Unethical sales practices in the annuity marketplace have increased over the last few years, according to the National Association of Securities Dealers, causing the organization to issue an “investor alert” on May 27, warning consumers about the product.
The alert, titled “Variable Annuities: Beyond the Hard Sell,” targets consumers who recently purchased or are considering purchasing deferred variable annuities.
“Marketing efforts used by some variable annuity sellers deserve scrutiny–especially when seniors are the targeted investors,” says Mary L. Schapiro, vice chairman and president of regulatory policy and oversight for the NASD, Washington, in a release announcing the alert.
Some sales pitches used by annuity marketers involve scare tactics, which can confuse investors and pressure them into buying the annuity, according to the alert.
“Sales pitches that confuse or frighten investors violate NASD rules and will be the subject of enforcement action,” says Schapiro, in the release.
The alert notes that while deferred VAs may be an appropriate investment given the right situation, investors need to be aware of the restrictive features, tax issues and fees associated with these products.
“We wanted to make sure that investors were alerted of some issues they should be aware of if theyre considering purchasing a variable annuity,” says John Gannon, director of individual investor services at the NASD, who authored the investor alert.
In addition to recommending that investors read the prospectus, the alert outlines seven factors consumers need to keep in mind when considering an annuity. These factors are:
1. Liquidity and early withdrawals. Since annuities are long-term investments, early access to values is limited. Surrender charges may last six to eight years, and withdrawals prior to age 59 1/2 are usually subject to a 10% penalty in addition to ordinary income taxes on any gains.
2. Sales and surrender charges. The alert compares annuities to “class B shares of mutual funds,” as many annuities do not charge front-end sales fees but instead assess an asset-based fee and a surrender charge, both of which usually decline over a number of years.
3. Fees and expenses. Mortality and expense charges, administrative fees, underlying fund expense charges and charges for special features may add up to as much as a 2% charge against the annuitys value each year, according to the alert. It warns investors to be aware of the special features they are paying for and to determine whether they need them.