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Suitability

Suitability refers to recommending and selecting investments that are sensible or “suitable” given personal factors such age, risk tolerance and overall investment objectives. As an example, if you’re 60 and about to retire, speculative investments and derivative products fail the suitability test. You can’t afford to lose money as you have relatively few years left to recoup the losses. In contrast, a 21 year old at the beginning of a long career can allocate some money to riskier investments that have potentially higher returns. In securities law, certain types of financial advisors such as stockbrokers or registered reps have to observe the “suitability” doctrine which requires that they should recommend only those investments that are “suitable” for their clients. This suitability standard does not imply that the broker must act in the best interest of their client or serve in a fiduciary capacity. A suitability standard is entirely different than a fiduciary standard.

Annuity Criticisms Often Boil-Down to Control of Assets

Annuity criticisms are a dime-a-dozen. 

The majority of financial advisors seem to have some issue with annuities, consumer perception is generally terrible and the financial media often appears to provide a reflection and reinforcement of prevailing sentiment.

There is a case to be made for “control of assets” as the common denominator for both the consumer and financial advisor perspectives.

Control of assets basically refers to the fact that annuities involve handing over money to an insurance company. 

An Interview with Jack Marrion and John Olsen, Authors of Index Annuities: A Suitable Approach

Jack Marrion heads a research consultancy focused on the annuity industry and John Olsen is a practicing financial advisor.

Both Jack and John have previously published books that are widely recognized as authoritative resources for the industry.

I had an opportunity to speak to them about their most recent book titled Index Annuities: A Suitable Approach (click here to visit the website for the book).

 

Survey Reveals High Levels of Confusion about Fiduciary Status

A survey conducted this past August confirms that consumers are confused by the different standards that apply to various types of financial advisors.

76 percent of the 1,319 survey respondents mistakenly believe that brokers are required to act as fiduciaries and serve the best interests of their clients. 

Proprietary Annuity Products

A recent article in Investment News discusses a recent trend that involves the sale of proprietary annuity products through annuity marketing organizations.

Instead of building a product and then building-out distribution, some smaller insurance companies will lend their product building capacity to national marketing organizations (field marketing organizations).

Exams and Suitability

An interesting article from Darla Mercado of Investment News discusses the NAIC's annuity suitability model law.

The model--which requires additional hours of annuity-related continuuing education and related exams--has been adopted by nine states thus far.

As discussed in the article, one of the effects of the NAIC model is additional time and related hurdles (e.g. exams) for financial advisors interested in selling annuity products.

Fixed Annuity Market Challenges

A very good article from Darla Mercado at Investment News discusses the current challenges that insurers face in the fixed annuity market.

The challenges basically involve two issues:

Annuity Distribution Becoming Mired by Additional Suitability Rules and Regulations

The National Association of Insurance Commissioners (NAIC) recently amended its suitability requirements.

The amendment makes insurers responsible for ensuring that all types of annuity sales or transactions are suitable.

Industry participants are struggling with the increased administrative complexity.

As discussed in a recent article in Investment News:

New Rules for Fixed Annuity Suitability

The National Association of Insurance Commissioners (NAIC) has adopted an amendment that will affect the processes involved in determining the suitability of fixed annuity sales.

Much of the supervisory responsibility for fixed annuity suitability will be shifted towards the insurance ccompany.

Inflation and Fixed Indexed Annuities

This forum thread is a continuation of a conversation that began as a comment and can be found here:

http://www.annuitydigest.com/blog/tom/fixed-annuity-sales-continue-soar-while-massive-inflation-risks-are-ignored#comment-363

The comment came from Phillip Hawley and is as follows:

House Bill Would Apply Fiduciary Status to Annuity Sales

The House Financial Services Committee passed the Investor Protection Act of 2009.

This legislation would have a meaningful impact on the sales of annuities and mutual funds as the current suitability standard would be replaced by a much higher fiduciary standard.  The net effect would be a big win for financial services consumers.

Currently, suitability standards require that financial advisors determine whether a product is appropriate for a given client profile, with risk tolerance as one of the main criteria.

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