon innocent consumers and completely disregard their best interests and needs. Your claim may even prevent others from suffering as you have by forcing Wall Street brokerage firms to conduct business with honesty and integrity.
You may be eligible to receive compensation regardless of whether you liquidated or continue to hold the annuity at issue. Contact us today to set up a free consultation. We will listen to your story, answer any questions you may have and discuss your legal rights and options.