Complaints surface at Finra over buffer annuities

A new type of VA is highly complex and uses structured products — not mutual funds — in the sub account as the underlying investment

Jan 25, 2017 @ 1:12 pm

By Bruce Kelly

A new type of variable annuity called a buffer annuity is beginning to gain attention from regulators. It is highly complex and uses structured products — not mutual funds — in the sub account as the underlying investment.

The Financial Industry Regulatory Authority Inc. has started to see complaints about the product, said Donald Lopezi, senior vice president and regional director for Finra's western region. And while California hasn't received any consumer complaints about buffer annuities, the California Department of Business Oversight has been approached by the state's insurance commissioner to discuss the product, according to Jan Lynn Owen, commissioner of the department.

Both were speaking Tuesday afternoon on a due diligence panel in San Francisco at the annual Financial Services Institute meeting, OneVoice.

“I spent some time with my team trying to see how this thing works,” said Mr. Lopezi. “It's very complicated. I can't speak nationally but we are starting to see some complaints on those products in the west region.”

“We have some individuals who really understand VAs and they were struggling with this,” Mr. Lopezi said. “You have to wonder, does the firm understand it? Does the rep?”

InvestmentNews reported three years ago that buffer annuities, so called because they are contracts that use structured products to buffer clients' account values against downside losses, had just started to gain interest among financial advisers.

In most cases, these annuities place a premium on principal protection and steady account value growth rather than rapid accumulation.

Generally, they allow clients to receive returns that are linked to a stock market index over a limited period of time. Those returns are subject to a cap or limit determined periodically by the life insurer.

At the same time, insurers use options to duplicate the performance of the index and to buffer a percentage of downside risk, which varies across the board on products offered by the insurers.

(See: DOL fiduciary rule hastening the death of L-share variable annuities)

Mr. Lopezi said he did not know the extent of complaints nationally about buffer annuities, but Finra's western region, which encompasses all states west of Denver, had seen them.

Asked by a brokerage executive whether Finra had received investor complaints about such annuities, Mr. Lopezi responded: “I know exactly what you are talking about. We have seen this buffer annuity product. To be honest my head spins.”

Both Mr. Lopezi and Ms. Owen declined to comment more specifically on the product.

(More: LPL sued by Galvin over top producer's alleged variable annuity abuses)


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