Client Solication Letter

[Allen Trent]

have zero angst about not doing what is right for my clients and if the insurance commissions did not feel that a health and life agent could sell these products than additional certifications would be required..

There has been more regulations passed in the last decade impacting annuities than the prior 100 years between Department of Labor laws, NAIC suitability Standard & Best Interest regulations in most states along with required CE courses.......and this is for those of us with only Life licenses. Most of the regulations & the lawsuits & Attorney General Actions stem from the Index Annuity abuses in the late 90s & early 2000s.

So, there are indeed way more requirements by the State Commissioner & carriers today.

Definitely doable & can do well with it. It just is alot more to take on & study than many believe it is

 

[davephx]

FINRA Said: The Uncertain Status of Unregistered Equity-Indexed Annuities

The question of whether a particular EIA is an insurance product or a security is complicated and depends upon the particular facts and circumstances concerning the instrument offered or sold. NASD does not seek to resolve that issue in this Notice; nor is this Notice intended to describe those circumstances in which an EIA might be deemed to be a security. However, a brief summary of the applicable provisions of the federal securities laws may be useful.

Section 2(a)(1) of the Securities Act broadly defines "security" to include such financial instruments as evidence of indebtedness, participation in profit-sharing agreements, and investment contracts. Section 3(a)(8) generally exempts from the Securities Act any security that is an "insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States or the District of Columbia."

In 1986, the Commission adopted Rule 151, a "safe harbor" under the Securities Act, which clarifies when certain annuity contracts are exempted securities under Section 3(a)(8). The fundamental construct of Rule 151 is derived from prior judicial interpretations of Section 3(a)(8). Consequently, the Commission has stated that the rationale underlying the conditions set forth in the rule are, along with applicable judicial interpretations, relevant to any Section 3(a)(8) analysis.5

In order for the Rule 151 safe harbor to apply:

• the product must be issued by an insurer that is subject to state insurance regulation;
• the insurer must assume investment risk, as provided in paragraph (b) of the rule; and
• the product may not be marketed primarily as an investment.
As noted above, the status of any particular EIA under the safe harbor (or under Section 3(a)(8)) will depend on the facts and circumstances.

 

[Tahoe Ray]

FINRA Said: The Uncertain Status of Unregistered Equity-Indexed Annuities

The question of whether a particular EIA is an insurance product or a security is complicated and depends upon the particular facts and circumstances concerning the instrument offered or sold. NASD does not seek to resolve that issue in this Notice; nor is this Notice intended to describe those circumstances in which an EIA might be deemed to be a security. However, a brief summary of the applicable provisions of the federal securities laws may be useful.

Section 2(a)(1) of the Securities Act broadly defines "security" to include such financial instruments as evidence of indebtedness, participation in profit-sharing agreements, and investment contracts. Section 3(a)(8) generally exempts from the Securities Act any security that is an "insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States or the District of Columbia."

In 1986, the Commission adopted Rule 151, a "safe harbor" under the Securities Act, which clarifies when certain annuity contracts are exempted securities under Section 3(a)(8). The fundamental construct of Rule 151 is derived from prior judicial interpretations of Section 3(a)(8). Consequently, the Commission has stated that the rationale underlying the conditions set forth in the rule are, along with applicable judicial interpretations, relevant to any Section 3(a)(8) analysis.5

In order for the Rule 151 safe harbor to apply:

• the product must be issued by an insurer that is subject to state insurance regulation;
• the insurer must assume investment risk, as provided in paragraph (b) of the rule; and
• the product may not be marketed primarily as an investment.
As noted above, the status of any particular EIA under the safe harbor (or under Section 3(a)(8)) will depend on the facts and circumstances.

That whole ruling/description/whatever has to be decades old. No one calls them EIA's anymore nor does FINRA have any jurisdiction over FIAs.

There is a lot of confusion out there now b/c several carriers are marketing "index hybrids" that have both the potential for loss and a variable component. You need to be securities licensed to sell those (and fall under the purview of FINRA) but the carriers market them as "indexed" because of how the crediting works.

It's confusing for everyone but until something changes, FIAs are fair game for an agent with only an insurance license.

 

[DHK]

Yeah... even the SEC gets things wrong:

SEC draws ire with indexed annuity misstep - InvestmentNews

You can read it here:
https://www.dynamicadvancedwealth.com/_files/ugd/f73857_2d1860d6b17543618e51115793078980.pdf

 

[CALTCAgent]

Is anyone willing to share a letter that you send to existing clients asking them to consider a fixed and or indexed annuity? I am not currently in the annuity world but want to offer this product to my existing clients.

I'd just call them up if they are my client already. I'd get in front of them.

 

[DHK]

nor does FINRA have any jurisdiction over FIAs.

Of course, you and I both know that FINRA isn't called FINRA (FINancial Regulatory Authority) for nothing. Just in the name, they want to expand their reach to anything 'financial'. Therefore, if there's anything to weigh-in on, they will.

So they did their thing on FIAs and reverse mortgages - both of which they don't regulate, but are financial decisions.

Maybe they chose the FINRA acronym for the pure reason so they can have a blog on everything financial?!

If they had their old name of NASD (National Association of Securities Dealers), their name would imply that they should stick to securities related issues only.

 

[davephx]

So true, but there are also a lot of dishonest registered reps that sell inappropriate products, churn etc. I get the monthly FINRA action updates and amazing how many fines and license suspensions there are for flagrant disregard for rules.

Now, with Best Interest the paperwork burden is much greater plus annual compliance audits, the FINA required continuing education on top of Insurance CE, CFP CE etc.

The new Best Interest Rules assumes everyone has been a crook instead of the statistically few bad apples.

Insurance sales is so much easier, although often have similar extensive suitability forms like on the investment side. (I have only done 2 insurance sales in the last two years which were fixed annuities)

Regarding annuities - as has been pointed out this only applies if you are also on the securities side. FINRA basically rules if you sell anything from the securities side to fund any annuity the broker-dealer has a supervision responsibility. In my firm even if we sell a fixed annuity (actually if $100k or more which all of mine are). we need about a 10 page Annuity Suitability Form in addition to a Switch Form much of which is also duplicated on the annuity side paperwork.

Pre 2008 some variable annuities were great where you could be very aggressive in growth sub accounts but had great guarantees such as highest anniversary value, or a guaranteed minimum return. All that changed a few years later since was too favorable to the VA customer. Now, I would never recommend a VA and Indexed with todays low participation rates I do not recommend vs maybe 5 years ago were much better and I have clients in them.
I find better options on the securities side but not bonds due to interest rate risk.

I have about 40 years in the business founded a small BD long ago with about 100 reps, have a CPA nerd background, a FINRA principal, Office of Supervisory Jurisdiction, and a separate RIA.

The FINRA world is very over-regulated in my view vs. insurance or RIA world. However, I have never had a client who would be suitable for asset based fees via fee only RIA, which is the most expensive way to get investment advice for the long-term investor who is not an active trader.

There are bad actors in all these industries but they are a small percentage yet especially in the broker-dealer world the assumption all might be crooks the paperwork and compliance is brutal.

 

[Allen Trent]

Now, I would never recommend a VA and Indexed with todays low participation rates I do not recommend vs maybe 5 years ago

With best interest standard, I am not so sure you should ever use words like never. That doesn't seem in the best interest of every single potential client. If you put a client in solely equities & they tank, they may sue you if they can show you knew they had an upcoming income need that could have been met with some VA or FIA income rider. Or, will they sue you because you put them in equities & didn't offer a RILA that could have offered a buffer or floor to the downside.

Not disagreeing with your premise, just saying all the Fiduciary or best interest level is way different than merely suitable & it won't be defined until court cases start to define it. And you can likely imagine how courts rule when Myrtle lost a lot of money.

I saw this happen in the late 90s before these standards applied. Because rep didn't offer lifetime income riders, client complained about that fact & many wom or were paid settlements

 

[DHK]

I can say "I'll never recommend a VA... because (other than fee-based VAs), I'm no longer registered to sell them." Of course, I can back up why that is. (Everything else being equal, the M&E, mutual fund sub-accounts, and any additional rider fees will eat up the cash values (inheritable benefits) more than a comparable fixed indexed annuity with the same rider guarantees.)

Of course, with everything, it depends on what you're trying to solve for the client and the tools you're using to solve them.

Regarding Best Interest Contracts, PTE 2020-02, etc., etc., etc., I just created my own 6-page disclosure document in the spirit of the fiduciary rules. My feeling is this: if I have to disclose ONE commission on a case, might as well disclose them all.

However, since it's MY disclosure form, I'll compare my plan to the traditional plan including fees, taxes, and reduction in cash flow over a 10 and 20 year period. Then compare it to my "high commission" plan over a 10 and 20 year period. (10 years to fund and do capital asset transfers and then an additional 10 for projected cash flow against that asset.)

I guarantee that my "high commission plan" will always win.

My disclosure form is not designed to be "legalese". My cover page says this:

"In keeping with the spirit and letter of the laws concerning fiduciary duty regarding retirement planning, I have prepared this fee and commission report for full disclosure of my compensation for enacting your plan.

This does not negate the use of other disclosure requirements, but to be supplemental to them as I will disclose not just my total plan compensation, but also the projected fees, taxes, and cash flow differences to the plan participant to be paid based on the current tax code."

I'm having others in my financial group take a look at it and give me their feedback.

 

[davephx]

Allen Response: I only recommend equities with a balance of various risks; growth, value, etc. for the long-term growth not for the protection side of portfolios. I only recommend mutual funds with detailed outside analyst reports (Morningstar etc.) looking at historic Alpha relative to Beta, expenses, and many other factors. On every recommendation, my RIA (actually just me) does an extensive advisory report with 2-5 pages of details, discussion, often analysis of top holdings, etc. In my last audit - two days with 2 AZ Securities auditors (routine every few years) they praised my reports and issued totally clean audits of both my RIA and as an OSJ on the brokerage side. I also have annual audits by the broker-dealer - actually yesterday looking at documentation for best-interest, suitability, the zillions of forms we have to do all the time, etc.

I agree I should not have used the term "never" since I did recommend some VA's pre the major changes after 2008 limiting sub-account choices vs some of the historically high growth options some VA's had along with the now unheard of downside grantees - not today's buffers, etc.

If I want "safety" I would use a fixed annuity or immediate annuity if needed totally secure income. My clients typically have over $1m with me - mostly because they have had good growth over the many years with me and are not looking for "safety of principal" since they can wait out a market decline.

Instead of "buffers" I prefer to on the growth side use far less costly carefully selected based on historical risk/reward equity funds diversified by managers, growth/value etc. If you want a "buffer" use option funds or a fixed annuity. Obviously, it all depends on the client's objective, risk tolerance, and timing of when will need the funds.

If they were a different type of client I might recommend fixed or immediate annuities but since they are based on interest rates the last few years have been some of the worst times in history with such low rates that are the base for both types of annuities.

I have done lots of modeling related to indexed annuities and have three problems.

1) While no one should liquidate before the surrender period, how often do reps point on the MVA that many indexed annuities have which if expected interest rates go up, could substantially increase the surrender cost. I am sure you all here do if you sold MVA products - Market Value Adjustment based on interest rates.

2) While past performance does not assure future results, historically I would challenge that a good Option fund will beat most annuities with minor downside risk. This is one "participate yet protect" suggestions I make to clients. Use covered call options and puts not naked. The idea is if the equity portion of a portfolio is in a decline and a client needs funds instead of locking in a loss in equities, this is historically far less risk and there is no surrender period - is immediately liquid.

3) With today's historically low participation rates (due to low-interest rates) all you need is a few down or no gain years of the index the participation rate is based on to have a far lower return after the surrender period - maybe closer to a CD rate.

All the insurance company is doing is matching their own bond maturities to protect principal and options to provide the participation at least basically. And of course, they make a hidden profit never disclosed.

Again if a client's objective was the safety of principal I would do more fixed or immediate annuities but as previously mentioned this is about the worst time in about the last 40 years to do them. Obviously, the high payout rate from immediate' s is mostly return of principal and the real return rate is maybe 1%.

I usually do not recommend bonds, although in some cases maybe high yields with short durations. Obviously, municipals have the highest interest rate risk next to zero-coupon bonds. Today's 10 yr Treasury 1.8% rate many believe would be 3.5%-4% if there wasn't the trillions of Fed bond-buying that is about to be reversed. If interest rates are allowed to normalize bond investors could face huge losses (unless held to maturity but still the opportunity cost lost). As folks probably know, for every 1% increase in interest rates the loss is about equal to a bond's duration. A 10 year Treasury has about a 7-year duration so it would lose about 7% in value for each 1% increase in interest rates - other factors equal.

I tend to be a detail nerd. Obviously, these are my opinions and I respect those that may disagree.

BTW am looking for potentially good reps if want to be on the security side But the licensing costs, required E&O insurance (never had a claim or customer complaint in about 40 years of paying premiums), and affiliation fees are huge compared to the insurance side, or the cost of just being an RIA.