Variable Annuities are Not Always Appropriate for Senior Investors

FINRA recently issued an investor alert warning “FINRA is issuing this Investor Alert to help seniors and other prospective variable annuity buyers to make informed decisions about how to invest for their retirement.”

What Are Variable Annuities?

Although variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers three basic features not commonly found in mutual funds:

  1. Tax-deferred treatment of earnings.
  2. A death benefit.
  3. Annuity payout options that can provide guaranteed income for life.

Generally, variable annuities have two phases:

  1. The “accumulation” phase when investor contributions—premiums—are allocated among investment portfolios—subaccounts—and earnings accumulate.
  2. The “distribution” phase when you withdraw money, typically as a lump sum or through various annuity payment options.

Many investors purchase a variable annuity from a stockbroker who touts a particular feature of the variable annuity.  The investor makes a decision based on the verbal representations of the broker.  However, the investor does not always have sufficient information to make a fully informed decision.

The documents involved in the sale of a variable annuity can be quite complicated.  The prospectus and contract documents can consist of hundreds.  Investors can feel overwhelmed by these documents and sometimes rely solely on verbal representations of the broker.

This can often lead to a dispute where the investor either misunderstands the broker or the broker misinforms the investor.

Evaluating Variable Annuities

The variety of features offered by variable annuity products can be confusing. For this reason, it can be difficult for investors to understand what’s being recommended for them to buy—especially when facing a hard-charging salesperson.

Before you consider purchasing a variable annuity, make sure you fully understand all of its terms. Carefully read the prospectus. Here are seven factors you should bear in mind before investing:

1. Liquidity and Early Withdrawals

Deferred variable annuities are long-term investments. Getting out early can mean taking a loss. Many variable annuities assess surrender charges for withdrawals within a specified period, which can be as long as six to eight years.

Also, any withdrawals before an investor reaches the age of 59 ½ are generally subject to a 10 percent tax penalty in addition to any gain being taxed as ordinary income.

2. Sales and Surrender Charges

Most variable annuities have a sales charge. Like class B shares of mutual funds, many variable annuity shares typically do not charge a front-end sales charge, but they do impose asset-based sales charges or surrender charges. These charges normally decline and eventually are eliminated the longer you hold your shares. For example, a surrender charge could start at 7 percent in the first year and decline by 1 percent per year until it reaches zero.

3. Fees and Expenses

In addition to sales and surrender charges, variable annuities may impose a variety of fees and expenses when you invest in them, such as:

Mortality and expense risk charges, which the insurance company charges for the insurance to cover:

guaranteed death benefits;

annuity payout options that can provide guaranteed income for life; or

guaranteed caps on administrative charges.

Administrative fees, for record-keeping and other administrative expenses.

Underlying fund expenses, relating to the investment subaccounts.

Charges for special features, such as:

stepped-up death benefits;

guaranteed minimum income benefits;

long-term health insurance; or

principal protection.

These annual fees on variable annuities can reach 2 percent or more of the annuity’s value. Remember, you will pay for each variable annuity benefit. If you don’t need or want these features, you should consider whether this is an appropriate investment for you.

4. Taxes

While earnings in a variable annuity accrue on a tax-deferred basis—typically a big selling point—they do not provide all the tax advantages of 401(k)s and other before-tax retirement plans. 401(k)s and other before-tax retirement plans not only allow you to defer taxes on income and investment gains, but allow your contributions to reduce your current taxable income. That’s why most investors should consider annuity products only after they make their maximum contributions to their 401(k)s and other before-tax retirement plans. To learn more about 401(k)s, please read Smart 401(k) Investing.

Once you start withdrawing money from your variable annuity, earnings (but not principal) will be taxed at the ordinary income rate, rather than at the lower capital gains rates applied to investments in stocks, bonds, mutual funds or other non-tax-deferred vehicles in which funds are held for more than one year.

Furthermore, proceeds of most variable annuities do not receive a “step-up” in cost basis when the owner dies. Other types of investments, such as stocks, bonds, and mutual funds, do provide a step up in tax basis upon the owner’s death.

5. Bonus Credits

In an attempt to attract investors, many variable annuities now offer bonus credits that can add a specified percentage to the amount invested in the variable annuity, generally ranging from 1 percent to 5 percent for each premium payment you make. Bonus credits, however, are usually not free. In order to fund them, insurance companies typically impose high mortality and expense charges and lengthy surrender charge periods.

Exchanging or Replacing Your Current Annuity

An exchange of an existing annuity for a new annuity may be the only way a salesperson can generate additional business. However, the new variable annuity may have a lower contract value and a smaller death benefit. You should exchange your annuity only when it is better for you and not just better for the person trying to sell you a new annuity. To learn more about exchanges, please read our Investor Alert, Should You Exchange Your Variable Annuity?

6. Guarantees

Insurance companies issuing variable annuities provide a number of specific guarantees. For example, they may guarantee a death benefit or an annuity payout option that can provide income for life. These guarantees are only as good as the insurance company that gives them. While it is an uncommon occurrence that the insurance companies that back these guarantees are unable to meet their obligations, it happens. There are several credit rating agencies that rate a company’s financial strength. Information about these agencies can be found on the SEC’s website.

7. Variable Annuities within IRAs

Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson.

Also, if the annuity is within a traditional (rather than a Roth) IRA, the government requires that you start withdrawing income no later than the April 1 that follows your 70½ birthday, regardless of any surrender charges the annuity might impose.

Individual Retirement Annuities.

Some variable annuity providers sell what is termed an Individual Retirement Annuity (IRA). You should be aware that this “IRA” is not an Individual Retirement Account (IRA). The Internal Revenue Service sets specific restrictions regarding Individual Retirement Annuities, which are not met by all annuity products. To learn more, please read IRS Publication 590.


How to Protect Yourself

Brokers recommending variable annuities must explain to you important facts, including: liquidity issues, such as potential surrender charges and 10 percent tax penalties; fees, including mortality and expense charges, administrative charges, and investment advisory fees; and market risk.

Brokers also must collect important information from you about your age, marital status, occupation, financial and tax status, investment objectives, and risk tolerance to assess whether a variable annuity is suitable for you.

Before purchasing a variable annuity, you should specifically—


Ask the person recommending that you purchase a variable annuity:

How long will my money be tied up?

Are there surrender charges or other penalties if I withdraw funds from the investment earlier than I anticipated?

Will you be paid a commission or receive any type of compensation for selling the variable annuity? How much?

What are the risks that my investment could decrease in value?

What are all the fees and expenses?

If you have variable annuity losses call Place and Hanley at (866) 318-4725 or

Categories: General, Investor Protection, and Securities Investigations.

Place and Hanley Investigates Tampa Broker Louis Tilchin

The Law Offices of Place and Hanley, PLLC has filed an arbitration claim versus PruCo Securities, LLC relating to the conduct of Louis Tilchin.  The arbitration claim relates to the unsuitable sales and misrepresentations in the sale of variable annuities.

According to Mr. Tilchin’s broker check report, he has five customer disputes.

If you have lost money as the result of similar misconduct, please contact The Law Offices of Place and Hanley, PLLC at 828-285-8898.

Categories: Broker Investigations.

FINRA Sanctions Firms for Sales of Leveraged and Inverse Exchange Traded Funds

The Financial Industry Regulatory Authority (FINRA) sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities.

FINRA sanctioned the following firms:

Wells Fargo – $2.1 million fine and $641,489 in restitution
Citigroup – $2 million fine and $146,431 in restitution
Morgan Stanley – $1.75 million fine and $604,584 in restitution
UBS – $1.5 million fine and $431,488 in restitution

ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

Leveraged and inverse ETFs have certain risks not found in traditional ETFs, such as the risks associated with a daily reset, leverage and compounding. Accordingly, investors were subjected to the risk that the performance of their investments in leveraged and inverse ETFs could differ significantly from the performance of the underlying index or benchmark when held for longer periods of time, particularly in the volatile markets that existed during January 2008 through June 2009. Despite the risks associated with holding leveraged and inverse ETFs for longer periods in volatile markets, certain customers of these firms held leveraged and inverse ETFs for extended time periods during January 2008 through June 2009.

If you have losses in leveraged ETF’s call the Law Offices of Place and Hanley at           (866) 318-4725 or


Categories: General.

SEC, FINRA Warn Retail Investors About Investing in Structured Notes With Principal Protection

The Law Offices of Place and Hanley currently represents investors who have lost money in structured notes. If you have lost money in structured notes and believe you have a claim, please contact The Law Offices of Place and Hanley at 828-285-8898.
WASHINGTON — The Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) have issued an investor alert called Structured Notes with Principal Protection: Note the Terms of Your Investment to educate investors about the risks of structured notes with principal protection, and to help them understand how these complex financial products work. The retail market for these notes has grown in recent years, and while these structured products have reassuring names, they are not risk-free.

Structured notes with principal protection typically combine a zero-coupon bond — which pays no interest until the bond matures — with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. The underlying asset, index or benchmark can vary widely, from commonly cited market benchmarks to currencies, commodities and spreads between interest rates. The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. However, investors should know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity will typically get back at least some of their investment, even if the underlying asset, index or benchmark declines. But protection levels vary, with some of these products guaranteeing as little as 10 percent — and any guarantee is only as good as the financial strength of the company that makes that promise.

“Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “This alert is a ‘must read’ for investors considering these products, especially those with the mistaken belief that these investments offer complete downside protection.”

“The current low interest rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said FINRA Senior Vice President for Investor Education John Gannon. “But retail investors should realize that chasing a higher yield by investing in these products could mean winding up with an expensive, risky, complex and illiquid investment.”

FINRA and the SEC’s Office of Investor Education and Advocacy are advising investors that structured notes with principal protection can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. Additionally, investors considering these notes should be aware that they could tie up their principal for upwards of a decade with the possibility of no profit on their initial investment.

Structured Notes with Principal Protection: Note the Terms of Your Investment also includes a list of questions investors should ask before investing in these products.

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC’s Office of Investor Education and Advocacy provides a variety of services and tools to address the problems and questions that individual investors may face. The Office conducts educational outreach, assists with investor complaints and inquiries, and facilitates individual investors in bringing their perspectives to the Commission and its staff. For more information, please visit or

FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing and enforcing rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit

Categories: Investor Protection.