Annuity Abuses Rise To Top Of Regulator’s Scam List

Has your broker recommended that you swap an old annuity contract for a newer one?

Regulators say that could be a way to scam you out of thousands of dollars.

Abusive swaps like these, involving improper annuity exchanges, have risen to the top of the investment scam list at FINRA (FINRA is the organization regulating brokers and security sales).

Here’s how the abusive account churning takes place, according to a recent exposé in Investment News by reporter Greg Iacurci.

The broker proposes a tax-free annuity transfer, called a 1035 exchange by those in the industry. If done properly, the exchange can be beneficial, allowing the client to swap one annuity for another without paying tax.

But in abusive exchanges, what may not be disclosed is how the swap generates thousands of dollars in additional commissions for the broker, and traps the annuity owner into years of expensive new fees.

In many cases, FINRA found that “not only did clients incur higher annuity fees and surrender charges (sometimes in the tens of thousands of dollars) due to the exchanges, but they also had significant tax liabilities because the brokers, in trying to conceal their abuse, didn’t categorize the annuity replacements as 1035 exchanges.”

If you’ve been offered a tax-free annuity change, here’s some important tips:

Done properly, an exchange from an expensive, commissioned product into a no-commission, low-expense product can save you thousands of dollars.

(For a real life example, see our prior article on Cutting Outrageous Annuity Fees Down To Size).

On the other hand, an abusive exchange can saddle you with thousands of dollars of expensive commissions and surrender charges for seven years or more.

(Check out Don’t Fall For The High Commission Annuity Sales Pitch).

Ask your broker to detail all expenses on the new product, including annual fees and commissions. Better yet, ask a fee-only financial planner to confirm that those fee illustrations are accurate, or call the insurance company headquarters for confirmation. Annuity fees are composed of several different expenses, and they need to be added together to come up with the grand total. An unscrupulous salesperson can mislead you by omitting key components of the multi-part fee.

(Want to know more? Click here for a handy Fidelity guide to annuity fees).

There’s almost never a good reason to buy a high-cost annuity (some products can cost well over 3% per year in fees, and that’s real money coming straight out of your pocket).

When a client needs an annuity, fee-only planners like us can turn to some great no-commission, low-expense annuity offerings.  The average cost for these products can be more than 70% lower than the industry average for variable annuities. That difference can save you an average of $1,700 a year in fees for every $100,000 you invest, according to Vanguard and calculations based on the Morningstar database. Plus,  there are no sales loads or surrender charges.

The Takeaway:

A 1035 annuity exchange can be a powerful and beneficial tool that can save you money. It can also be a pretense to scam you out of thousands of dollars. How do you know the difference? If the person pushing the exchange receives commissions from the sale (ask them to disclose what they will earn in writing), steer clear.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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