Variable annuities “are complex investments that are commonly marketed and sold to retirees or people saving for retirement,” says the Financial Industry Regulatory Authority, and while it is customary to say that any investment other than common stock is “complex,” I am willing to give FINRA this one. How complex are variable annuities? So complex that when MetLife Securities was pitching customers on replacing one variable annuity with another, it “required registered representatives to inform a customer whether the proposed VA contract was more expensive than the existing VA contract,” and they basically couldn’t:

MSI’s registered representatives answered this question incorrectly in 30 percent of its replacement applications by indicating that the proposed VA contract was less expensive than the customer’s existing VA contract. In reality, the proposed VA contract was more expensive.

That is a pretty basic question! Like, if you ask a car salesman if the Sonata is more expensive than the Elantra, he’ll be able to tell you, and he’ll get it right more than 70 percent of the time. Getting it wrong 30 percent of the time suggests that MetLife’s representatives had no idea what they were selling.

Obviously the other possibility is that the representatives knew that the new product was more expensive than the old one, but said it was cheaper just to get more fees. But that’s not what FINRA concluded when it fined MetLife Securities $20 million and ordered it to pay back $5 million to customers for “negligent material misrepresentations and omissions” in its variable annuity replacement business. ”MSI misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing VA contracts in 72 percent of the 35,500 VA replacement applications the firm approved” — 72 percent! — but these were apparently negligent accidents, not intentional mis-selling. Anyway here is another proof of the product’s complexity:

VA Replacements constituted a substantial portion of MSI’s business. During the Relevant Period, MSI sold at least $3 billion in VAs through 35,500 VA Replacements generating $152 million in gross dealer commission for the Firm.

That’s like a 5 percent commission. You can’t get 5 percent on common stocks these days. For 5 percent, your product had better be complex.

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