In Focus

May 2, 2005

he ugly underbelly of variable annuity sales again was exposed, this time by Waddell & Reed's $16 million fine for wrongfully switching its customers' variable annuities.

Quite simply, Waddell & Reed placed its financial interests ahead of its customers' well-being when, in 2001 and 2002, it switched about 5,000 customers out of their United Investors Life Insurance contracts and into Nationwide Insurance Company contracts. Why? Nationwide Insurance Company had agreed to pay Waddell & Reed fees in a fee-sharing agreement that would benefit the company's brokers and its bottom line.

As Mary Schapiro of the NASD stated, "What was most troubling about the case is what a concerted and aggressive campaign it was on the part of the company. There was little regard given to whether this was good for investors."

Despite proclaiming its innocence months ago and promising a vigorous defense, Waddell & Reed now has agreed to pay as much as $11 million in restitution to customers. The firm also will pay a $5 million fine to the NASD and a $2 million fine to state regulators. The variable annuity switches cost Waddell's customers almost $10 million in surrender charges (fees paid to exit a variable annuity early).

Thankfully, the NASD also sent a message to executives. Waddell & Reed's former president, Robert Hechler, was suspended for six months and fined $150,000. Waddell's former national sales manager (now senior vice president for public affairs), Robert Williams, received the same sanction.

Investors beware! This Kansas based firm has $38.2 billion of customer assets under management.

— James J. Eccleston
FinancialCounsel.com