“Infinite Banking” Strategy Employed by O.N. Equity Advisor Lands Firm in Hot Water

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with broker-advisors who’ve recommended variable annuities. There’s little question that when broker-advisors peddle variable annuities to clients that in most cases it’s in the best interests of brokers, not customers.

Variable annuities, or “variables,” are complex investments that combine mutual funds within a “wrapper” of an insurance policy. Beneficiaries will be paid a death benefit when the holder of the annuity dies. In the interim, an investor’s capital is invested in an array of mutual funds that can invest in bonds and stocks.

When variable annuities are combined with other insurance policies, the broker’s pitch is that you can tap funds at any time. But the truth is that you’re paying onerous expenses in this set-up. Such arrangements can run afoul of securities regulations. When variable annuities are paired with a whole-life insurance policy, it could constitute an “unsuitable investment strategy,” according to FINRA, the main U.S. securities industry regulator. FINRA recently reached a $1.3 million settlement with a broker-dealer owned by Ohio National Financial Services (O.N. Equity Sales Company) for selling this package to clients.

What was wrong with this insurance strategy, which the broker labeled as “infinite banking?” It involves switching out of insurance products to generate broker commissions and “surrender” fees, steep charges that are levied if an investor doesn’t stay in a vehicle for a given length of time. Investors get dinged two or three times in these transactions, although broker-dealers always profit.

Here’s how the Ohio National scheme worked, according to FINRA: “The broker routinely recommended his customers take withdrawals from their variable annuities shortly after they were purchased, causing them to incur significant surrender charges, tax penalties, and additional charges.” The broker-dealer “failed to detect that from 2014 to 2017, the sales rep recommended the liquidation of retirement funds to purchase high-fee variable annuities, followed by the withdrawal of funds from those annuities to purchase whole life insurance policies,” according to FINRA.

“Such transactions generate commissions for the representative and the broker-dealer,” FINRA noted, adding “the broker’s 76 customers who purchased variable annuities and took short-term withdrawals incurred $371,000 in surrender charges. And the broker-dealer was paid $733,000 in gross commissions for the sale of these annuities.”

The Ohio National settlement “involves the failure to supervise adequately a complex series of transactions involving variable annuities. First, the broker’s clients sold securities like mutual funds to close retirement accounts and then used that money to buy variable annuities. Clients then sold the annuities in order to build `cash value’ in whole life insurance policies.” A spokesperson for Ohio National declined to comment.

Have you invested with broker-advisers who have put your retirement funds at risk or shifted you into expensive insurance products? FINRA and the SEC have strict rules on disclosing expenses and risk profiles on all investments sold by brokers and investment advisers. If they fail to fully inform you of downside risk, you may have a case in arbitration.  Firms are also legally required by FINRA to monitor and supervise what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the vehicles sold. Investors can file FINRA arbitration complaints if these rules are broken.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!