Client Suitability: NAIC Senior Protection in Annuity Transaction Model Act Regulation
If there is one phrase that you begin to hear more and more it will be the phrase “Client Suitability.” What could be more important than matching the right product with the right client? Throughout this book, we discuss global issues like ascertaining prudent approaches such as diversification, full disclosure, and asking questions. In other words, asking people what they want and helping them get what they want.

The National Association of Insurance Commissioners has adopted regulations on the issue of suitability. One specific regulation that relates to this book is the Senior Protection in Annuity Transaction Model Act and Regulation.

This regulation addresses the importance of the following issues:

Consumer’s Financial Status
While an annuity provides many benefits, we must remind ourselves and the consumer that an annuity is a long-term financial vehicle. While there are annuities with short surrender charge periods, the average surrender charge period ranges from 5 to 10 years.

Income / Liquid Assets / LTC
Let’s determine if the client can comfortably set aside money into the annuity with “no current need” to withdraw or surrender that money for the surrender charge period. To increase the probability of that, setting aside at least six months income in a money market account or passbook savings becomes a consideration. Since diversification should be part of every portfolio, your clients will be able to turn to other assets that they own – like CDs – if we recommend that only some of their money go into an annuity.

These recommendations make even more common sense when you study the statistical probability of a senior needing Long-Term Care sometime in their life. Also, since there are annuities with shorter surrender charge periods, perhaps these types of annuities can play an increasing role in your recommendations when their needs may be better served.

Tax Status
Understandably, tax-deferred accumulation is better than taxable accumulation. However, an annuity is not always better than another taxable alternative for every client.

We must identify their tax status. Generally speaking, an annuity may not play an important role in retirement planning for someone in a low tax bracket.

Similarly, withdrawals and distributions prior to age 59.5 are subject to a 10% federal excise tax penalty. Admittedly, this regulation deals with seniors, but you deal with people of all ages and “suitability” should be extended to all age groups. In addition, there will be times that your presentation with seniors might involve their adult children, or grandchildren, or their younger pre-59.5 spouse. In other words, consider ordinary income taxes and federal excise tax penalties when considering an annuity since younger parties could be involved.

Investment Objectives / Other Relevant Information
While there are many people who can benefit from an annuity, there are people whose investment objectives are unique. It is our responsibility to ascertain their objectives and match their objectives with the right recommendation. There is nothing wrong with a financial professional saying to the prospective client that an annuity cannot help them.

A person in a low tax bracket or a family faced with large medical expenses may need a financial professional to tell them that a specific “financial product” is not in their best interests. To some, that “no sale” transaction might appear to be counter-productive. And, maybe it would be counter-productive if this were a job, but it is not a job. It is a profession, the profession of giving people what they want and need, the profession of caring about them more than about ourselves.

Fortunately, the financial professional who can say, “The annuity is not the right product for you now,” to a prospect has a more successful career than the financial professional who sees everyone as an annuity prospect.

Example
Mary, a financial professional for over 30 years, feels that, generally speaking, a client in a 15% tax bracket or less and a client who needs their interest earnings each year should not consider the tax-deferred annuity as a primary tool for retirement. Many other seasoned financial professionals would also concur with Mary’s opinion.

This story is fictional and does not portray any individual(s) or company (ies) nor any anticipated performance of any specific product.

Recordkeeping
Since it is easy to forget, it makes good business sense for the consumer and financial professional to keep a good set of records. It would be wise to keep a file for each client where the following items are kept: illustrations, written correspondence, phone records, and copies of any presentations used. In the event that you use a questionnaire at the point-of-sale, it would be wise to include a copy of that in your file as well.

Speaking of questionnaires and suitability, here we have included a series of questions to ask the insurer. Later, you’ll be given an additional series of questions to ask the consumer that may assist you helping more people. Are these questionnaires perfect as is? No, they are simply intended to be used as a guide.