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November 01, 2004

NASD continues probe into abusive sales practices of variable annuities

The NASD has said it has resumed its probe into abusive sales practices of variable annuities because those practices haven't stopped since they originally began investigating last year.

The two abuses that seem to be the most common are selling annuities to investors when they are not appropriate investments for that investor and what the NASD calls “inappropriate switching”. This occurs in many instances when an advisor leaves one firm and takes his clients with him.

When brokers go to another firm, they are often paid extra commissions. It's sort of like double coupons, to get them started. Many brokers use that opportunity to switch their clients out of their old annuity, into a new one.

Variable annuities are very lucrative for the person selling them. Bloomberg columnist John Wasik notes, "Variable annuities continue to be sold aggressively because commissions on them are generous -- as much as 10 percent -- versus a 4.5 percent load for a conventional broker-sold mutual fund."

This window where the advisor is paid extra opens the door for greedy advisors to switch, "or churn", their client's annuities for a fat payday. The advisor engaging in this practice usually covers his recommendation to the client, telling the client the annuities at his new company are "better" than those he sold them at the old firm.

It’s probably not a coincidence that this investigation has come up again at the same time Elliott Spitzer has filed suit against a number of the nations’ largest insurance companies, which are the companies that sell these variable annuities. Many observers expect Spitzer’s investigation to spill over into the area of variable annuities as well.

I mentioned there were two common abuses. Wasik says, "Variable annuities are much like flood insurance for people living on mountaintops. Very rarely are they needed." But they are peddled as aggressively as fake Gucci purses on a New York street corner.

"High commissions, typically above 5 percent for variable annuities, help drive sales of these products,'' concluded a joint SEC/NASD staff report in June, adding ``high fees and surrender charges combine with other factors to make variable insurance products inappropriate for many investors.''

I would amend that last sentence to say MOST investors.

SOURCES:

1. Alistair Barr, "NASD still probing variable annuities," http://cbs.marketwatch.com/news/print_story.asp?print=1&guid=%7B666B29EB-774D-4186-9677-CE88F647503B%7D&siteid=mktw, 21 October 2004.

2. John Wasik, "How to Avoid the Sting of U.S. Variable Annuities," http://quote.bloomberg.com/apps/news?pid=10000039&sid=aYqs8s9ENazc&refer=columnist_wasik, 20 September 2004.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Posted by Kim Snider on November 01, 2004 | Permalink

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