An Ohio National Life Insurance subsidiary was fined $275,000 Friday after the Financial Industry Regulatory Authority said one of its top producers recommended unsuitable investment strategies to 76 customers involving variable annuities and whole life policies.
Finra is also requiring the subsidiary, the O.N. Equity Sales Company, or ONESCO, to give more than $1 million back to the customers.
According to Finra, ONESCO failed to supervise the registered rep, identified in a previous Finra complaint in November as Richard Michael Wesselt. The agency said that in 2016 he was the top variable annuities producer at the company.
Wesselt’s strategy, said the agency, was “predicated on persuading customers to liquidate their retirement accounts, which typically held a portfolio of mutual funds, to use the proceeds of that liquidation to purchase variable annuities, and then to liquidate the variable annuities in order to build cash value in whole life insurance policies.” Wesselt racked up $686,000 in commissions on the sales of the variable annuities, Finra said in November.
He called these strategies “building your bank” or “infinite banking.”
Wesselt usually put the clients in similar VA types, using the same riders and asset allocations, and failed to account for the personal financial situations of the clients—such as their employment, liquidity needs or risk tolerance, Finra said. The clients would then sell the VAs, ringing up charges, and pay premiums to whole life policies, with which they could make loans to themselves.
The strategy involved a number of steps: First, Wesselt asked the customers to liquidate retirement savings, including 401(k)s or IRAs. Next, he told the customers to buy variable annuities with the liquidated funds. The VAs he steered the customers to had several features: There were cash bonuses to the contracts, they had guaranteed withdrawal benefit riders and they had long surrender periods.
The specs increased the customers’ fees for buying the annuities, Finra said. Last, the rep encouraged the clients to take early withdrawals, which racked up surrender charges and lost them the benefits of the annuities. The large onetime withdrawals were recommended to fund premiums on whole life policies or to pay for big ticket items such as a home purchase.
According to the November complaint, one customer met with Wesselt in October 2014, when she was 59. She “sought Wesselt's advice regarding the purchase of an apartment and assisting a child with student loan repayment. Wesselt recommended that she purchase a variable annuity, using approximately $58,000 that she held in a 401(k).”