Fears of increased paperwork and disclosures related to Finra's variable annuity suitability rule have been realized, with many firms reporting that they are still overburdened by hair-splitting requirements.
Last May, the New York- and Washington-based Financial Industry Regulatory Authority Inc. enacted Rule 2821, the regulation that requires suitability checks, supervisory systems and principal review for VA transactions. There was much gnashing of teeth among principals at small broker-dealer firms, who feared that they lacked the manpower and resources necessary to ensure full compliance with the rule.
"The real impact of the rule is twofold: We have more questions and more paperwork," said Scott Stolz, president of Planning Corporation of America, the insurance general agency of Raymond James Financial Inc. in St. Petersburg, Fla.
"We weeded out bad orders to the extent that we don't get them in the first place," he said. "We have to document specifically why an adviser sold this product and why this investment makes the most sense."
Mr. Stolz hosted an open forum last week at Reston, Va.-based NAVA Inc.'s annual marketing conference in New York. The forum, "The Effect of the New Suitability Rules," gave executives from broker-dealers, financial services firms and insurance companies a chance to discuss the inconveniences and developments that have arisen.
Problems are cropping up as some firms have added extra paperwork and processes, including the use of informal fee caps on VA sales, guidelines for how much of an individual's net worth should be in the variable annuity, and up to an additional hour spent on each customer to ensure that he or she signs all printed disclosure forms — even if the forms are electronic, according to executives at the forum.
An executive at UBS Financial Services Inc. of New York, who asked not to be identified, pointed out his growing concern that during an audit, Finra might dig into share class suitability for senior citizens who are purchasing variable annuities. Liquidity needs, the customer's assets and the tax implications of an annuity purchase are all suitability components under Finra's rule, but there aren't any restrictions on a senior's purchase of L shares or B shares.
SHARE CLASSES
In a B share variable annuity, there is no initial sales charge, but the owner pays deferred sales charges if he or she cancels the policy within the six- to eight-year surrender period. The product also pays a higher upfront commission to the broker or adviser who sells it.
Meanwhile, an L share variable annuity has three- to four-year surrender periods, but clients have to pay higher mortality and expense fees.
Forum co-host Amy Lynch, president of FrontLine Compliance LLC in Alexandria, Va., pointed out that the regulators still have a bad taste in their mouths from the B share mutual fund scandals, but she recommends that advisers and brokers focus more on the planning context and rationale behind their VA choices.
"It depends on the circumstances of each individual sale as to what makes sense for the investor," she said.
"That's what the regulators want firms to get. L shares or B shares can work, but it depends on the individual and that person's goals," Ms. Lynch said.
Insurers have also been on their guard for VA litigation, creating their own disclosure forms that broker-dealers must use in order to do business with these companies.
For example, Allstate Financial Group of Northbrook, Ill., includes an additional disclosure form when a translator is involved in the sale of a variable annuity.
The consumer and interpreter fill out the form and confirm that the transaction was performed in the client's native language. The investor must also write in his or her native language that he or she understands what is being purchased, and the adviser must sign off on the form.
"Any carrier can mandate an additional form," Ms. Lynch said.
"From the broker-dealer's perspective, they're stuck with it," she said. "Firms can only control their own forms, so it's in the broker-dealer's best interest to streamline its applications and make the process simple."
E-mail Darla Mercado at [email protected].
