Complex Financial Products

Complex financial products continue to make stock brokers rich while only sometimes satisfying the needs of individual investors. Many of these products are so complex that the financial advisors who are selling them do not fully understand how they work. However, federal security law mandates that investment strategies and individual investments must demonstrate an ongoing suitability match between investment and investor.

What Is An L-Share Variable Annuity Product?

FINRA recently fined eight financial firms a total of $6.2 million for supervisory failures related to Variable Annuity L-Shares.

Most broadly, L-Share Annuities are a common share class offered by a variable annuity that has a short surrender period. They are designed ideally for investors who want the option to be able to withdraw funds from the account after a short period of time in what would otherwise be a very illiquid investment.

Variable Annuity Characteristics

L-shares are a class of variable annuities, which are long-term investment products designed for retirement planners and sold by insurance companies (and often offered through brokerage firms). In exchange for a combination of portfolios like equities, fixed income, and money markets, investors or planners pay an annual premium fee.

Some of the major advertised benefits of variable annuities:

  • Tax-deferment
  • Value correlating to performance of underlying investments
  • Death benefit clauses

One of the major drawbacks of variable annuities is their illiquidity. Since they are designed as long-term investment vehicles, investors who withdraw funds from the annuities often suffer severe withdrawal penalties as well as surrender penalties for liquidating the funds in their entirety.

The L-Share Class of Variable Annuities

The L share class differs from other annuity classes in terms of surrender charges, administrative and expense fees, and the mortality fee schedule.

  • Surrender charges. The surrender period is the period of time during which an annuitant may not withdraw funds from the account, otherwise, a surrender charge or penalty will be applied. The L share class has a surrender period of 3 to 4 years, while the average surrender period for a variable annuity is 6 to 8 years.
  • Sales charges. L-Share Variable Annuities have no upfront sales like other classes of VAs.
  • Mortality & Expense charges. L-share annuity classes offer a relatively higher mortality risk and expense (M&E) charge compared to other variable annuity classes. M&E charges for variable annuities typically range from 0.9 to 1.95%, with L share class fees in the higher spectrum of that range.
  • Administrative fees. Variable annuity administrative fees range from 0 to 0.6% annually with L shares offering the higher percentage of the account value.

Based on these characteristics, the L-share is most valuable to investors who want access to their investment funds after four years without being penalized.

Problems with L-Share Variable Annuities

In a recent report, securities industry watchdog FINRA (Financial Industry Regulatory Authority) cited, among other complex products, multi-share products like the L-Share as increasingly being misused by the financial industry.

FINRA found that some firms failed to meet their suitability obligations with respect to individual customers when recommending multi-share class or complex products.

In addition, FINRA observed that some firms failed to establish and implement adequate supervisory systems and written supervisory procedures with regard to multi-share class and complex products. At one firm, for example, FINRA observed that in a sample of short-term surrender variable annuity transactions, over 50 percent of customers had a long-term investment time horizon. Despite this appearance of a conflict with the recommendation to purchase the short-term surrender annuity, FINRA found no evidence in most of the transactions that the firm had performed a supervisory review addressing these concerns.

In other words, the same key feature of L-Share Variable Annuity that distinguishes them from other classes of VAs is becoming a major problems for investors who actually don’t need that feature. It is the rare investor indeed who purchases a long-term investment product but for some reason needs the option to withdraw funds in the short-term. After all, there are plenty of other less inexpensive and less complicated products in the market that could serve that purpose without costing investors the high fees associated with variable annuities.

Also recently, FINRA fined eight financial firms a total of $6.2 million for supervisory failures related to Variable Annuity L-Shares.

FINRA Securities Litigation Law Firm

Name *
Name
Phone
Phone

If you or someone you know has been the victim of securities fraud or broker misconduct, please contact our law firm immediately for a free consultation to protect your legal rights by calling 215 462 3330 or by using our online contact form.

bestlawyers.jpeg
40u40seal.png