by Lawrence C. Melton, Esq., [email protected]
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567
Most annuity purchases are actually the reinvestment of proceeds from the sale of other annuities. This practice is referred to as "annuity switching." It is analogous to mutual fund flipping and is highly suspect. The switch pays the broker significant commissions and involves the reestablishment of maximum surrender charges, while providing the investor with little benefit over their existing annuity.
Surrender charges are paid by an investor when he or she withdraws money from a variable annuity before a specified period. Annuity switching may prolong the surrender charge period. With respect to the old annuity, you may be at the end of the surrender charge period. Once the surrender charge period is over, you do not have to pay any further charge for withdrawals. This favorable position is lost by the annuity switch. Now you have to start over again. The new annuity imposes a new surrender charge period that lasts another seven to fifteen years.
Just last week, FINRA (Financial Industry Regulatory Authority) filed a complaint against Mutual Service Corp alleging that it failed to reasonably supervise the firms' review of its variable annuity transactions, reports InvestmentNews.com. (Bruce Kelly, FINRA eyes MSC for VA oversight, InvestmentNews, August 29, 2007). http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070829/REG/70829017
FINRA alleges that Mutual Service Corp maintained inaccurate books and recordings with respect to the sale of variable annuities. FINRA also says Mutual Service Corp maintained inaccurate books and records with respect to the tax-free exchange of variable annuities. (Bruce Kelly, FINRA eyes MSC for VA oversight, InvestmentNews, August 29, 2007). http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070829/REG/70829017
According to FINRA (then known as NASD):
NASD has become increasingly concerned about some members' unsuitable recommendations and inadequate supervision of transactions in deferred variable annuities...[C]ertain firms continue to engage in unacceptable sales and supervision practices regarding these products. For instance, variable annuity sales have been the subject of more than 80 NASD disciplinary actions in the past two years. These disciplinary actions involved a wide array of misconduct regarding the sales of variable annuity products, including excessive switching, misleading marketing, failure to disclose material facts, unsuitable sales, inadequate training and supervision of salespeople and deficient written supervisory procedures."
A broker and brokerage house must have reasonable grounds for believing that a variable annuity is suitable for the particular individual customer. NASD NTM 96-86http://www.finra.org/RulesRegulation/NoticestoMembers/1996NoticestoMembers/P004696