Zika Virus and Related Investment Scams

By Kelly Robinson, Spring 2016 Student Intern

In today’s interconnected world, news spreads quickly. Social media and other news outlets disseminate information (whether true or not) and a story explodes. While the latest story about Justin Bieber may not lead you towards a particular investment, those stories that potentially affect our businesses or livelihoods tend to create a lot of hype and fear, and in turn, also create lucrative investment scams (think Y2K).

The Zika Virus (or Ebola, or Swine Flu, or [insert other illness here]) all feed an interest in products that claim to prevent the spread of the disease or fight its symptoms. Scammers will aggressively promote these stocks, sometimes using false proclamations of success or overly-optimistic statements about the product’s benefits. The aggressive promotion inflates the price of the stock as people buy in, which is when the scammers then sell their stocks at a premium, leaving others with unprofitable stocks.

Scammers have taken this “sick twist” on the classic pump and dump scheme into the modern era by using social media and related apps to further hype the stock. This hype can be as simple as commenting about the stock under a Zika Virus news article, to push notifications touting the success of the stock sent directly to consumers of various apps, to more sophisticated scams involving the creation of a webpage with links to success stories and the like. Remember, it is ALWAYS a good idea to be especially careful with social media investment promotions as they may be scams (or at least poor investments) and it can be difficult to track the creator/promoter. If you’re looking for more ways to protect yourself, FINRA has an excellent podcast on what to look out for here.

FINRA Bars Two Brokers from the Industry for Fraud Related to Hedge Fund Sales

By Michael Williford, Spring 2016 Student Intern

On February 11, 2016, the Financial Industry Regulatory Authority (FINRA) announced it was barring two brokers based in Buffalo, New York for material misrepresentations and omissions connection with their sales pitch to investors that the Prestige Wealth Management Fund was a “growth” fund driven by sophisticated computer algorithms designed to minimize risk. Continue reading

Annuities Fraud

By Kelly Robinson, Spring 2016 Student Intern

Annuities aren’t designed for everyone. Like many other financial products, annuities can be used as a mechanism to perpetuate fraud. In our previous posts about annuities, we touched on the subject of fraud, but this week we will take a comprehensive look at the tactics used to target potential victims and the ways you can avoid becoming a victim yourself.

Bad Agents. While the majority of agents and brokers in the world are honest people, annuities can offer incentives that can put their interests before yours. For instance, annuities, especially variable annuities, can have very high commissions associated with them. Sometimes these commissions can be as large as 10%. This creates an incentive for a broker to be dishonest in telling the investor what the best course of action is for their needs. For example, an agent may push the sale of an annuity when one is unnecessary. If someone is already collecting social security or has a pension, they already have an annuity that pays them for life. For this investor, an annuity could add unneeded and expensive bells and whistles while further increasing the risks and costs. Another example would be an investor who is looking for a guaranteed fixed rate of return. He will not want a variable annuity, as that exposes the investor to market risk, however, if he is a less knowledgeable investor, then he might be swayed to purchase the unsuitable variable annuity. Unbeknownst to him, the broker is earning a hefty cash bonus for its sale behind closed doors.

Poor Companies. Another risk lies in the company themselves. If you purchase a fixed annuity, but the company isn’t around by the time your payments start, there is a major issue with recourse for you or your beneficiaries. While there may be some state regulation, if the company fails, the FDIC, SIPC, and other federal agencies won’t guarantee your annuities. Another issue, aside from the bankrupt company, is the fake company. This issue often arises with charitable annuities, in which the charitable organization does not actually exist or the funds are not actually invested in the charitable organization. Instead, the money is either placed in other investments (like high-risk investments with high commissions), or is pocketed by the fake agents.

The best way to hedge against these types of risk is to research your broker or agent using your state regulatory agency and/or FINRA’s BrokerCheck database. These databases will give you information about your firm or agent such as what licenses they hold, what complaints they’ve had, and whether they are registered to sell the product in your state. It is also always a good idea to get a second opinion of someone who is unrelated to the industry, but still has some knowledge about the type of product.

Charitable Gift Annuities

By Kelly Robinson, Spring 2016 Student Intern

Another type of annuity that is lesser known is the charitable gift annuity. A charitable annuity is set up similarly to that of a fixed annuity, in that it is set up as a contract between the donor (annuitant) and the charitable organization. Like fixed annuities, the charitable annuity is regulated under state insurance laws, and may be subject to the laws of the state in which the charity is located, and the laws of the state in which the donor is located. Continue reading

Indexed Annuities

By Kelly Robinson, Spring 2016 Student Intern

Today we will be exploring the indexed annuity.  The indexed annuity (AKA as the equity-indexed annuity or fixed-index annuity) is a combination of a fixed and variable annuity. An indexed annuity works by basing your returns on the gains of a stock market index, such as the S&P 500 (features of a variable annuity/security), while also guaranteeing a minimum return (features of a fixed annuity/insurance product). As with a fixed annuity, the indexed annuity is a contract between you and an insurance company, and is therefore regulated by the state insurance commissioner.  Some misleading agents, as well as the general complexity of these products sparked FINRA to issue an Investor Alert about indexed annuities. It provides a wonderful walkthrough of how to analyze various indexed annuities and what questions to ask your agent before investing.

Indexed annuities can be very complex and come with a wide variety of options that can affect your return. One issue is trying to understand the method used to calculate the gain in the index to which the annuity is linked. This formula can be based on a number of factors such as participation rates, interest rate caps, and margin fees; however, this list is not exhaustive. For a more in-depth review of how each of these is calculated, check out the SEC’s Investor Bulletin on Indexed Annuities. Another issue is trying to compare indexed annuities to one another. The variety of methods used to calculate your gains makes it difficult to be accurate in your comparisons.

While often pitched as “the best of both worlds,” this concept is a little misleading. With regard to the guaranteed minimum return, some might assume that this means you are guaranteed to make some money, or at least not lose any. Unfortunately, this is an incorrect assumption. Instead, the typical guaranteed rate is set at 87.5% of the premium paid, at 1-3% interest. That means if no interest is gained (your index declines), you can lose money on your investment. As mentioned above, it can be difficult to estimate your return amongst the varying indexed annuities, but making it harder is that the insurance company may retain the right to change these rates annually, so it’s very important to read over your contract to understand what to expect (to the extent that you can).


Variable Annuities

By Kelly Robinson, Spring 2016 Student Intern

In this series, we’re examining annuities and this week we will explore the realm of variable annuities. If you need a refresher on the basics of how annuities work, check out our earlier blogs posts.

Variable annuities are different from the other annuities we discuss for a number of reasons. First, variable annuities are classified as securities, the sale of which is regulated by the SEC and FINRA. Compare this to fixed annuities, which are insurance products and regulated by state insurance commissioners, and indexed annuities, which may or may not be securities, but are typically not regulated by the SEC or FINRA. Continue reading

Fixed Annuities

By Kelly Robinson, Spring 2016 Student Intern

In the world of annuities, the most common an investor can choose between are fixed, variable, or indexed annuities. As mentioned before, annuities are complex products so we’ll explore each in a separate blog post, starting with fixed annuities today. Continue reading