Regulators question suitability of some advice
April 22, 2015 by Nick Thornton
A joint initiative between the Securities and Exchange Commission and the Financial Industry Regulatory Authority found that 34 percent of broker-dealer firms made one or more potentially unsuitable recommendations of variable annuities to senior investors.
Data from the coordinated examinations of 44 broker-dealers in 2013 was published as the Department of Labor released its proposed conflict of interest rule, which aims to insist a fiduciary standard of care on all broker-dealers advising retirement plan participants and individual investors.
The report, The National Senior Investment Initiative, focused on how firms conduct business with investors age 65 and older as they prepare for an enter retirement.
The regulators called into the question the suitability of the variable annuity recommendations based on the high fees incurred from the advice.
Thirty percent of investors think their brokerage firms don’t charge annual service and maintenance fees, although almost all of them…
In one case, a representative “displayed a consistent pattern” of recommending investors to exchange variable annuity contracts purchased within the previous three years.
In doing so, investors paid surrender charges, lost death benefits, and paid increased fees to the new annuity contracts.
“The cost and commissions charged with the new contract appeared to outweigh the benefits,” wrote the regulators.
Broker-dealers are not held to a fiduciary standard, but “generally have an obligation to recommend only those specific investments or overall investment strategies that are suitable for their customers,” according to the report.
That distinction is, of course, at the core of the debate over the DOL’s proposed conflict of interest rule.
In the proposal, the DOL took direct aim at broker-dealers in their capacity as retirement advisors, writing, “there appears to be a widespread belief among broker-dealers that they are not fiduciaries with respect to (retirement) plans or IRAs because they do not hold themselves out as registered investment advisers, even though they often market their services as financial or retirement planners.”
The SEC-FINRA report found patterns of large percentages of investors’ liquid net worth being invested in variable annuities, which “prompted” the examiners’ review of the recommendations.
In some cases, investment time horizons in certain products were poorly aligned with investors’ age. In other cases, broker reps failed to sufficiently collect thorough investment profile information from investors.
About 14 percent of the firms reviewed by the regulators made potentially unsuitable recommendations to buy alternative investments.
In one firm, a 90-year old, low-income investor was sold an alternative investment, which are known to often be complex, difficult to value and expensive. In the case of another client, a rep from the same firm failed to consider the limited investment experience and investment objectives of another senior investor.
In both cases, the investments were held for less than 10 days, and resulted in “significant realized losses,” according to the report.
The report also found that 9 percent of firms made potentially unsuitable recommendations for mutual funds, 7 percent of firms made questionable recommendations for structured debt products, and another 7 percent for REITs, according to the report.
