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.

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...

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NAIC Proposes More Stringent Rules for Annuity Sales

The National Association of Insurance Commissioners (NAIC) has proposed amendments to the regulatory framework that governs annuity sales. The NAIC Suitability in Annuity Transactions Model Regulation is the existing framework. The NAIC is proposing more stringent suitability guidelines for the sale of all types of annuities--including fixed annuities. The amendments would place insurance agents who sell fixed annuities under the same suitability guidelines that apply to financial advisors who...

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Sheryl Moore on Fixed Indexed Annuities and the SEC Proposed Rule 151A

The Securities and Exchange Commission’s (SEC) proposed Rule 151A would change the securities status of indexed annuities from fixed insurance products to registered, securities products.

The proposed rule would have a significant impact on their entire industry landscape. SEC 151A would affect the way in which insurance companies develop...

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Independent Financial Advisors Gaining Market Share

The Wall Street Journal reports that customers are moving towards independent registered investment advisors (RIA) and away from Wall Street brokerage firms. RIAs brought in $108 billion in new assets in 2008 while brokerage firms lost $8 billion. The change is seen in large part as a migration towards more objective financial advice. A registered investment advisor acts as a fiduciary , offers an advisory account , and is free of many of the potential conflicts of interest that are inherent in...

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Obama Administration Proposes Fiduciary Standards for Brokers

The Obama administration's proposed financial services regulatory overhaul may have a profound impact on the way that investment advice is disseminated in the United States.