FINRA Issues Investment Alert on Transactions in Pension or Settlement Income Streams

by Antonio Romano

The Financial Industry Regulatory Authority (“FINRA”) recently issued a notice to investors laying out precautions that should be taken before buying or selling pension or settlement income streams.

Individuals may be eligible to receive a pension after working for a number of years, or may receive a structured settlement in a lawsuit. Typically retired government employees, retired members of the military, or a plaintiff in a personal injury case will be approached by a pension purchasing or structured settlement company. These salespeople target those receiving monthly payments from their structured settlement or pension and offer a lump sum to buy the rights to some or all of the payments. The lump sum is less—sometimes much less—than the total amount of the anticipated payments. Individuals might choose to sell the rights to some or all of the payments for a number of reasons, usually being the rising cost of living and/or unanticipated expenses. FINRA and the SEC’s Office of Investor Education and Advocacy issued the Investor Alert to inform anyone considering selling their rights to an income stream—or investing in someone else’s income stream—of the risks involved and to urge investors to proceed with caution.

FINRA discusses several factors to be considered in deciding whether to sell the rights to an income stream. Transaction costs—including brokerage commissions, legal and notary fees, and administrative charges—can be high. Also, it is necessary to consider how to replace the cash flow the pension or structured settlement income provides, especially if that income stream is depended upon to pay monthly or other expenses. Furthermore, some salespeople can be aggressive or persuasive when trying to get an individual to sell the income stream and, in some cases, there may be outright fraud.

FINRA also lays out several important questions to ask. Is the transaction legal? The law may prohibit the right to sell the pension, and selling the rights to a settlement may require approval by a court. Is the transaction worth the cost? On top of being provided an amount less than the income stream is worth, other considerations include fees, transaction costs, commissions, and administrative costs in evaluating whether it is worth selling the income stream. What are the tax consequences? Taking a lump sum may cause the seller of the income stream to lose tax advantages and/or have to pay taxes on the lump sum. Most importantly—does the sale fit long-term financial goals? Selling now to cover an expense may seem wise in the short-run; however, it is crucial to sit and analyze the purpose of the income stream, and the effects of it no longer existing.

Ultimately, it is imperative to do as much research as possible before making a financial decision that can alter long-term financial security, and to take into consideration all of the factors and consequences involved.

FINRA Releases Study Indicating Floridians Are Too Confident in Assessing Their Financial Knowledge

By Netaly Masica

In 2012, the FINRA Investor Education Foundation commissioned its second national study of the financial capability, which evaluates how key indicators—categorized as “making ends meet,” “planning ahead,” “managing financial products,” and “financial knowledge and decision-making”—vary with underlying demographic, behavioral, attitudinal, and financial literacy characteristics.

The study, released on May 29, 2013 and available at, compares the financial capabilities across all 50 states and the District of Columbia, and across the nation as a whole. This blog entry explores the financial capabilities of Floridians compared to the national average with specific emphasis on the fourth factor, “financial knowledge and decision-making.”

Making Ends Meet. This indicator encompasses the extent to which Americans balance monthly income and expenses (spending vs. saving) and how they deal with everyday financial matters (e.g., medical debt). This indicator is at least partially influenced by general economic conditions.

Floridians tied for fifth in the country in spending less than their household income, meaning that Floridians are more likely than the national average to save their money. 44% of Floridians reported spending less than their household income, while the national average was 41%. This is not surprising considering that over 20% of Florida’s respondents indicated that they are retired, and according to the survey, respondents who receive retirement income are less likely to have difficulty in making ends meet.

Planning Ahead. This indicator shows the ability of Americans to make necessary changes to buffer themselves against financial emergencies. In Florida, 49% of respondents reported having “rainy day” savings to cover three months of unanticipated financial emergencies. While Florida did not rank in this category, this is still significantly more than the national average of 44%.

Managing Financial Products. This indicator encompasses how money inflows and outflows are managed (i.e., methods of receiving income and payment methods), where money is stored (e.g., banking, investments), and how money is borrowed (i.e., debt).

Floridians ranked third in avoiding only making the minimum payment on their credit card. In other words, 27% of Floridians reported paying only the minimum payment during the past year compared with 34% of all Americans.

Financial Knowledge and Decision-Making. This indicator measures the level of financial knowledge and the skills to apply the knowledge to actual decision-making situations. Of principal importance is the gap that exists between self-reported knowledge and real-world behavior.

On a test of five basic financial literacy questions, Floridians answered an average of 2.8 questions correctly compared to the national average of 2.88 questions. Financial literacy is strongly correlated with behavior that is indicative of financial capability. Those with higher literacy are more likely to plan for retirement and to have an emergency fund, and less likely to engage in expensive credit card behaviors.

Despite the relatively low levels of financial literacy as measured by the questions, Americans tend to have positively biased self-perceptions of their financial knowledge. When asked to assess their own financial knowledge, nearly three-quarters of respondents (73%, nationwide and 74% for Florida) gave themselves high marks. In reality however, only 14% of respondents nationwide (11% for Florida) were able to answer all five questions correctly and only 39% (37% for Florida) were able to answer four or more questions correctly.

Those respondents who stated they received financial education scored higher than those who did not; however, the study indicated that these findings did not imply a causal relationship between financial education and financial literacy, and may be attributable solely to the differences in education levels, employment, and other demographic factors.

In conclusion, financial capability encompasses multiple aspects of behavior relating to how individuals manage their resources and how they make financial decisions, including the factors they consider and the skill sets they use. The information provided by this survey allows the public, policymakers, and researchers to compare trends that lead to sound and unsound investments, and will hopefully encourage education on investment.