The purpose
of asking the suitability questions of a client is to make sure
that the investment choices match the objectives and risk tolerance
of that particular client. The FINRA requires you, the registered
rep, to complete suitability forms on clients to assist you in
making suitable recommendations. The suitability form can help
reps make a proper “diagnosis” of what might be suitable BEFORE
recommending a particular fund portfolio. The suitability
form not only protects the client, it protects the rep! For
example, if you have established that a client is only willing
to take moderate risk, and he later comes to you complaining that
he did not get that 25% or 35% return he heard about on some high
risk fund, you can go back to the suitability form and his risk
tolerance. The very high numbers almost always involve very high
risk, and will also be the first funds to plummet 15% or 20%
when the market goes down. There is nothing wrong with high risk
funds as long as the client is fully informed and understands
the relationship between high rewards and high risk.
The Administrative
Staff of ANICO have responsibility for signing off on the suitability
of all variable policies, and the SM&R Compliance Department
conducts random audits. If there is a problem with the suitability
form, the rep will be called or will receive correspondence addressing
the problem, all of which will delay the policy being issued.
1) Using
an old suitability form or one out of a Mutual Fund Prospectus.
You must use the form found in the most current VUL or VA prospectus.
New prospectuses will come out every April, although sometimes
the initial distribution of new ones may not occur until May.
Reps should receive a small initial supply from ANICO when a new
prospectus is published, and then order their own supply via
regular channels. Always throw away any old ones you have.
Check your supply by noting the date on the back of the Product
prospectus (vs. the investment portfolio prospectuses.)
2) Client
chooses an investment portfolio that is not suitable for the risk
comfort level he states on the suitability form. For example,
principals responsible for signing off commonly see reps/clients
mark the risk comfort level as “MODERATE” with an investment preference
of “income/growth potential” and then choose a HIGH risk portfolio
like Fidelity Growth. The risk level, time horizon, and investment
preference on the suitability form must be consistent with the
risk level of the portfolio chosen.
Suppose a
client says he says he is moderate but then insists that he wants
to put all of his money in Fidelity’s Contra because he has heard
such good things about it. The rep should then hold him accountable
for his choice by telling him that if he wants a high risk portfolio,
he’ll need to re-examine his risk comfort level, which would have
to be changed to “high” and then initial the change. Otherwise
you cannot in good conscious recommend a high risk portfolio,
and the client would need to change his investment choice. Remember
that reps will be held accountable to the FINRA for being the investment
professional. Only after a proper “diagnosis,” can the rep make
suitable recommendations.
4) Forgetting
to have the client sign the arbitration agreement. Make sure
the client signs the “Purchaser Agreement to Arbitration” when
applicable. If a client occasionally refuses, please write “client
refuses to sign” and have the client initial.
5) Forgetting
to keep a copy of the suitability form, along with the application
and check. You may want to go back and review you SM&R
Regulatory Manual regarding your books and records requirements.
It’s very important that you have copies of suitability forms
in your client files. Random audits by SM&R Compliance personnel
and state regulators have become more common.
6) Forgetting
that you must submit a suitability form even if you have submitted
one before, for any new business. The current guidelines
(which are subject to change by the Securities and Exchange Commission)
state that if you check with a client at the time of a new application,
and nothing has changed from the suitability form you have on
file, then you can use the old one if it is not more than 3 years
old. However, you will need to review it with the client for
changes, and if there are none, date and initial a copy of the
form you have on file (to show nothing has changed) and submit
that with your application. If the suitability form you have
on file is more than 3 years old, you will need to get a new form.
As many life insurance agents know, this can be an excellent way
of uncovering new needs for securities and/or insurance.
For
specific variable portfolio information see anicoagent.com.
