Breaking News: Security Benefit Sued for Fraud in FIA Class Action Lawsuit
Download the Updated 50-State Asset Protection Chart for Life, Annuities, and IRAs. This is my most popular download EVER. To download it, click on the following link:
To download the complaint (which should be mandatory reading for every advisor as well as IMO and insurance company President), click on the following link (I’ve highlighted the parts of the complaint I think are most interesting):
Security Benefit Life Class Action Lawsuit-I rarely put out more than one newsletter a week, but when this came across my desk this morning, I had to get it out.
For the record, I warned agents to stay away from Security Benefit (SB) and their too good to be true FIAs that are the subject to this lawsuit. Greedy agents (high commissions) and IMOs that don’t seem to care about anything but maximizing commissions helped make this train wreck happen.
What can be learned by this lawsuit? DO NOT sell products that have marketing materials with unrealistic rate of returns for Volatility Control Indexes (VCI). STAY AWAY from 2, 3, 4, 5-year point-to-point crediting methods in FIAs if there are annual point-to-point products with good terms.
It is because of annuities sold in this lawsuit and pushed by IMOs I would have a hard time recommending that I put out newsletters titled The Best FIA IMOs Won’t Offer. Every advisor who sells or is thinking of selling an FIA should learn about this product. To learn more, click on the following link:
What’s the lawsuit about? The lawsuit is mainly a fraud lawsuit.
What’s the fraud? The fraud is essentially how SB illustrated, marketed, and sold Fixed Indexed Annuities (FIAs).
1) Illustrations-SB was one of the early companies to use Volatility Control Indexes in an effort to boost the returns in FIAs (boost returns above what annual point-to-point S&P 500 based indexes could return).
SB also used multi-year buckets to boost returns in their illustrations. SB used 2- and 5-year point-to-point buckets. The illustrations were back-tested because they didn’t really exist before they were used in SB’s FIAs. The back-tested returns seemed ridiculously high (especially for their commodities based index that had a fee and spread). They should never have passed an advisor’s smell test (except many were blinded by the commissions).
2) Marketing-the lawsuit alleges that the marketing material was consistently deceptive and lacked proper disclosures.
It’s insane to have in an FIA brochure with a hypothetical actual rate of return that is anywhere near 8%. And then to compare the returns to what appears to be an intentionally depressed illustration of an S&P 500 annual point-to-point product with a cap, is begging for the lawsuit that has now come.
The following chart is from the complaint. The green line is the SB product and the red line is an FIA with a 3.25% annual point-to-point cap. This seems to be a cherry-picked illustration that started right when the first crash happened in 2000.
Because of the marketing materials that made the product look so much better than any other product in the market and because SB was paying high commissions on the product, agents flocked to it in droves and made it the #1 selling product in the market (sad but true).
The following from the complaint shows the actual performance of the VCI used in the SB FIA from 2014 through 2018 as compared to a few real stock indexes.
Actual results were predictable and pathetic.
It’s sort of heart breaking to read part of this complaint. Here are a few examples:
1) In the two-year bucket of a client from the complaint from November 6, 2014, and November 6, 2016, crediting amount in the annuity was ZERO!
2) In the two-year bucket of a client from the complaint from November 6, 2016, and November 6, 2018, crediting amount in the annuity was only 1.68%!
3) In the five-year bucket of a client from the complaint April 15, 2013, and April 15, 2018, crediting amount in the annuity was ZERO!
Bottom line-this lawsuit is probably several years overdue and hopefully it will be a reminder to advisors to stay away from products that look too good to be true.
Finally, I’d like to thank Anil Vazirani for bringing this lawsuit to my attention.
Roccy DeFrancesco, JD