A new federal suit in California could show what the courts think investment advisors should tell clients about the finances of struggling annuity issuers.
Kerry Nietz has sued LPL Financial over allegations that LPL and affiliated advisors should have warned him about the weak finances of PHL Variable Insurance Co. before March 31, 2023, when the Connecticut Insurance Department put PHL under administrative supervision.
PHL — a company that was once part of the Phoenix Cos., a popular annuity issuer — entered rehabilitation in 2024, and Connecticut officials later suggested that PHL would enter liquidation proceedings in the first half of 2027.
A trust controlled by Nietz bought a Big Edge Choice variable annuity from PHL in 1997. The annuity had a market value of $1,063,037 in 2021, but, now, because of a moratorium on withdrawals imposed by the rehabilitator, Nietz can take out only $250,000 in funds, according to a complaint filed June 3 in the U.S. District Court for the Southern District of California.
LPL should have known about the financial problems at Phoenix and PHL by 2009, when major rating agencies downgraded Phoenix, and after State Farm, a major Phoenix product distributor, stopped selling Phoenix life and annuity products, Nietz said in the complaint.
"While Phoenix's financial condition continued to severely deteriorate after 2009, LPL never informed Mr. Nietz that his retirement security was at risk," Nietz said.
Nietz, a Washington state resident, is seeking to represent a nationwide class that includes all people who acquired "rights under life insurance policies or annuity contracts" offered by the Phoenix Cos. and purchased through LPL investments, according to the complaint.
Nietz said in the complaint that LPL continued to receive "trail compensation," or ongoing fees, after it sold life insurance policies and annuity contracts to the clients.
"LPL breached its fiduciary duty and failed to exercise the duty of care expected of it under the circumstances surrounding the Phoenix Products," Nietz said in the complaint. "For more than a decade, LPL collected significant trail compensation in connection with Plaintiff and Class Members' Phoenix Products, with full knowledge that Phoenix/PHL Variable's financial outlook was poor, deteriorating, and unsound, and/or with knowledge of the material risk of the Phoenix Products or the material risk surrounding Phoenix/PHL Variable... LPL should have advised or notified Plaintiff and Class Members that their policies and contracts may be threatened due to Phoenix/PHL Variable's unsound financial condition."
In the complaint, Nietz has accused LPL of charges that include professional negligence, fraudulent concealment of PHL's problems, breach of fiduciary duty, unjust enrichment, and, for the Washington state plaintiffs, violation of the Washington Consumer Protection Act.
LPL has not yet appeared in court.
Representatives from LPL could not immediately be reached for comment.
Eddie Stone, a member of the plaintiffs' legal team, said the team is looking for evidence that would show why LPL took PHL products off its advisory platform.
What advisors should do: Whatever the outcome of the LPL case, the Nietz suit shows that advisors selling life and annuity products should:
◆ Pay close attention to the education and continuing education classes required by states' new "best interest" annuity sales standards.
◆ Seek guidance from their errors and omissions advisors and insurance providers.
◆ Follow news about issuer solvency closely.
◆ Watch product issuers' ratings.
◆ Understand the rules of the state guaranty associations that offer some protection for the customers of failed life insurance and annuity issuers.
Courtesy photo
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