What is "Suitability?"

[Gulfman]

Suitability?

I'm a LH guy (indi,groups) BUT not licensed as a security agent/dealer or advisor. However, my license does allow me to sell Fixed Annuities (of which i know little about). BUT, i certainly have some questions.

1. Is it suitable to sell a "private mortgage and note" that pays 6% to a senior who's investment would be worth 25% of her net worth? Since this is not a security, does any kind of investment rule OR gov. agency regulation apply?
2. I know that insurance companies have restrictions on how much can be invested in annuities. Does anyone know what "that rule" is for suitability with investments? I believe it is limited by % amount of assets....?
3. I know that insurance companies have restrictions on how much can be invested in annuities. Does anyone know what "that rule" is?

Appreciate the input you guys give. and THANKS very much!

~T

 

[DHK]

Amazon.com: Taxation and Suitability of Annuities for the Professional Advisor

 

[TheAnnuityAcademy]

1. I think it is a bad move to sell anything that is not an insurance company based product if you don't have a securities license. That practice is not allowed in a lot of states.
2. Don't know the answer to this but I have ran into many clients who have had every penny of their money into securities.
3. Usually a 60% max is allowed into an annuity. It is flexible, but greatly depends on the information you get from Fact Finding and finding out their financial situation. Best of luck. Chad Owen

 

[Gulfman]

1. I think it is a bad move to sell anything that is not an insurance company based product if you don't have a securities license. That practice is not allowed in a lot of states.
2. Don't know the answer to this but I have ran into many clients who have had every penny of their money into securities.
3. Usually a 60% max is allowed into an annuity. It is flexible, but greatly depends on the information you get from Fact Finding and finding out their financial situation. Best of luck. Chad Owen

Doesnt sound right. Appreciate the comments but a private mortgage is not a security. Ppl who sell them aren't even licensed.

 

[LGilmore]

With the first one, it's going to depend on risk. I had an older client hit me with this decades ago. "Why am I not doing this?" My answer was "remember when we started you wanted to sleep at night? Where you're at lets you do that."

There may not be any rules for the sale or a ton because it involves a senior. The private note probably does not offer any security to the purchaser. It doesn't make it illegal, but could make it very risky. I would question about how secure the investment actually is. In other words what protects the consumer? anything?

As to the other questions, going to depend on the company. As far as suitability usually it involves risk assessment. Does the product choice fit the consumers goals and needs?

 

[Gulfman]

With the first one, it's going to depend on risk. I had an older client hit me with this decades ago. "Why am I not doing this?" My answer was "remember when we started you wanted to sleep at night? Where you're at lets you do that."

There may not be any rules for the sale or a ton because it involves a senior. The private note probably does not offer any security to the purchaser. It doesn't make it illegal, but could make it very risky. I would question about how secure the investment actually is. In other words what protects the consumer? anything?

As to the other questions, going to depend on the company. As far as suitability usually it involves risk assessment. Does the product choice fit the consumers goals and needs?

Thanks for commenting Gilmore,

RE: Private Mtgs; There is very little risk associated with a buying a seasoned private mortgage. Sure there are some, but its a piece of paper that is attached to tangible property. ALSO, most 1rst mortgages sold have been seasoned for a few years and have a track record of payment. If the mortgagee fails to make a payment, the property is foreclosed on. IMO, one of the safer investments and in many cases better than rental property because there are no management issues. Moreover, I've yet to hear of any "current" annuities paying 7-8% that are secured by real estate?

IMO, the goals and needs of most clients who buy annuities or fixed return products is 1. Security 2. Guaranteed payment.

The question is, does a private mortgage purchase violate any laws for insurance agents who are licensed to sell fixed rate/indexed annuities?

?

 

[scagnt83]

To my knowledge, selling a private mortage does not violate any insurance laws. But I would certainly check on state laws and regulations.

From a risk perspective, there is no comparison between a private mortgage (if I understand the concept correctly) and a Fixed Annuity.

A Private Mortgage is dependent upon 1 single individual and their economic circumstances. A Fixed Annuity is dependent upon a multi-trillion dollar insurance carrier and their economic circumstances.

Oh, and the funds of that Fixed Annuity are largely invested in US Treasuries... which is the literal definition of a zero risk investment.

Private mortgage is dependent upon an individual's financial responsibility, PLUS... their job situation, health situation, family situation, etc.


Return is an indicator of risk. Something giving a return that is 3x-5x what other guaranteed returns provide.... is guaranteed to not be low risk in any shape or form... anyone telling you otherwise is full of it.


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Buying a Private Mortage is just the same as whats done on a larger scale with securitizing (bundling and selling) multiple mortgages up into a big investment offer for banks and funds. And there is a reason they bundle more than one together... its because owning just a single mortgage or just a few carries a very high risk.

Also by definition, those mortgage-based securities carry a higher risk than a Fixed Annuity. And just a single mortgage would carry a much higher risk than the bundle of mortgages.


Sure there is a piece of property you get if they default. But that is just an expense until you are able to sell it. And there is no guarantee of when you will be able to sell it... or for how much. That was most investors' fall back in 2009... sell the property.... LOL!!!

Yes, some people think that real estate is always a great buy and anything tied to real estate is too. But thats what was at the root of the 2008/9 financial crisis.

Plus there is a serious cost of both money and time to evict someone and foreclose on a house.

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Personally, I would not risk my career (meaning the potential litigation costs of getting sued) with something that risky and that unregulated. Regulations help to protect the agent as well. Plus it would not be covered by E&O... so you are really out there in the wind on this product... JMHO


Also, I would think there would be lots of liquidity risk with the PM. You would be locked in for at least 10 years I would think, if not 15 or 20. Sure you can sell it.... but how liquid is the market? Especially in a financial crisis?

Im not saying its bad. Just not anywhere near as safe as a Fixed Annuity. Lots more risk.

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A thought just occurred to me. If you are taking funds out of an Annuity, especially an Annuity that you personally sold someone, and placing those funds into that Private Mortgage Purchase... THEN you could have issues with the DOI and suitability if there was ever a complaint.

 

[Newby]

Suitability?

I'm a LH guy (indi,groups) BUT not licensed as a security agent/dealer or advisor. However, my license does allow me to sell Fixed Annuities (of which i know little about). BUT, i certainly have some questions.

1. Is it suitable to sell a "private mortgage and note" that pays 6% to a senior who's investment would be worth 25% of her net worth? Since this is not a security, does any kind of investment rule OR gov. agency regulation apply?
2. I know that insurance companies have restrictions on how much can be invested in annuities. Does anyone know what "that rule" is for suitability with investments? I believe it is limited by % amount of assets....?
3. I know that insurance companies have restrictions on how much can be invested in annuities. Does anyone know what "that rule" is?

Appreciate the input you guys give. and THANKS very much!

~T

Unless they are buying Varible Annuities from an agent who is securities licensed, they can't "invest" anything into an annuity.

Fixed annuities and indexed annuities are not investments. They are insurance products. People HAVE lost their license over that incorrect verbiage.

 

[LGilmore]

Thanks for commenting Gilmore,

RE: Private Mtgs; There is very little risk associated with a buying a seasoned private mortgage. Sure there are some, but its a piece of paper that is attached to tangible property. ALSO, most 1rst mortgages sold have been seasoned for a few years and have a track record of payment. If the mortgagee fails to make a payment, the property is foreclosed on. IMO, one of the safer investments and in many cases better than rental property because there are no management issues. Moreover, I've yet to hear of any "current" annuities paying 7-8% that are secured by real estate?

IMO, the goals and needs of most clients who buy annuities or fixed return products is 1. Security 2. Guaranteed payment.

The question is, does a private mortgage purchase violate any laws for insurance agents who are licensed to sell fixed rate/indexed annuities?

?

Just curious are you here to sell the concept?

The two are not the same. They have different levels of risk. As SCagent pointed out a private mortgage, is driven by one person and default if it happens isn't easy peasy to resolve. So if you're talking about an income stream for a senior, is it wise to place them into something where if it defaults, ceases to pay the senior ANY money while it is sorted out over what may take a couple years?

I think you're applying your level of risk acceptance, not a seniors to this situation. Lots of things may be just fine with a time window that allows for correction. A senior doesn't have that same window, so suitability certainly would come into play and as SC also pointed out, you'd have no malpractice insurance to protect your business.

Back when I dealt with this concept the supposed payout was 30%. The annuities I was dealing with were paying 4-5%. The levels of risk were not the same, not even close. The person decided to stay with the annuity because they had already worked their life to get a chunk of money and the thought of losing it via default or having to sue for recovery just wasn't appealing at their age. Sweating a return is different for a 30 year old is different than for a 60 year old.


And something tells me or has me questioning the risk when you're claiming a 6% payout on a mortgage when the current rate for someone with good credit is 3.25% (kids just bought homes in the last 6 months) so if they're claiming a 6% payout they are selling higher risk mortgages where default is a real possibility because a person who is a good credit risk is paying around 3.25 to 3.5 right now.

 

[VolAgent]

This thread is a hoot, a lot of heat getting thrown around.

The reality is, a private mortgage is going to entail a fair amount of risk. It is a single entity, not a basket such as a fund or an asset backed by a collection of investments or assets.

The risk comparison is similar to comparing an individual stock to a mutual fund or an individual bond to a bond fund. However, there are additional risks. A private mortgage did not go through a bank, was underwriting as strict? Was it written at a discount or a surcharge to nominal rates at the time? If so, why?

Additionally, should the borrower default and you have to foreclose, who handles that? Is there a servicing company that will handle it, if so what is the fee? Also, foreclosure is not an easy process. How long can the borrow stretch it out? What condition will the property be in when they leave? Even if they don't trash the home, simply not keeping up with maintenance can do massive damage. What will the local housing market be like at the time? Even if as a nation the real estate market is white hot, it could be that the local market is horrible. Think about North Dakota a few years ago when oil prices collapsed, I can only imagine what it did to housing prices.

Like anything in life, it is great until it is not. Selling individual private mortgages to a risk adverse person is a great way to not be able to sleep at night. Maybe everything goes great, maybe it doesn't. And if it doesn't and considering the likely size of the mortgage, you are quite likely to see the inside of a court. As has been previously mentioned, it is almost certain your insurance E&O won't cover you. If you go down this path, you should definitely acquire other professional liability insurance to protect you.