Tuesday, February 9, 2010

FINRA Regulatory Notice: Variable Annuities

February 8, 2010 - FINRA Reminds Firms of Their Responsibilities Under FINRA Rule 2330 for Recommended Purchases or Exchanges of Deferred Variable Annuities

The Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 10-05 reminding firms of their responsibilities concerning deferred variable annuities. Annuities can carry costs and risks that many investors may not be aware of because brokers who are incentivized by commission-generation do not make them clear to investors. Costs include surrender charges on the investor who seeks to withdraw money during a pre-specified ‘surrender period’, and fees such as advisory fees, administrative fees and mortality and expense charges.

Dr Craig McCann, founder of SLCG, has written a White Paper on a type of annuity called equity-indexed annuities. In the paper, he concludes that these annuities are too complex for unsophisticated investors to understand and that their complexity masks their true costs. Furthermore, the lack of disciplinary recourse for those who engage in sales practice abuse makes investors even more vulnerable to the loss money. Equity-indexed annuities’ surrender charges can range from 10% to 25% of net asset and the surrender period can last as long as 10 years. Other features such as participation rates, which is a fraction of the return of the index to which the annuities are tied, and caps, which is the maximum return that the investor can receive, limit the overall return of these annuities. Thus investors must be diligent enough to understand the detailed features of equity-indexed annuities.

SLCG has written other papers on annuities. You may find at our dedicated website research on related products and markets.

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