Variable Annuities- make sure your broker told you everything!

Variable annuities are complicated products with high commissions and deferred sales charges. Regulation Best Interest protects you. Variable annuities have a high rate of buyers remorse.

FINRA has special disclosure rules governing annuities however, they haven't upgraded them for Reg BI- see comparison below.

Due to the complexity and confusion surrounding them, which can lead to questionable sales practices, variable annuities are a leading source of investor complaints to FINRA. (quote from FINRA website)

Your broker has to have given you enough information to make an informed decision. If he didn't and you find out later that something wasn't on the up and up. You are the only vote that matters and you have recourse.

If your broker told you there was "no-fee" and he made a high commission and you think he was conflicted, he WAS conflicted.

Did they tell you about a rider but "forget" the fine print and you are not able to take out as much as you want- you have recourse.

Many annuities have brokerage and advisory share classes. The broker doesn't get paid any extra when he puts you in the advisory share class and the advisory share class has daily liquidity. If you weren't given a choice between brokerage and advisory, they broke Reg BI and you have recourse.

Many annuities have a commission of 7-8%. If they put that money back into the annuity the terms for the retail customer are better. Some annuities offer the upside of the S&P over 5-7 years with a 15% buffer on the downside. If they don't pay the broker the 8% commission and instead use it to improve the annuity, the upside can be 15-20% higher or there can be a larger buffer. The money given to the broker comes directly out of the clients pocket.

Comparison of disclosure rules between Reg BI and FINRA.

You can see how much more stringent Reg BI is and the difference that information will make when retail customers are thinking about a variable annuity. The regulators have not kept up with Reg BI.

Reg BI Requires:

a) "Full and Fair" disclosure of ALL material facts as determined by the retail customer.

b) The broker has to know that the customer made an "Informed Decision" after being told all of the material information- sufficiently specific to be able to make said "Informed Decision."

FINRA (not upgraded for Reg BI) : A broker just has to have a "reasonable basis" to believe that the customer "has been informed" in "general terms."

Reg BI Disclosures

Furthermore, we are modifying the Disclosure Obligation to explicitly require broker dealers to  provide “full and fair” disclosure of material facts, rather than requiring broker-dealers to “reasonably disclose” such information. (page 35 of rule) There was so much discussion on disclosure that the original Reg BI release was upgraded from “reasonably disclose”  to “full and fair disclosure of ALL material facts.” 

The Disclosure Obligation requires the disclosure of all material facts related to the 

scope and terms of the relationship with the retail customer. (page 132 of rule) ALL is highlighted in rule 

Regulation Best Interest also explicitly requires that disclosures be “full and fair,” and thus that a broker-dealer must provide sufficient information to enable a retail customer to make an informed decision with regard to a recommendation…. By explicitly requiring that broker-dealers provide sufficient information to enable retail investors to make an informed decision with regard to a recommendation, Regulation Best Interest imposes a minimum standard on disclosures  (page 552 of rule)

The Disclosure Obligation requires the disclosure of all material facts related to the 

scope and terms of the relationship with the retail customer. The standard for materiality for purposes of the Disclosure Obligation is consistent with the one the Supreme Court articulated in Basic v. Levinson.291  Specifically, a fact is material if there is “a substantial likelihood that a reasonable shareholder would consider it important.” In the context of Regulation Best Interest, the standard is the retail customer, (page 132 of rule)

FINRA 2330 Disclosure Rules on Variable Annuities

https://www.finra.org/rules-guidance/key-topics/variable-annuities

(Brokers have to comply with suitability and Best Interest. Given the investor complaints about variable annuities, you would think that this section would have been upgraded in the first month, but it has been five years.)

FINRA developed Rule 2330 to enhance firms’ compliance and supervisory systems, and provide more comprehensive and targeted protection to investors who purchase or exchange deferred variable annuities.

Among the rule’s key requirements, a registered representative, when recommending a deferred variable annuity transaction, must reasonably believe the customer has been informed of the various features of this type of annuity, such as a surrender charge, potential tax penalties, various fees and costs, and market risk.

2330 Recommendation Requirements

(1) No member or person associated with a member shall recommend to any customer the purchase or exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe

(A) that the transaction is suitable in accordance with Rule 2111 and, in particular, that there is a reasonable basis to believe that the customer has been informed, in general terms, of various features of deferred variable annuities, such as the  potential surrender period and surrender charge; potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59½; mortality and expense fees; investment advisory fees; potential charges for and features of riders; the insurance and investment components of deferred variable annuities; and market risk;