The Financial Industry Regulatory Authority (“FINRA”) has censured and fined four brokerage firms for failure to supervise variable annuity exchanges. Collectively, Woodbury Financial Services, Sagepoint Financial, FSC Securities Corporation, and Royal Alliance Associates must pay $1 million in fines pursuant to FINRA’s Acceptance, Waiver, and Consent letter entered against the firms.
According to FINRA’s factual findings, the firms did not adequately monitor sales and exchanges of variable annuities and did not address suitability concerns regarding different share classes of variable annuity products, particularly with regard to fees and costs associated with shorter term “L-share” contracts. The firms were collectively fined $1 million by FINRA, broken down as follows: Royal Alliance, $350,000; FSC, $200,000; SagePoint, $200,000; and Woodbury, $250,000.
FINRA’s censure is the latest example of FINRA’s emphasis on punishing and deterring variable annuity misconduct. Variable annuities are insurance products that are frequently marketed to senior investors as providing a guaranteed income stream, with tax advantages and a death benefit. In reality, however, these benefits are often offset by high commissions and fees, surrender charges, and illiquidity, while the underlying principal is exposed to market risks.
While variable annuities may be a suitable investment for a narrow band of investors with a long investment timeline, who do not have life insurance, and who do not already have tax-advantaged investments, variable annuities are too often sold to investors who do not need these features and for whom the products are wholly unsuitable. Brokers are incentivized to sell variable annuities because of the high commissions and fees these products generate.