Proponents argue that for their money, investors get those valuable tax breaks as well as a death benefit.
But their clients may not realize that they are tying up their money for as long as ten years. Clients may also not understand that hefty surrender charges apply if they cash in the product earlier, sometimes as much as 8 percent.
Even brokers who make a good-faith effort to explain the product can still fall short, risking angry clients who may complain to supervisors and regulators. "If the customer doesn't understand the product, the broker shouldn't sell it," said Joel Beck, a lawyer in Lawrenceville, Ga. who advises brokers.
One reason why clients may not grasp how a variable annuity works, Beck noted, is that the brokers who sold them may not have understood the product well enough to adequately explain them. "The more complex these products get, the more homework the broker has to do in terms of reviewing the product, the contract and marketing materials," Beck said.
Brokerages must have procedures and systems in place so that brokers can properly evaluate the costs and benefits of annuity exchanges, Finra’s Axelrod said. At large brokerages, variable annuity sales are typically subject to multiple screenings by computer software and a centralized review team, one brokerage executive said.
Facing Regulators
Disciplinary cases involving variable annuities are not as common in recent years as those stemming from other products, such as privately issued securities, but that does not mean that regulators are not looking.
Finra barred a broker last month who coaxed a customer to cash in one variable annuity and buy another. He told her that a $15,000 surrender charge did not apply to the transaction when, in fact, it did, according to a regulatory filing.
Florida insurance regulators have been examining what happens when brokers convince clients to exchange older annuities (which may have paid up front-loaded commissions) for new ones with new commissions.
In one Florida case, a broker advised a client to cash in a variable annuity and buy another that promised higher returns. But he bungled the tax treatment, leading to an unexpected $24,000 tax bill.