Variable Annuity Suitability – Are Your Representatives Making Suitable Product Recommendations?

By Oyster Consulting LLC

Annuities written on a chalkboard

What’s Happening:

Variable annuities offer a number of complex features and options, which can be confusing for both investors and the financial professionals who offer them for sale. Among those features and options are fees, expenses and other charges that can vary depending upon how the product is designed. Examples include:

  • sales charges, which may or may not include a front-end sales charge or a contingent deferred sales charge;
  • surrender charges, the amount of which typically declines during a limited surrender period until they no longer apply; and
  • Mortality and Expense (M&E) charges.

In many cases, if the same variable annuity product is offered using different share classes (e.g., B-Shares, C-Shares and L-Shares), the charges described above will differ.

FINRA rules require that in order for these annuities to be recommended, financial professionals must have a reasonable basis to believe that the customer would benefit from certain features, such as tax deferral, a death benefit or a living benefit. They must also reasonably believe that a customer has been informed of the various product features, including various fees and costs, investment risks and potential tax penalties.

What You Should Do:

To help ensure that recommendations of variable annuity products are suitable, your firm should do the following:

  • Establish and maintain written supervisory procedures reasonably designed to comply with applicable suitability standards. These procedures should include a surveillance program designed to determine whether a financial professional has recommended variable annuity exchanges that may be inappropriate.
  • For each new variable annuity product proposed for sale, you should conduct appropriate due diligence regarding the product’s features and material risks, and determine whether the product is suitable for customers based on your understanding of potential risks and rewards.
  • Before you make a variable annuity available to your representatives, provide them with adequate training regarding (i) product features, benefits and material risks, and (ii) disclosures that are necessary and appropriate to ensure a proper understanding of the product.
  • Make sure that customers are fully informed of the costs, features and benefits by providing clear disclosures and educational materials.

How Oyster Can Help:

Oyster Consulting has the knowledge and experience to help you establish effective processes and documentation for making suitability determinations, establish effective written supervisory policies and procedures, and provide training for your personnel. If you have any questions regarding this topic or would like to discuss receiving some assistance in this area, give us a call and we will put you in touch with our experts.