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Variable annuities are often recommended by investment advisors and brokers as a secure element of your retirement plan. Yet they are not suitable for many consumers, particularly elderly investors, and are sometimes sold against clients’ best interests. Annuities pay some of the highest commissions in the securities markets, the annual costs can exceed 3%, and there are very high penalties for liquidating.
Variable Annuities and Broker Commissions
Though inappropriate for most investors, financial advisors and brokers sometimes recommend variable annuities because they pay higher commissions for the investment required than other (and more fitting) securities. In order to sell variable annuities, brokers may misrepresent or omit information regarding an annuity’s costs (which are some of the highest in the industry), risks or propose an annuity despite a conflict. The investor’s age, risk tolerance and investment objectives frequently make an annuity unsuitable. Financial advisors may also recommend the unnecessary exchange of existing annuities to generate additional commissions.
Many investors, for example, are not made aware that variable annuities have long holding periods that may commit their money long-term and are very expensive. While any gains in variable annuities are tax-deferred, variable annuities are also subject to the market and come with high surrender charges for early withdrawal as well as other penalties.
The Complexity of Variable Annuities
Financial advisors and brokers who sell variable annuities often imply that, as insurance products, they are safe investments. They may push the so-called benefits of variable annuities: tax-deferred gains, death benefits to your beneficiary, life insurance coverage, regular payments. In many cases, however, investors do not need these benefits and the costs are unwarranted.
The penalties are often disguised in complex agreement language or through deceitful sales tactics. Variable annuities are particularly poor investments for the elderly as well as investors who need access to money from their investments, have adequate life insurance coverage without an annuity, already have their money in a qualified account, do not need the expense of a death benefit, have short-term investment goals, or have low risk tolerance among other factors.
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