Variable Annuity Switching

(FINRA Rule 2330)

The recommended purchase or exchange of a variable annuity requires that a financial advisor must make a reasonable inquiry as to a client's situation before making a recommendation to switch. The factors to be considered, at a minimum, before making a recommendation include:

  • age;
  • annual income;
  • financial situation and needs;
  • investment experience;
  • investment objectives;
  • intended use of variable annuity;
  • investment time horizon;
  • existing assets;
  • liquid assets;
  • risk tolerance, and
  • tax status.

In the event of a recommended replacement of a variable annuity, consideration should be given to these additional factors:

  • any surrender charges and/or bonuses received;
  • loss of existing benefits (living or death);
  • any increased annual contract costs;
  • any increases in the surrender charge period;
  • any product enhancements and improvements obtained; and
  • whether customer has replaced another variable annuity in preceding
    36 months.

Annuities Held in Individual Retirement Accounts

Variable annuities represent a significant portion of the retirement assets held by individual investors. The growth in this investment category can be attributed to many factors, including compensation paid to financial advisors who recommend their purchase. Variable annuity purchases are not subject to sales breakpoint discounts provided by mutual fund families. In some instances, a conflict of interest can help explain why variable annuities are recommended as funding vehicles for Individual Retirement Accounts (IRA) instead of mutual funds. A variable annuity held in a tax deferred account, such as an IRA, simply adds an additional layer of costs with no additional tax benefits. These factors lead many in the securities industry to conclude that variable annuities are unsuitable for retirement accounts.

Annuity Replacement: Cost vs. Benefit Analysis

There are surrender charges and greater costs associated with a variable annuity that are a function of the compensation paid to a financial advisor and certain living and death benefits for contract holders. The living benefits provide through policy provisions the ability to withdraw lifetime income, with a rider issued by the insurance company. These living benefits are considered a valuable benefit not available through alternative means. Due to the complexities of variable annuities, complete disclosure of all relevant benefits and costs need to be disclosed to investors.

Recent developments in the competitive arena for investor funds have led to the innovation of bonus annuity products that have resulted in significant abuses. The annuity bonus is designed to provide an offset against any surrender charges incurred from the surrender of an annuity contract with the intention to replace the contract with a new "better" annuity product. The recommendation to sell an annuity and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer. There are important factors to consider which require the disclosure all relevant facts related to the replacement transaction. For instance, the bonus can result in higher ongoing contract costs, an extended surrender charge period and the loss of contractual living and death benefits. These costs are often minimized or not disclosed which result in a fraudulent misrepresentation when the motive of the financial advisor's compensation is taken into consideration.

Unsuitable Subaccount Asset Allocation

The sales practice rules concerning the recommended purchase or replacement of an annuity requires that, at the time of investment, a financial advisor must make a suitable allocation of the subaccount investments held inside the variable annuity contract. This requirement holds the financial advisor and brokerage firm liable for any losses that were the result of an unsuitable allocation into the subaccount investment options for the variable annuity. Investors who purchased or exchanged a variable annuity near retirement age are reasonable to expect that the investment allocations recommended by the financial advisor are suitable for them.

You are probably asking yourself whether you have a legitimate claim for damages. You are not sure whether stockbroker misconduct was the direct cause of your losses. To consider whether you are the victim of a variable annuity "switch" transaction, consider the following FAQs.

Frequently Asked Questions:

Q: I have invested in both fixed and variable annuities for my entire life. When I reached retirement age, my financial advisor recommended that I replace my annuities for the next generation of products. Soon after, the market dropped and now I cannot generate the income I need. What are my options?

Q: I recently noticed, my mother is age 78, had purchased a new bonus variable annuity contract from her insurance agent, is this considered a switch transaction?

Q: My financial advisor changed his broker dealer and told me to transfer my existing annuity contract to his new company so he could continue to manage my investment, is this considered a switch transaction?

Q: How do I determine whether I have a viable Securities Arbitration Claim?


Q: I have invested in both fixed and variable annuities for my entire life. When I reached retirement age, my financial advisor recommended that I replace my annuities for the next generation of products. Soon after, the market dropped and now I cannot generate the income I need. What are my options?
The exchange of annuities from fixed to variable contracts requires an examination of risk tolerance to determine whether the allocation of the variable subaccounts was suitable. The exchange of variable annuities to other variable annuities contracts requires a review of the differences in the contract benefits and costs associated with any changes. Costs to be considered include, increased annual costs, surrender charges and longer surrender charge periods. Finally, the issues related to retirement age require a complete assessment of changes in your risk tolerance, investment objectives and investment time horizon to make sure the allocation of your retirement assets is suitable.


Q: I recently noticed my mother, age 78, had purchased a new bonus variable annuity contract from her insurance agent, is this considered a switch transaction?
At your mother's age, the replacement of her existing annuity with a bonus annuity is in most instances unsuitable and therefore, a switch transaction. The bonus annuity increased annual costs and lengthened the surrender charge period to the end of her life expectancy. Review the documentation to determine whether a full disclosure of all the relevant factors was made and that your mother understood them all.


Q: My financial advisor changed his broker dealer and told me to transfer my existing annuity contract to his new company so he could continue to manage my investment, is this considered a switch transaction?
Most broker dealers allow for variable annuities purchased from different broker dealers to be assigned to a successor brokerage firm for purposes of continued management of the annuity contract. Except in rare cases, this seems to be an instance where the financial advisor was interested in generating new commissions for an investment vehicle you already owned.


Q: How do I determine whether I have a viable Securities Arbitration Claim?
Take the Following Steps to Begin the Recovery of Your Investment Losses:

  • Contact Our Legal Team to complete a Case Facts Summary
  • Schedule a time For an Interview with an Industry Expert
  • Gather Critical Case Documents
  • Complete Risk Tolerance Assessment
  • Assess Account Damages and Financial Advisor Misconduct
  • File Statement of Claim for Securities Arbitration