Although producers don't think so often enough, good suitability is good business.
The NAIC has taken specific action to require that agents and companies selling annuities take affirmative steps to ensure the suitability of the annuity for the consumer. In 2000, the NAIC adopted a white paper calling for the development of suitability standards for non-registered products, similar to those that had been promulgated by the SEC for registered products. The result of that white paper was a working group under the Life Insurance and Annuities Committee that drafted a model setting suitability standards for all life insurance and annuity products.
The committee decided to focus first on the area that had been identified as subject to the greatest abuse -- the inappropriate sales of annuities to seniors. The resulting Senior Protection in Annuity Transactions Model Regulation ("Suitability Model") was adopted by the NAIC in 2003. This new model was another tool that regulators could use to protect consumers from inappropriate sales practices, in addition to the NAIC's Annuity Disclosure Model Regulation.
Purchasing life and annuity products can be a complicated and confusing process for consumers of all ages, not just for seniors. Accordingly, the NAIC urged regulators to expand the protections of the Suitability Model beyond seniors. Indeed, in 2006, the NAIC membership overwhelmingly adopted revisions to the Suitability Model to have its requirements apply to all consumers regardless of age.
The Suitability Model imposes certain duties and responsibilities on insurers and insurance producers regarding the suitability of a sale or exchange of an annuity to a consumer and remains a work in progress. Indeed, this March, the NAIC will consider additional changes to the Model. However, the essence of the regulation is pretty clear. In recommending to a consumer the purchase of an annuity or the exchange of an annuity, the insurance producer must have reasonable grounds for believing that the recommendation is suitable for the consumer. This conclusion is based upon facts disclosed by the consumer as to his or her investments and other insurance products and upon his or her financial situation and needs. To ascertain the product's suitability, prior to the execution of a purchase or exchange of the recommended annuity, the insurance producer must make all reasonable efforts to obtain information concerning: (1) the consumer's financial status; (2) the consumer's tax status; (3) the consumer's investment objectives; and (4) any other information used or considered to be reasonable in making the recommendation to the consumer. The vast majority of states have adopted the Suitability Model or similar suitability regulations.
But what do these regulations really mean? I suggest they mean the following:
No. 1 -- Do the right thing. Doing the right thing primarily means putting the interests of the client first. A producer with that commitment and that mindset will avoid the vast majority of suitability problems.
No. 2 -- Develop a relationship. The days of the "one call close" are essentially over. Indeed, if would-be mentors brag about how often they close business at a first appointment or about how quickly they get business done, look out. Finding out the details of a client's situation and objectives -- knowing your customer -- takes time and effort and mandates a real relationship.
No. 3 -- Discover the story. Finding out those details means finding facts, but it also means figuring out the "story" -- what drives the client and where s/he is trying to go. What we're really talking about here is analysis that is (a) needs based; (b) objectives driven; and (c) comprehensive. The sale of a single product can only be suitable when it fits properly into the client's comprehensive needs and goals.
No. 4 -- Discern the right approach. One size doesn't fit all. Every client is different, so the client's situation must be approached individually.
No. 5 -- Deliver the right solution. If you are predominately selling one or two products, you might ask yourself whether the product is driving your proposed solution or whether the client's situation and story are driving your solution.
No. 6 -- Document the decisions made. Suitability, in a nutshell, is doing the right thing with proper documentation. Nobody likes paperwork, and the mountain of required paperwork in today's financial services universe is enormous. I wish that weren't the case, but it is. Make sure you do it and that you do it correctly.
No. 7 -- Defend your actions (when necessary and appropriate). It's the rare advisor that never has a recommendation or sale questioned at some point. When that happens, your having done the right thing under the circumstances is your best defense. But you will also need to have access to the proper documentation. Having a written explanation of what you did and why is invaluable in such a situation. That's why I recommend using a cover letter with every application outlining what the client is doing and why. If it's signed by the client, so much the better.
Doing the right thing every time should be a mantra for you. After doing the right thing, you need to document what you've done. Nobody likes dealing with paperwork, especially when it seems excessive. But if you take great care in the business you do, the way you do it, and the documentation you create, more of your business will "stick" and you will face fewer problems down the line. Good suitability really is good business.
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