The things we spend our money on tend to change as we get older. There’s a good chance you have a lot more money in your pocket now than you did in your late-teens, but the downside is that you now have to spend it on some not-so-fun stuff.
Utility bills and health insurance, for example, are on absolutely no one’s wish list. Spending your hard-earned money on these kinds of things is pretty boring and unfulfilling, but you simply have no other choice.
Annuities are in that same boring basket. They’re basically an agreement that you’ll pay a certain sum today, and be assured a fixed sum every month from the day you retire to the day you die. Though it might not be very exciting, a constant, guaranteed stream of lifelong income is very appealing, and it’s not a very complicated concept. But most people would rather watch paint dry than calculate the present value of an annuity to see if they’re getting a good deal.
That’s why a lot of people place their trust in financial advisors at their preferred insurance company. And that’s where things can, sometimes, go wrong.
FINRA realized this when the regulator sanctioned MetLife for improper selling practices recently. Turns out the salesforce at the insurance giant were encouraging their clients to swap the annuity they were signed up for. These newer annuities were meant to take advantage of the so-called Section 1035 Exchange, which allows annuity holders to exchange their existing annuities for newer schemes without triggering any tax consequences.
If swapping a complicated financial product for the same complicated financial product because of tax benefits sounds like a bad idea, that’s because it is.
Brokers were pushing these swaps just to get additional commissions. A broker gets between 6% and 7% when a customer either buys a new annuity or swaps their existing one for a new one. And to makes things worse, brokers told their clients that these new annuities would cost them less, when in fact, they were more expensive and lacked some of the features of the existing annuities.
When FINRA dug into the details of this mess, they found that many of the customers were also charged a number of “fees and charges” for this advice, while on the books these services were listed as free. All in all, the “annuity switching” scheme brought in more than $152 million in fees and commissions for MetLife between 2009 and 2014.
This sort of gross misrepresentation was the reason FINRA decided to levy the second largest penalty in history. MetLife paid up close to $25 million in one of the largest settlements of all time: $20 million in fines and $5 million to the victims.
This is also why FINRA is encouraging consumers to enquire about their broker’s fee structure and understand all the features or tax implications before signing onto a new annuity. It’s also worth speaking to an independant financial planner to see if you can get a second opinion.