January 2009 Archives

January 31, 2009

Looking Back: The Trouble with Variable Annuities

In May 2008, new suitability rules went into effect attempting to stop the proliferation of variable annuity complaints. Yet, from all appearances, variable annuities are still being sold to uninformed consumers, many of them elderly, who do not understand what they are getting themselves into--until it is too late.

A variable annuity is a hybrid product that includes both insurance and securities features. Due to their complexity, many customers are at the mercy of their brokers when deciding whether a variable annuity is a suitable investment. Because of the insurance element, many investors wrongly assume that their investment will not lose value.

Variable annuities come with a lot of costly features that are unnecessary for most investors. For many investors, particularly elderly ones, a variable annuity is a poor investment choice that can expose them to unnecessary market risk.

Variable annuity investments are ill-suited for customers that have one or more of the following characteristics:

  • Are elderly
  • Have a low risk tolerance
  • Need access to cash or require income
  • Do not need or want the available death benefit
  • Already have adequate life insurance coverage prior to purchasing the annuity
When recommending a variable annuity, brokers must make a determination that the entire variable annuity, including its component parts and the initial subaccount allocations, is suitable for the customer. Under the new rules, brokers also have a duty to inform their clients about the material features of any variable annuity product they are recommending. In order to meet this requirement, the broker must do more than merely give the customer a copy of the prospectus.


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The Bottom Line
  • Think twice before investing in a variable annuity.
  • Never invest in anything that you cannot easily understand.
  • Do not rely only on the recommendation of a commissioned broker. Get a second opinion from an independent financial advisor.

Click here for more blog postings about variable annuities.

January 28, 2009

Securities Arbitration vs. Class Actions: Consider Your Options

Securities class actions are on the rise again. In 2008, there were 210 federal securities class actions filed, nearly half involved firms in the financial services sector.

Class Actions: Not for Everyone

For millions of consumers, participating in a securities class action is an almost effortless process. Class members are seldom required to do much more than submit a proof of claim and wait for their share of the recovery.

The primary disadvantage is that, even though class action settlements can be considerable, they must be distributed to a large class of customers. As a result, individual recoveries are often quite small in comparison to the multi-million dollar settlements and awards paid out by large corporations.

Opting Out of Securities Class Actions

Another option that is frequently overlooked is "opting out" of a securities class action and pursuing an independent arbitration claim. Customers that have suffered substantial investment losses could recover significantly more by pursuing their own individual claim.

The "Opt Out" Deadline

If you recently discovered that you are a member of a pending securities class action, you will have a limited period of time to decide whether to participate in the lawsuit or pursue your own claim in arbitration. If you do nothing, you may be automatically included in the class.

See also: Are Securities Arbitration Cases More Financially Rewarding for Investors than Class Actions?

Schwab Yield Plus Class Action

The Schwab Yield Plus case is a recent example of a class action that is awaiting certification by the Court. The pending Schwab Yield Plus class action applies to investors who purchased the Schwab Yield Plus (SWYPX and SWYSX) money market funds.

The class action complaint alleges that Charles Schwab Corporation issued untrue statements regarding the lack of diversification of these funds and the extent of investments assigned to sub-prime mortgage backed and related securities. The complaint also alleges the funds registration statements and prospectuses contained untrue statements of material facts, and omitted important information regarding the funds' investments, ultimately misleading investors.

If the Court certifies the case as a class action, a notice will be sent out to investors in these funds advising them of the class action and their right to opt out.

Click here to view all "YieldPlus" blog postings.

Click here to view all "Class Action" blog postings.

Carefully consider your options before participating in a class action. If you believe you have a meritorious securities claim, speak with a securities attorney to discuss your rights and the advisability of opting out based on your individual circumstances.

January 26, 2009

Is Your Broker Looking Out for You?

The recently published book, "The Middle-Class Millionaire: The Rise of the New Rich and How They are Changing America," illuminates a disturbing trend among financial advisors. The authors surveyed a randomly chosen group of experienced financial advisors. The advisors were divided into two groups: (1) Middle-Class Millionaire ("MCM") advisors with a reported net worth between $1 million and $10 million; and (2) "aspiring" advisors with a reported a net worth below $1 million.

The Dark Side of Success

According to the survey, there were some surprising differences in beliefs and attitudes between the aspiring advisors and the wealthier MCM advisors. The survey showed that MCM advisors did not believe that success depended upon doing what you love, having a high IQ or working with good people. Instead, MCM advisors believed that, in order to be successful, it was necessary to:

  • Do whatever it takes to win
  • Take advantage of the weakness of others
  • Bend the rules at times
  • Leave a rewarding career to pursue financial success
  • Be Machiavellian at times

While the above characteristics may increase the advisor's bottom line, I am not so sure how these characteristics will benefit the advisor's customers.

The Brokers are Coming

These traits for success bring to mind the stereotypical stockbroker. In fact, the group of survey participants was limited to registered representatives working at brokerage firms and independent broker/dealers. Do stockbrokers have a different mindset than registered investment advisors? One can only hope that RIAs exhibit a less cutthroat attitude; however, with the steady increase in the number of brokers "going independent" and shifting into advisory practices, the lines are getting blurred.

Undoubtedly there are ethical investment professionals in both camps. Unfortunately, the investing public is largely unable to distinguish a financial advisor (i.e., stockbroker) from an investment advisor. According to a survey by Opinion Research Corporation conducted in April 2007:

Fewer than one out of three U.S. investors (30 percent in 2007)correctly understand that the "primary service" provided by stockbrokers is the buying and selling of stocks, mutual funds, bonds, etc., not investment advice.

January 26, 2009

Elder Financial Abuse

As the wealthiest segment of our population ages, instances of elder financial abuse will be on the rise. Whenever elder financial abuse is suspected, it should be immediately reported. What is elder financial abuse? Elder financial abuse is broadly defined as the theft or taking of money or property from an elder or senior citizen.

In 2009, California amended its Elder Abuse laws to include the taking money from an elder through the use of undue influence. Elder abusers can also include those who help or assist in the financial abuse of an elder.

What should you do if you suspect elder abuse?

Members of the public are encouraged to report instances of elder abuse to local law enforcement or adult protective services. If a financial institution reasonably suspects that there has been elder financial abuse, they are required by law to report the abuse. Victims of financial abuse can also take legal action against the abuser and anyone that has assisted them. Warning signs of elder financial abuse:

  • The elder person develops a new close relationship with someone who offers to manage their finances and assets.
  • Family members or caregivers isolate the elder and restrict the person's contact with others and closely regulate/monitor the elder's visitors.
  • The elder is confused, forgetful, frightened, withdrawn or secretive.
  • The appearance of suspicious spending patterns, withdrawals or financial activity in the elder's bank or brokerage accounts.
  • The elder has made an investment that they do not understand or that appears inappropriate, particularly investments that charge high fees/commissions or impose early withdrawal penalties.
  • Signatures on checks or forms do not resemble the elder's or the information on the form is incorrect.
Fiduciaries such as investment advisors, trustees or conservators should be wary of any family member, caregiver or newcomer who has taken a sudden interest in an elderly person's financial affairs. Obvious red flags include the following: (1) sudden changes to an elderly person's estate plan; (2) a newly created power of attorney for a bank or brokerage account; or (3) the appointment of a co-trustee for a bank or brokerage account.

Immediately report any instance of elder abuse to Adult Protective Services or the police department. Many states make it mandatory for financial institutions to report suspected financial elder abuse. Remember, anyone who assists in the financial abuse of an elder, may also be liable.

Click here for related blog posts about senior investors.

January 8, 2009

Check Your Broker

Would you like to know whether your brokerage firm or stockbroker has had a history of customer complaints?

You can easily check a broker's employment and disciplinary history online at FINRA BrokerCheck Website or call the BrokerCheck Hotline at (800) 289-9999.

The letters F-I-N-R-A stand for the Financial Industry Regulatory Authority. They are the non-governmental regulatory authority for securities firms and stockbrokers.