U.S securities regulators issued an investor alert Thursday warning about the risks involved when selling their rights to an income stream, or investing in someone else’s income stream.
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) published an alert urging investors considering an investment in pension or settlement income streams to proceed with caution.
The regulators note that anyone receiving a monthly pension, or regular distributions from a lawsuit settlement, may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments. The alert warns that the lump-sum amount will almost always be significantly lower than the present value of that future income stream.
The alert also warns investors considering the purchase of the rights to someone else’s pension or settlement, that such deals may carry hefty commissions, may not be liquid, and could face legal challenges.
“Investors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income stream products,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy. “This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”
Gerri Walsh, FINRA’s senior vice president for investor education, said, “Consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person’s income stream should know that yield comes with high fees and considerable risks.”