When we offer our client choices — and document that we did so — we increase the probability of making suitable sales.
We've all seen deferred annuities
with long, steep surrender charge schedules. Usually, these are contracts offering a front-end "bonus" interest. (Generally speaking, the higher the bonus interest, the stiffer and longer the surrender charges). Do these things ever make sense for a buyer? Would they ever pass your suitability muster?
Let's look at a hypothetical example:
ABC Life Insurance Company's "Bonus10" contract offers a 10 percent initial interest bonus. A $100,000 contribution would be credited with annual interest on $110,000. The surrender charge schedule starting at 15 percent, rateably reducing to zero over 15 years. Many of us might reject this contract out of hand, as having charges that are way too high. But should we do that? Are there not questions we should ask before making that determination? (I'm assuming that such a contract is approved for sale in your state).
How about this one? "What benefits does my client, Sally, get in exchange for this stiffer-than-normal restriction on liquidity
?" Clearly, the bonus interest is a benefit. If this contract offers a projected annual interest crediting rate equal to that offered by another deferred annuity that imposes smaller surrender charges or a shorter surrender charge period (perhaps 10 percent, grading to zero over 10years), Sally stands to get more interest (because N percent interest on $110,000 is 10 percent greater than N percent interest on $100,000). If she intends to withdraw interest each year, as credited, and no more, and has sufficient liquidity in her other financial assets to meet emergencies, is a 10 percent greater income each year worth the additional liquidity cost?
We needn't try to answer this question ourselves. Indeed, we shouldn't try. We have only to show Sally both contracts and ask her. Yet, in my experience, many advisors do not do this. Some won't even show the bonus alternative. I think that's a mistake, because I believe that a prudent advisor has the duty of showing more than one solution to a problem.
To presume that Sally wouldn't want higher surrender charges, even if they come with higher interest income, is to substitute our judgment for our client's and deny her the opportunity to make a choice. If we show both alternatives, one of two things will happen: Either Sally will opt for the lower charge-no bonus alternative (in which event, we will know which alternative she finds best; we won't have to proceed from our own presumption) or she'll choose the bonus annuity (in which event, we'll have supplied her with a solution that we would otherwise have concealed from her).
Either way, she wins, and so do we.
Other advisors will show only the bonus annuity
. That's a much worse mistake, because we've now kept Sally from being able to choose a lower liquidity cost. And, if she later has a complaint about the sale, she'll be able to demonstrate that she didn't know that she could have opted for lower charges.
Of course, many bonus annuities pay higher commissions than their non-bonus cousins. Aren't we asking for trouble in recommending a solution that pays us more? No, we're not. We show both options, revealing the commission difference, let Sally choose, and document that we did all that.
It comes down to this: When we offer our client choices — and document that we did so — we increase the probability of making suitable sales