Buffer Annuities: Why Regulators Are Seeing Complaints

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Buffer Annuities: Why Regulators Are Seeing Complaints

Regulators are beginning to shift their attention toward buffer annuities, a new kind of variable annuity. These annuities are extremely complicated and utilize structured products, rather than mutual funds, in the sub-account as the underlying investment.

Donald Lopezi, Senior Vice President and Regional Director of FINRA’s western region, has noted that the regulator has started to see complaints regarding these annuities. “I spent some time with my team trying to see how this thing works,” Lopzi stated. “It’s very complicated. I can’t speak nationally but we are starting to see some complaints on those products in the west region.” He further noted, “We have some individuals who really understand [variable annuities] and they were struggling with this. You have to wonder, does the firm understand it? Does the rep?”

Buffer annuities got their name because they are contracts that use structured products to buffer clients’ account values against downside losses. They started to gain traction among financial advisors about three years ago. For the most part, these products focus on protecting principal and gradual account value growth over rapid accumulation. Typically, they allow clients to see returns that are linked to a stock market index over a limited period of time. These returns are subject to a limit determined from time to time by the life insurer. Simultaneously, insurers use options to duplicate the performance of the index and to buffer a percentage of downside risk, which varies across the board on products offered by the insurers.

As buffer annuities are extremely complex products, they are not suitable for everyone. Brokers have a duty to only recommend investments that are suitable for particular customers. They must consider a variety of facts, such as age, investment objectives, and risk tolerance, when determining whether investments are suitable for a customer. If you were sold a buffer annuity or any other type of investment that you believe was not suitable for your investment needs, you may have legal recourse.  Please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies or complete the contact form.

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