Meyer Wilson

Recovering Losses Caused By Investment Misconduct

Money Magazine Calls Index Annuities a Safety Trap

Many retirees have heard the pitch: Index annuities are a perfect blend of stock performance and little risk. They offer returns that go up when the market does and are guaranteed to never lose principal funds. Sounds like a great deal, and many retirees bought into it, which caused the relatively new industry to soar from $5.3 billion in sales to $29.9 billion in just nine years (“Index annuities are a safety trap,” Money Magazine, Jan. 17, 2011).

Despite their popularity, however, index annuities can mean big problems for investors. They can be incredibly complex, and they often have lower returns than investors expect. Additionally, they can feature high fees and hidden expenses, especially if the investor cashes out of the annuity before the contract period is over.

This last issue may be the most problematic. Recently, many investment advisors have begun advising that their clients “swap” their existing annuities for new ones, often before their existing contracts are up. (For more information about “swaps,” see our Nov. 2010 post.) This causes investors to suffer large surrender fees and/or early withdrawal penalties.

But, why would an advisor recommend a product or action to their client that may not be in the client’s best interest? The answer may lie in how advisors are paid for annuity sales.

In 2008, Illinois state regulators began investigating Senior Financial Strategies of Champaign, which does business as Pinnacle Investment Advisors, after the Illinois Securities Department received a complaint made by some of Pinnacle’s clients who alleged negligence on the part of the company (“Illinois Securities Department says clients incurred steep withdrawal penalties,” The News-Gazette, Sept. 27, 2010).

In its investigation, the regulators found at least 15 cases where Pinnacle’s clients purchased equity-indexed annuities with funds that came from the liquidation of other annuities. None of the previous annuities were held long enough for the clients to escape steep early withdrawal penalties, but that didn’t stop Pinnacle from advising their clients to make the switch. According to The News-Gazette article, Pinnacle sold 65 equity-indexed annuities to clients in just five months and made $426,281 in commission fees. (To learn about the problems associated with equity-indexed annuities, click here.) That’s $85,256.20 per month and $6,558.17 per annuity.

"When you have a market incentive to sell, sell, sell, why would anyone be surprised that there are all sorts of abuses?" said Birny Birnbaum, a former consumer representative to the National Association of Insurance Commissioners (NAIC), in the Jan. 17 Money Magazine article.

Why, indeed. We’re glad that state securities regulators are beginning to address issues like this, but it’s equally important that investors protect themselves, as well. Remember: With any investment, if it sounds too good to be true, it probably is – regardless of what the guy selling it says.

Choose a Firm with Accolades:

  • Super Lawyers
  • Million Dollar Advocates Forum
  • Preeminent AV Peer Review Rated
  • Best Lawyers Lawyer of the Year
  • Best Lawyers Best Law Firm
  • The Best Lawyers in America
  • Avvo 10/10 Rating