California Variable Annuity and Structured Products Attorneys
Variable annuities and structured products are complex investments that brokers and investment advisers sell to retail investors who often do not understand what they are buying. Both categories share the same pattern: high internal costs, long lock-up periods, and compensation structures that reward the broker far more generously than simpler alternatives. Both are frequently pitched to retirees and conservative investors for whom they are unsuitable.
We represent investors in FINRA arbitration and securities litigation to recover losses caused by unsuitable variable annuity and structured product recommendations. Most claims come down to the same question: did the broker recommend the product because it served the client, or because it paid the broker?
Variable Annuities
A variable annuity is an insurance contract that offers tax-deferred growth and, in some versions, guaranteed income or death benefit features. Those features come at a cost. Variable annuities typically layer mortality and expense charges, administrative fees, underlying fund expenses, and rider fees on top of one another, producing annual costs that can materially reduce returns. They also impose surrender charges that penalize the investor for withdrawing funds, often for six to ten years after purchase.
For a narrow set of investors, variable annuities can make sense. For many others, they do not. The recommendations that generate claims tend to share a small number of features:
Sales inside IRAs or other tax-deferred accounts. Variable annuities provide tax deferral. An IRA already provides tax deferral. Selling a variable annuity inside an IRA duplicates the feature the investor is paying a premium for, which generally serves no purpose except to generate a commission.
Sales to elderly investors. Surrender charges can run six to ten years or longer. An investor in their seventies or eighties may not have the time horizon to outlast the surrender period, which means any need for liquidity triggers a penalty that eats into principal.
Annuity exchanges. A broker who recommends replacing one annuity with another typically generates a new commission while starting the surrender clock over. Unless the new annuity offers features the old one lacked and the investor actually needs, the exchange primarily serves the broker.
Misrepresented guarantees. Living benefit and death benefit riders are often sold as guaranteed returns when they actually guarantee a withdrawal amount or a death benefit, with conditions that limit their value. Investors frequently learn what the guarantee actually promises only when they try to use it.
Structured Products
Structured products are customized debt instruments issued by banks that combine a note with a derivative tied to an underlying asset such as a stock index, a basket of securities, a commodity, or an interest rate. The note pays a return that depends on how the underlying asset performs over a defined period, subject to caps, barriers, buffers, knock-in and knock-out features, and other terms that can be difficult to model and easy to misunderstand.
The risks that generate claims are consistent:
Illiquidity. Structured products rarely trade on a secondary market. Investors who need access to their capital before maturity often cannot sell at all or can sell only back to the issuing bank at a steep discount.
Credit risk. Because the product is a debt obligation of the issuing bank, an investor is exposed to the bank’s creditworthiness. If the issuer fails, the product can become worthless regardless of how the underlying asset performed.
Opaque payoff structures. The combination of caps, barriers, and conditional payouts can create situations where a small adverse movement in the underlying asset triggers large losses while meaningful upside is capped. Investors are frequently sold on the upside case without being walked through the downside.
Commission incentive. Structured products pay broker-dealers considerably more than conventional bonds or index funds, and the built-in costs are often not visible to the investor at the point of sale.
How We Pursue These Claims
Most variable annuity and structured product claims are suitability claims. The question is whether the investor had the risk tolerance, time horizon, and liquidity needs the product demanded, and whether the broker or firm adequately disclosed the costs, illiquidity, and downside scenarios. We review the investor’s financial profile at the time of the recommendation, the broker’s compensation, the firm’s supervisory records, the product’s prospectus and offering materials, and the actual performance of the investment. Where the evidence shows the recommendation served the broker’s interest rather than the client’s, we pursue recovery in FINRA arbitration.
FAQs
Are variable annuities always a bad investment?
No. A narrow set of investors can benefit from a variable annuity: someone who has already maxed out other tax-deferred retirement accounts, has a long time horizon, understands the fee structure, and actually needs the particular rider feature being purchased. The problem is that those conditions rarely apply to the retail investors to whom variable annuities are most aggressively sold. When an annuity is sold to an investor who does not fit that profile, the product’s costs and restrictions typically outweigh any benefit.
What is a structured product?
A structured product is a debt instrument issued by a bank whose return depends on the performance of an underlying asset, subject to terms that cap the upside and define the downside. The investor is lending money to the bank in exchange for a return that tracks something else, with conditions. Risks include illiquidity (the product usually cannot be sold before maturity), credit risk (the investor is exposed to the issuing bank’s financial health), and complexity (the payoff terms can produce unexpected results).
My broker said the annuity was guaranteed. Do I still have a claim?
Possibly. Variable annuities include features that are often described as guarantees but that guarantee something narrower than the investor was led to believe. A guaranteed minimum withdrawal benefit, for example, guarantees a specific withdrawal amount under specific conditions, not that the contract value will never go down. If the broker described the product as safe, principal-protected, or guaranteed in a way that did not match what the contract actually provided, the misrepresentation itself may support a claim regardless of the contract’s stated terms.
Talk to a California Variable Annuity and Structured Products Lawyer
If your broker recommended a variable annuity or structured product that was unsuitable for your financial situation or did not fully disclose the costs, illiquidity, or downside risks, contact Rosenberger + Kawabata. Call (310) 894-6921 or submit an inquiry through our contact form.