FINRA Takes a Closer Look at Variable Annuity Sales
The things we spend our money on tend to change as we get older. There’s a good chance you have a lot more money in your pocket now than you did in your late-teens, but the downside is that you now have to spend it on some not-so-fun stuff.
Utility bills and long term care insurance, for example, are on absolutely no one’s wish list. Spending your hard-earned money on these kinds of things is pretty boring and unfulfilling, but prudence really demands it.
Annuities might not make anyone’s wish list either. They’re basically an agreement that you’ll pay a certain sum today, and be assured a fixed sum every month from the day you retire to the day you die. Though it might not be very exciting, a constant, guaranteed stream of lifelong income is very appealing, and it’s not a very complicated concept. But most people would rather watch paint dry than calculate the present value of an annuity to see if they’re getting a good deal.
That’s why a lot of people place their trust in financial advisors to the simple annuity illustrated above or more complex varieties. And that’s where things can, sometimes, go wrong.
FINRA accused MetLife of improper selling practices recently as part of its investigation and settlement with sanctions. According to FINRA’s claims, the salesforce at the insurance giant were encouraging their clients to swap the annuity they were signed up for newer ones. These newer annuities were meant to take advantage of the so-called Section 1035 Exchange, which allows annuity holders to exchange their existing annuities for newer ones without triggering any immediate tax consequences.
Swapping a complicated financial product for another hard to understand complicated financial product can mean trouble. Throw in riders about “second to die” provisions or lifetime income and determining if the pitched change makes sense can flummox even the most astute client of a brokerage firm.
Brokers were alleged to be pushing these swaps just to get additional commissions. A broker can get between 6% and 7% when a customer either buys a new annuity or swaps their existing one for a new one. And to makes things worse, brokers told their clients that these new annuities would cost them less, when in fact, they were more expensive and lacked some of the features of the existing annuities according to FINRA’s allegations against MetLife.
When FINRA dug into the details of this scenario, they found that many of the customers were also charged a number of “fees and charges” for this advice, while on the books these services were listed as free. All in all, the “annuity switching” scheme brought in more than $152 million in fees and commissions for MetLife between 2009 and 2014 according to FINRA.
While MetLife did not admit the allegations, FINRA levied the second largest penalty in its history. MetLife paid up close to $25 million in one of the largest settlements of all time: $20 million in fines and $5 million to the annuity holders.
Annuities can be complicated and can be very useful to the right investor. Consumers should understand the fees and understand all the features or tax implications before signing onto a new annuity.