There is a continuing problem for investors relating to the improper sale or switching by investment advisors of variable annuities that can be annuity fraud and result is annuity losses. Many older investors have been counseled by their brokers to replace their old variable annuity contracts with new ones. In many cases it may be unsuitable and result in the creation of fees and commissions for the advisor, surrender charges for the investor and new long term non-liquid investment. Furthermore, adding insult to injury, in some cases advisors have neglected to exercise due diligence by assuring that the exchange of those annuities was tax free under Internal Revenue Code (Section 1035).
If done properly, exchanging variable annuities should be tax free.
In a tax-free 1035 exchange, the owner of a variable annuity replaces the current contract with a new contract. No tax is paid on the investment gains or income from the old variable annuity. If, however, an investor gives up his or her old annuity for cash and then uses that money to buy a new annuity, he or she will have to pay taxes on the old annuity.
Variable annuities can be fraught with hidden costs.
An additional problem with variable annuities is that exchanging and replacing them often results in surrender charges. Customers must pay these charges when annuities are surrendered before the end of their given surrender period. Usually, that’s six to eight years from the purchase date. Because surrender charges reduce the amount of money available for reinvestment in a new annuity, they also lower an investor’s potential return. And if that weren’t bad enough, the new replacement annuity has a new surrender period, so funds are ordinarily locked into place for another six to eight years.
In general, seniors shouldn’t invest in them.
Because of the risks, high fees and surrender charges associated with variable annuities, they’re poor financial choices for most investors over 65. In fact, California law requires that selling agents prove that an annuity replacement is of “substantial benefit” to their senior clients.
FINRA oversight of variable annuities is increasing.
The Financial Industry Regulatory Authority (FINRA) has recently implemented new rules regarding broker recommendations to purchase and exchange variable annuities, making variable annuities one of the few securities products with its own suitability requirements. These new rules require that brokerage firms put supervisory procedures into practice for the detection and prevention of “inappropriate exchanges.”
Should you contact a securities attorney?
If you’re an older investor whose financial advisor has advised to exchange or replace variable annuities, resulting in a loss in your annuity either fraom annuity fraud or simple negligence, call Carlson Law for a free consultation at 619-544-9300. Furthermore, if your broker failed to facilitate a tax-free 1035 exchange of variable annuities, contact our firm. Your broker may be liable for any or all fees, taxes and financial loss you incurred as a result.
- AG Edwards & Sons Pays $775,000 to Settle Improper Conduct Charges (securities-fraud-lawyer-blog.com)