More than a third of brokerage firms examined by regulators made one or more potentially unsuitable recommendations of variable annuities to senior investors, a report issued Wednesday found.
The greatest issue regarding these sales was whether it was appropriate to exchange variable annuity contracts in light of the fees incurred, according to
the report on the treatment of senior investors by the Securities and Exchange Commission and the
Financial Industry Regulatory Authority Inc., the self-regulator of brokers.
Firms generated the most revenue from seniors by selling open-end mutual funds, variable annuities, equities, fixed-income investments, unit investment trusts and exchange-traded funds, nontraded real estate investment trusts, alternative investments and structured products, in that order.
TYPES OF INVESTMENTS
Staff from the SEC and Finra analyzed examinations of 44 broker-dealers in 2013, looking at the types of investments purchased by firms' senior clients, the training financial professionals who handle aging clients receive and the marketing aimed at older investors.
“It is imperative that firms are recommending suitable investments and providing proper disclosures regarding the related terms and risks,” said
Andrew Bowden, director of the SEC's Office of Compliance Inspections and Examinations.
(More: 9 compliance takeaways from the SEC, Finra senior investor report)
About 13% of U.S. residents are at least 65 years old, or about 41 million people, according to U.S. Census Bureau data. That number is projected to jump to 79 million by 2040.
“The culture of compliance at firms is key to ensuring that seniors receive suitable recommendations and proper disclosures of the risks, benefits and costs of any investments they are purchasing,” said Susan Axelrod, Finra's executive vice president of regulatory operations.
The most common complaints among senior investors were poor service and high fees. Instances of misrepresentation, unsuitable investments, churning and bad advice also were reported, but less so, the report said.
One senior investor alleged his investment account was churned and the broker traded in his account without permission from 2007 until 2011, according to the report.
MANY SCORE WELL
Many of the firms scored well on certain metrics.
Three quarters of the firms were incorporating training specific to senior investors and had special senior investment precautions, the report said. Many set 70 as the age those initiatives kicked in, although some firms used 60 as the age threshold. The report didn't indicate either was preferred.
About 89% of firms made appropriate disclosures to senior investors, even though the authors of the report said “it is unclear how well investors understand the disclosures they receive on recommended securities.”
Protecting seniors from
elder financial abuse has been a high regulatory priority in recent years, but the regulators completed this examination review because of fears the low-interest-rate environment might lead brokers to recommend “riskier and possibly unsuitable securities to senior investors looking for higher returns,” the regulators said in a joint release.
