Brokers, Clients Speak Out On Finra Complaints Over IRA Rollovers

Non-Traded REITs

McCollam said they recommended that clients put 60 percent to 70 percent of their money in variable annuities. The balance would end up in non-traded REITs, including Oak Brook, Illinois-based Inland American Real Estate Inc. The REITs generated dividends of 6 percent to 8 percent a year, providing an alternative to the vagaries of the stock market, Tarr said.

In variable annuities, customers invest in mutual funds within an insurance wrapper, which offers a death benefit, typically providing heirs a minimum payout. Earnings are tax- deferred.

Investing in a variable annuity within an IRA “may not be a good idea” because it provides no additional tax savings over an already tax-advantaged IRA, according to a Finra alert on its Web site. The annuities will increase costs, “generating fees and commissions for the broker or salesperson,” Finra says.

Variable Annuities

Customers often choose variable annuities because they offer a guaranteed minimum lifetime income, which is assured no matter how their investments perform, said Andrew Simonelli, a spokesman for the Washington-based Insured Retirement Institute, which represents companies that offer annuities.

“While tax deferral is certainly part of the value proposition of annuities, it’s not the only reason,” Simonelli said.

McCollam said he, Tarr and Royal Alliance would generally receive a total commission of as much as 6 percent or 7 percent of the money that clients invested in variable annuities. The mutual funds they selected would charge customers 2 percent to 3 percent a year in fees. Those fees were no higher than those of many mutual funds sold by brokers, Tarr said.

Broker Commissions

The brokers and Royal Alliance also received commissions totaling 6 percent to 7 percent for selling non-traded REITs, McCollam said. Typically, Tarr and McCollum kept 90 percent of their commissions, giving 10 percent to Royal Alliance, McCollam said.

Over time, the pair signed up as many as 500 customers, most from AT&T, McCollam said. Overseeing about $90 million in investments, their business generated about $600,000 to $700,000 in annual commissions -- and $1 million in its best year, he said. As the founder of the operation, he would keep 90 percent and Tarr, 10 percent, McCollum said. He said they won sales awards, with Royal Alliance sending one or both to resorts in the Bahamas; Boca Raton and Orlando, Florida; Arizona and Texas.

Doug Beal, a $32-an-hour mechanic specializing in air conditioning and fire detection, heard about Tarr from his union steward. Tarr visited Beal in his shop, where he worked outside San Francisco.

“I wanted something where I wouldn’t lose a whole bunch if the market went crazy,” said Beal, a disabled Vietnam veteran.

When he retired in 2009, Beal invested $320,000 in variable annuities and REITs, rolled over from his pension and 401(k). He has since lost $60,000 because of a decline in the REITs’ value, said Frank Sommers of Sommers & Schwartz LLP in San Francisco, who represents 17 of Tarr’s former clients.