The Securities Lawyers at Halling & Cayo, S.C. are pleased to announce the successful resolution of a FINRA arbitration claim on behalf of a retired couple against a national brokerage firm. The claim alleged that the firm’s financial advisor recommended unsuitable, high-cost variable annuities by misrepresenting the payout rates as guaranteed investment “yields.”
This settlement highlights a pervasive issue in the financial services industry: the confusion between withdrawal rates and actual investment returns in variable annuity products.
The Bait-and-Switch: Bonds vs. Variable Annuities
In this matter, the investors were a retired couple looking to generate income and preserve their savings for their children. Having previously invested in investment-grade bonds, they approached their financial advisor with a specific request: they wanted to invest their savings in bonds generating interest in the realm of 5%.
Instead of fulfilling this request, the financial advisor recommended the purchase of Variable Annuities. According to the Statement of Claim, the advisor induced the sale by telling the retirees he had “found 5.35%,” leading them to believe the investment would generate a 5.35% annual yield or interest rate.
The “5.35%” Misconception
One of the most dangerous traps for retirees is the misunderstanding of “guaranteed income” riders on annuity products.
In this case, the Claimants alleged that the “5.35%” figure did not refer to the growth of their money. Instead, it referred only to the allowable annual withdrawal amount. Crucially, these withdrawals were not interest payments; they were arguably a return of the investors’ own principal.
Because the advisor allegedly failed to explain this distinction, the investors believed their principal was growing at 5.35% per year. In reality, high internal fees—including mortality and expense charges, administration charges, and rider fees—dragged down the account performance. As they took their “income” withdrawals, their account value reportedly declined, and the high fees made it difficult for the underlying investments to keep pace.
The Trap of Illiquidity and Surrender Charges
Beyond the confusion regarding returns, variable annuities often carry significant liquidity restrictions. The Claimants in this case alleged they were not informed of the onerous 7-year surrender period, which imposed hefty penalties for early access to their funds.
For retirees accustomed to the liquidity and transparency of traditional bonds, being locked into a complex insurance product can be financially devastating. The Statement of Claim argued that had the investors been placed in a suitable, balanced portfolio of traditional investments, they would have avoided these unnecessary fees and maintained access to their capital.
Protecting Your Retirement Savings
Financial advisors have a duty under FINRA rules to recommend investments that are suitable for a client’s age, financial situation, and investment objectives. When an advisor prioritizes a commission over a client’s best interest—or fails to clearly explain the difference between a withdrawal rate and a return on investment—they may be held liable for the resulting losses.
If you were sold a variable annuity based on promises of “guaranteed yields” that turned out to be simple principal withdrawals, or if you were unaware of the high fees and surrender charges associated with your investment, you may have a claim.
Sean M. Sweeney is a shareholder at Halling and Cayo, a full service law firm in Milwaukee, WI and the head of its Securities Litigation team.
He represents individual and institutional investors in FINRA arbitration and court nationwide. He recovers investment losses from fraud or breach of duty from their broker-dealer.
Contact him at (414) 755-5020 or via e-mail at SMS@hallingcayo.com to see if he can help recover your funds.