Regulators Send Message To Sellers Of Securities: Beware
Securities regulators have continued to target practices used by broker-dealers to sell variable annuities and have started targeting certain practices used to sell mutual funds.
On May 27, 2003, for example, the National Association of Securities Dealers issued an Investor Alert for the investing public.
Entitled “Variable Annuities: Beyond the Hard Sell,” the Investor Alert carries a clear message: Beware of aggressive sales tactics by sellers.
For sellers, the implicit message is that they, too, should beware–in this case, beware of regulatory scrutiny of their sales practices.
The Alert begins with a warning to seniors that some sellers may use “scare tactics.” It continues its cautionary tale and provides factors an investor should consider before purchasing a variable annuity, including:
Liquidity and Early Withdrawal. The Alert advises that deferred variable annuities are long-term investments, and that early withdrawal may result in sales charges and tax penalties.
Fees and Expenses. The Alert discusses the different fees and expenses imposed under a variable annuity, including the surrender charge. It notes that there are additional charges for special features and warns investors not to pay for them if “you dont need or want these features.” The Alert warns that variable annuities offering bonus credits typically impose higher mortality and expense charges and lengthy surrender charge periods.
Taxes. The Alert advises that investors should consider annuity products only after they make their maximum contributions to 401(k)s and other qualified plans. It notes that earnings withdrawn from annuities are taxed at ordinary income rates, rather than the lower capital gains rates, and that there is no “stepped up” basis on annuity proceeds upon the death of the owner. It also warns that investing in a variable annuity within a tax deferred account “may not be a good idea.”
Guarantees. The Alert warns that guarantees backed by an insurance company, such as the death benefit or annuity payout, “are only as good as the insurance company that gives them,” and suggests that investors research the insurers credit rating before investing.
Finally, the Alert reminds investors that if they already have purchased a variable annuity and are “having second thoughts,” the annuity may have a free-look period that would allow the investor to cancel the policy.