One of the challenges you face when considering any financial
product is figuring out whether it's a good choice for meeting your
goals. Often, you rely on advice and recommendations from financial
professionals to make your decision. But there's a catch.
Unfortunately, because some products carry much higher
commissions
than others, some salespeople have found it tempting to boost their
income by recommending products with higher sales charges to people who
really shouldn't be buying them. Deferred variable
annuities,
which may
carry a commission of 5% or more, fall into that category.
Both
state and federal regulators have become increasingly
concerned about unsuitable sales of variable
annuities,
both because of their high
commissions and the
surrender
fees
that apply if you end the contract within a certain
period — often seven years, but sometimes more.
Following actions against brokers who made improper
sales, in 2004 the precursor to
Financial Industry Regulatory Authority (FINRA), NASD,
proposed a new rule governing variable annuity sales,
and in 2005, the state of Massachusetts pursued actions
against two banks for improper variable annuity sales.
In the
eyes of regulators, the most problematic sales have been to older, less
affluent customers, some of whom have borrowed against their homes to
buy deferred variable annuities. An additional problem, in cases such
as these, is that deferred annuities are structured to accumulate
assets over an extended period before being converted to a source of
retirement income. If the investor has a relatively short time frame in
which to allow the annuity to grow, he or she is less likely to realize
enough gains to offset the annuity's costs.
