Vernon Litigation Group has filed a US Financial Industry and Regulatory Agency (Finra) arbitration claim on behalf of an 88-year old retail investor who invested in a variable annuity sold by Allianz Life.
The claim relates to activities of financial professionals National Planning Corporation (NPC) and Christopher P. Jordan in handling his investments, and alleges that the 88-year old client was sold an Allianz variable annuity, an FS Investments private placement, and a non-traded real estate investment trust (REIT) which amounted to US$2m.
According to the claimant's attorney, Chris Vernon (pictured), variable annuities are the kinds of products that typically require a salesperson and a high commission incentive to sell because of their "illiquidity, complexity, high expenses, and, often, very high risks".
"People are seeking advice from professionals when investing their money, but they are being sold products that don't meet their risk profiles and financial objectives," said Vernon. "There is no motivation in the financial industry to curb this practice because the firms selling those products are getting hefty commissions."
Before filing the arbitration claim with the regulator, the client approached Allianz but the life insurance provider did not acknowledge any wrongdoing, "which forced our client to file a formal claim for compensation through our firm", according to Vernon.
The annuity involved in this case is Allianz's Vision Variable Annuity, a managed funds-linked product with a seven year surrender charge that starts at 8% and "works its way down". Variable annuities are designed to be long-term investments, requiring the payment of surrender charges if the investor chooses or needs to liquidate in the early years, and are also expensive in that they include mortality and expense charges, administrative charges, and investment advisory fees, said Vernon.
In Florida, duties of the insurance company and salesperson include reasonable grounds for believing that the recommendation is suitable for the consumer, based on a number of factors, including a reasonable basis to believe the consumer would benefit from tax-deferred growth.
"This is why variable annuities can be especially inappropriate for older investors," said Vernon, adding that the claim against NPC asserts industry standards and regulatory and legal requirements were not followed with respect to the sale of the variable annuity.
"I think regulators have failed to address some of the issues around suitability and disclosure at the point of sale," said Vernon. "Regulators are under-resourced and under-staffed, and they haven't succeeded in changing the culture in Wall Street or at other financial institutions such as big banks and insurance companies."
According to Vernon, this case highlights once more that sales processes are not adequately controlled and that the lack of a fiduciary mandate means that the sales force of financial product providers do not work in the interest of the end clients. "The complexity around products allows this defective sales set up to survive," said Vernon. "Advisors are actually acting as salespeople and pushing products that are not suitable for the end investors. Complexity is being disguised as innovation and the fiduciary responsibility from financial professionals has been lost."
The arbitration claim against Allianz Life follows a penalty of US$20m imposed to MetLife Securities (MSI) by the Finra in early May which also ordered the firm to pay US$5m in redress to clients for making negligent material misrepresentations and omissions on variable annuity (VA) replacement applications for tens of thousands of customers.
Also, back in January, the US Finra underscored its focus on the suitability obligations of issuers and distributors in the context of recommendations regarding complex, speculative or longer-duration, interest-rate sensitive and alternative products, in its annual regulatory and examination priorities (2016 Regulatory and Examination Priorities letter).
More than 560 variable annuities have been marketed across jurisdictions of which 84 were sold in the US market, according to SRP data which also shows that Allianz Life has marketed seven index-linked variable annuities since 2005.
In March, Allianz Life launched the Pimco Tactical Balanced Index as an allocation option for two of its index-linked vairiable annuities (Allianz 360 Annuity and Allianz 222 Annuity). This new index dynamically allocates daily between the S&P 500 index, a bond component comprised of the Pimco Synthetic Bond Index with a duration overlay, and cash.
Click in the link to see the fact sheet of the Allianz Vision Variable Annuity.
Calls to Allianz Life to establish the firm's position in this case were not returned by press time.
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