Investor Resource
Variable Annuity Fraud
Variable annuities are frequently mis-sold to investors. High fees, surrender charges, and unsuitable recommendations are common violations.
What Is a Variable Annuity?
A variable annuity is an insurance product that allows investors to allocate money among a selection of investment subaccounts — similar to mutual funds. The product offers tax-deferred growth and, upon annuitization, a stream of income payments. On paper, these features sound attractive. In practice, variable annuities carry some of the highest fees in the investment industry — typically 2% to 4% per year when all layers of charges are combined. They also impose surrender charges — early withdrawal penalties that can last 7 to 10 years — that can trap investors in unsuitable products.
Why Brokers Over-Sell Them
Variable annuities pay some of the highest commissions in the industry — often 5% to 8% of the amount invested, paid upfront to the broker. This creates a powerful financial incentive for brokers to recommend them, even when they are not in the client's best interest. The result is a well-documented pattern of unsuitable sales: annuities sold inside IRAs (where the tax deferral benefit is redundant and therefore worthless), sold to elderly investors who need liquidity, or replaced frequently to generate new commissions — a practice called 'switching' or 'twisting.'
Common Variable Annuity Violations
The most common violations include: selling a variable annuity inside a tax-advantaged account (IRA, 401k) where tax deferral provides no benefit; recommending annuities to investors who need liquidity and will incur surrender charges to access their money; 'switching' — recommending a client surrender one annuity (paying a surrender charge) to buy a new one, generating a fresh commission; and failing to disclose total fees, surrender periods, and the conflicts of interest created by the commission structure. All of these can give rise to a FINRA arbitration claim.
Frequently Asked Questions
Is it always wrong for a broker to recommend a variable annuity?
No. Variable annuities can be appropriate for certain investors — particularly younger investors in higher tax brackets who have maximized other tax-advantaged accounts and have a long time horizon. The problem arises when they are recommended without regard to suitability, or when the broker's commission interest drives the recommendation rather than the client's needs.
I was sold an annuity inside my IRA. Is that a problem?
Almost certainly. IRAs already provide tax-deferred growth — the primary feature of a variable annuity. Putting an annuity inside an IRA provides no additional tax benefit, but you still pay the annuity's high annual fees and face surrender charges. FINRA arbitration panels have repeatedly found this to be an unsuitable recommendation. Contact a securities attorney to evaluate your claim.
Can I get my money back from a bad annuity recommendation?
Yes, through FINRA arbitration. Recoverable damages typically include excess fees paid, surrender charges incurred, and the difference between your actual return and what you would have earned in a suitable alternative investment. In cases of egregious misconduct, punitive damages may also be available.
Attorneys Who Handle These Cases
These attorneys have experience with variable annuity fraud matters.
Howard M. Rosenfield
Rosenfield & Associates
Joe Fogel
Fogel & Associates
Douglas J. Schulz
Invest Securities Consulting, Inc.