Broker moved funds from VA to MF and created Tax Penalties
I have a client who got involved with a broker from RJ’s. The broker convinced him to take a distribution from a Variable Annuity that was well over 10 yrs old and move the money to Mutual Funds. The problem was that my client was only 57 yrs old. This automatically kicked in the 10% federal penalty. Also my client had a cost basis of $75k and removed $175k from this account. And now that his accountant has let him know he owes $42k total in taxes and penalties he is coming back to me wanting what actions he can take. The problem here was that we were in the process of 1035 exchanging the funds when this broker got involved and convinced him to do the MF’s. Now he is wanting to know what level of recourse he has against this broker for negligence. The only good thing that happened was that I had already warned him about losing his death benefit if he took all the money out. There was 2 other accounts that I did pick up, and I made sure to leave plenty of money in them to keep the death Benefit in force. When we sat down last week for a review I noticed that this broker actually came in and removed even more money from these accounts. Now the client has a very minimum amount in these accounts to keep the death benefit.
Permalink Submitted by Alan Spross on Mon, 2010-03-29 02:21
There are too many unknowns here to determine if the client has any chance of recovery in a legal action against this broker, but it certainly seems that the client has not asked the questions he should be asking. Even if brokers are eventually bound to a higher level of fiduciary responsibility, at present their liability is rather limited.
Perhaps he should be referred to legal counsel specializing in such cases. At the rate he is going, the death benefit is going to be the least of his concerns. Working with different brokers or advisors on the same asset pool seems like a recipe for disaster. If the client is very old and/or suffers from any form of dementia under which he would not be expected to understand what was going on, he might have a better chance of relief in a legal action.
Permalink Submitted by Shawn Freeman on Mon, 2010-03-29 20:59
Thank you for the response. The client is only 57 and in good mind. The problem is he is a truck driver and not a tax professional or broker. He was expecting the broker to let him know if there was going to be any penalties or tax consequences. Its amazing they are wanting to regulate our industry when they are not eevn smart enough to handle their own. To me this is a pure case of negligence on teh Securities Licensed Broker. How can they possibly be able to handle security related transactions if they don’t know the rules of Variable Annuities. Especially the 59 1/2 rule and the income tax rules.
Thank you again for the response. I have already spoke with the client about hiring an attorney who specializes in this field.
Shawn