One of the biggest cons on Wall Street is happening every single day inside the largest and most powerful brokerage houses in the business. Its primary target is senior citizens who have money to invest and very limited investment experience. This scam has the words ‘variable annuity’ attached to it and it could easily happen to you, your parent, or your loved one if you don’t know what to look for.
How Variable Annuity Fraud Often Happens
You’re sitting inside your new stockbroker’s office at a very well-regarded brokerage firm. He came highly recommended and he’s even a member of your church choir. He’s dressed in a well-tailored suit and gives you a warm and welcoming feeling. You have a strong sense that you can really trust this guy.
As you tell him about your need for safety, security and a reliable retirement income, he’s nodding in agreement, diligently taking notes with a Mont Blanc pen on a leather-bound notepad, while occasionally making eye contact with you over the top of his bifocals. You feel completely supported and confident knowing this highly accomplished individual will be taking care of your finances.
You have no idea what a variable annuity is, but pretty soon your new broker is going to tell you everything he wants you to know about annuities. In other words, you will learn nothing about the truth of this investment and nothing about why it’s a highly inappropriate investment for a retiree like you.
After explaining your financial history and needs, you’ve revealed some of the most intimate aspects of your life to him. Such strong rapport and trust has been established between you that you’ll agree to virtually any investment he recommends.
This is the moment when your broker suggests you purchase a variable annuity.
He explains a variety of tax benefits associated with the annuity. He explains the death benefit that will give your family a large payout should you pass away. He touts the safety and security of the annuity which will provide you with a monthly income throughout the remainder of your golden years.
He pulls out a very long contract, highlights the amazing things he mentioned, and shows you how much money you’ll invest and how much income you’ll receive. However, he neglects to mention the penalties for early withdrawal, he glosses over the term ‘variable’ and he doesn’t mention anything about risk. Even if he does talk about these things, you’re so enthralled by his spiel that it doesn’t really matter. Instead of the negative aspects, he focuses on the positives – your future monthly income and the incredible potential for growing your money.
Excitedly, you say “Excellent!” and sign the dotted line.
Six Months Later…
After a brief period of time, you’re shocked to find your annuity has declined by half its initial value due to irregularities in the stock market. Even worse, when you frantically call your stockbroker and ask to liquidate the investment and withdrawal your money, he tells you it will cost tens of thousands of dollars in penalties and fees to remove your money.
At best, he recommends that you reallocate your annuity, moving out of the speculative stock funds he chose and into safer bond funds or money market funds, but it’s unlikely you’ll ever recoup your losses. He also says you’ll have to wait 15 years before you can have full access to your money.
“What? This is the first I’ve heard about withdrawal penalties. Didn’t you say my money would be safe?” you ask.
You’re 82 years old and realize that you’re never going to see your money again unless you pay the giant withdrawal fees or hire a stock fraud attorney to sue the brokerage firm for ignoring its obligation to recommend suitable investments in your best interest.
Variable Annuity Fraud Happens to Retirees Every Day
Unfortunately, I hear this story with subtle variations time and time again, and it never fails to make me sick. Why would an investment advisor recommend such a highly illiquid (and sometimes highly risky) investment to retirees who need safety and security and full access to their savings?
The answer lies in the commissions that the brokerage firm receives for selling the annuity. The size of these incentives is shocking.
But what is an annuity, exactly?
An annuity is an insurance product. Think of it like a giant lockbox with a timer on it that you put your money inside. You will not be able to remove your money from that lockbox without huge monetary penalties until the timer has reached its end. Some annuities have shorter terms, like five years and others much longer. While you do receive certain benefits for freezing up your assets like this, the negatives often outweigh the rewards – especially when retirees are concerned.
The reason why investment professionals absolutely love to sell annuities is because they pay massive commissions to the brokers who sell them. If your stockbroker was lucky enough to talk you into putting $600,000 inside an annuity, he’s going to get an instant commission so big that it will probably make you shudder. With an annuity that size, he could be walking away with an extra $25,000 cash in his pocket, and the brokerage firm he works for will be receiving even more.
This commission structure is part of the reason why you will pay a massive penalty for removing your funds from your annuity before it has matured. The salesman has to get paid.
As for annuities themselves, they come in different varieties. Some are fixed, which guarantee a certain pay out in exchange for locking away your money for a given period of time. Some are variable, which also lock away your funds, but don’t come with a pay out guarantee. Instead, they promise a higher rate of return on your investment in exchange for the risk of losing big.
Because of the way they freeze up your assets, annuities are like an extremely illiquid investment account; however, there’s one more important difference. Your variable annuity/investment account can only be invested in a limited variety of mutual funds – money market funds, bond funds, stock funds, mixed funds and others. Since the funds available for investment range from highly risky to highly secure, the safety of the money inside your variable annuity depends on the mutual funds it’s invested in.
A lot of times investors don’t know their annuity can be reorganized and reinvested into safer or riskier funds. Often, investors think the annuity itself is an investment, but this couldn’t be further from the truth.
Why Annuities are Unsuitable for Seniors
Investors in their 80’s are typically retired, so they will have a modest social security income and a finite amount of savings available to supplement that income. Because of their age and because they’re not working, the typical retiree doesn’t have the time or the ability earn back losses from risky investments. Therefore, seniors require investments that will safely generate an income to supplement their social security. Seniors also require liquidity. They need full access to their savings in case of a medical problem or life emergency. As a retiree, you need to have full access to your money.
While annuities may be suitable for a younger investor because of the life insurance component and the tax benefits, the illiquidity of annuities (i.e. the way they freeze up your money so you can’t access it for a specific period of time) makes them entirely unsuitable for seniors in most cases. Combine that with the risk of investment declines associated with variable annuities and you have the perfect recipe for disaster.
Thankfully, laws exist to protect retirees from highly unsuitable investment advice. If you’re a retiree who was misled into purchasing an annuity of any kind, depending on the facts of your case, you may have a viable claim to get yourself out of this investment or to get compensated for the money you lost as a result of this investment.
Don’t take investment fraud on the chin. If you suspect that you or a loved one has been a victim of variable annuity fraud, contact a stock fraud attorney now.