As reported in Structured Retail Products online Magazine
By Lori Pizzani, North American news correspondent
A Finra arbitration claim filed earlier this month by an elderly Florida couple will challenge a broker’s repeated claim that the money invested within their variable annuity would be principal protected through the purchase of a voluntary contract rider.
The claim, filed by securities fraud attorney Mark Tepper of Ft. Lauderdale on behalf of the Sunrise, Florida pair, alleges that a broker employed by Citigroup Global Markets (then known as Smith Barney) enticed the couple and other investors to a free lunch seminar on how to invest for retirement.
After lunch he invited them back to his office and sold the senior couple an unsuitable variable annuity. The annuity, the claim alleges, was loaded with fees totaling 4.65%, in addition to a high commission charge of 5%.
Fees to the investors included a 0.75% to add on an optional guaranteed minimum income benefit rider which, the claim alleges, promised to pay the couple an annual return of 7.5%. Moreover, the claim charges, the couple was repeatedly told by the broker with whom the couple had an existing relationship that the additional rider served to protect the couple’s principal. But when the time came four years later to cash out the annuity, a significant loss of principal had occurred.
“These were very conservative investors who wanted to preserve [their capital], but wanted to have a monthly income,” Tepper told SRP. “The husband was in cancer remission and just wanted to protect his wife and income.”
Tepper declined to specify how much was invested in the variable annuity, other than to note that is was a six-figure sum. The annuity was underwritten by ING, which is not being charged with any wrongdoing.
A Citigroup spokesman declined to comment.
A guaranteed minimum income is a common feature that can be purchased with a variable annuity. The feature guarantees a specific annual return. The underlying principal, which is typically invested in one or more mutual funds, increases and decreases in tandem with the returns of the fund(s) and is not principal protected. If the principal decreases over time, so will the specific payouts to contract holders even if the rider guarantees a set percentage return will be paid. Conversely, if the underlyings perform well, the static return will provide increasing payouts. Newer rider enhancements may boost income or peg lifetime withdrawals to inflation.
“Smith Barney is liable for damages caused by its broker’s unsuitable recommendation as well as the broker’s untrue and misleading statements,” the claim notes. This case could take four to six months to be heard and then be determined by a single presiding arbitrator.