Problems Cited In Broker-Dealers‚ Variable Insurance Sales

Broker-dealer sales of variable insurance are the source of a large number of complaints–including many cases where the products were clearly inappropriate for meeting client goals, according to a joint study by the Securities and Exchange Commission (SEC) and NASD.

The study also found that many customers were buying variable products they did not fully understand.

The newly released study comes as the NASD is proposing new rules governing the sale of deferred variable annuities, including measures that would increase disclosure of terms, fees and risk exposure. In conjunction with the release of the report, the SEC released an alert to remind investors that variable annuities are not suitable if you need money in the short term. The alert also warned against borrowing against home mortgages to buy a variable annuity or life insurance product.

The report cites cases in which broker-dealers recommended variable products to senior citizens and others who could only afford them by mortgaging their homes. "It is critical that broker-dealers ensure that the securities they sell are appropriate for the individual investor," says SEC Chairman William H. Donaldson. "The findings of these examinations show that many firms should take steps to improve their practices."

The study found examples of both good and bad practices in the broker-dealer industry when it came to variable product sales. Among the most common problems, however, were cases where investors were sold variable products that did not match their goals.

Among the problems cited in the report:

• Unsuitable product recommendations even in cases where the broker should have known they were inappropriate. In some cases, variable products were sold to customers looking to save for college costs, despite the fact that they would not reach the age of 591/2 before their children reach college. This would result in them paying tax penalties and surrender charges for withdrawing the money when they need it.

• Excessive switching of variable annuity products in customer accounts, sometimes as frequently as once every two or three years.

• Inadequate supervision of registered representatives, and inadequate policies and procedures to ensure the proper sale of variable products.

• Failure to fully disclose fees and tax implications, such as the fact that the increased value of the account is subject to ordinary income tax rates and that the entire value of the annuity is included in estate tax calculations.

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