Morningstar Advisor - Summer 2007 - (Page 26)

When a firm offers a product for the first time, it may be tempted to market certain features without presenting a full and balanced description of the product. Brokers may be less familiar with it, Schapiro warns. The firm must ensure adequate training and guide the broker’s disclosure and suitability analysis. Also, insurance companies must evaluate the status of a new product under federal securities laws, Schapiro says. For example, an advisor may want to sell a new product that combines an investment with estate or insurance planning features. A determination must be made if the product is a security or an estate planning vehicle. The question: Does the firm have to supervise the sale of the product as a security? In the future, financial advisors can expect more variable annuity sales will be disapproved by broker-dealer compliance officers than in the past. In addition to adhering to the suitability rules, brokers may require additional documentation for 1035 exchanges and the sale of products with guaranteed lifetime minimum withdrawal benefit riders for older clients, or for those rolling 401(k)s into IRAs. Investment time horizons and the age of investors also will be considered. “The vast majority of firms’ compliance people are sensitive to suitability concerns,” says Nelson, the Denver attorney. “The regulators have a hot button regarding age and (1035) exchanges. They will be cautiously scrutinizing sales. The trend is toward disapproving a number of transactions that don’t feel right on a reasonable basis. The handwriting is on the wall.” K Alan Lavine is a syndicated columnist and author of a number of investment books. The latest is Quick Steps to Financial Stability (Que). Go to http://www.navanet.org for a table that explains the different types of variable annuity death and living benefit guarantees. The World Under NASD Rule 2821 1 Firms Must Establish Suitability Procedures 2 Advisors Must Match Client and Product Appropriately 3 Clients Must Receive a Prospectus With “Plain English” Risk Disclosure Highlight the main features of the variable annuity, including potential surrender charges, IRS penalties, sales charges, and fees, including mortality and administrative fees, investment advisor fees, and charges for riders, such as death and living benefit guarantees. Include information about the federal tax treatment of variable annuities, any state and local government premium taxes, as well as the market risk of the investments. Inform the client whether a “free look” period applies to the variable annuity. During that period, the client could terminate the contract without paying any charges and receive a refund on his or her purchase payments. 4 Registered Principals Must Review and Approve Transactions Does the customer’s age and liquidity needs make longterm investing inappropriate? Provide written approval of the suitability analysis document. If the transaction involved an exchange or replacement of a variable annuity, review and approve those documents as well. 1 2 Create new written supervisory guidelines to ensure compliance with the rule’s new standards. Develop training programs to ensure compliance with the rule’s requirements and that advisors understand the features of a deferred variable annuity. 1 2 3 4 Inform client of the unique features of a deferred variable annuity, including tax deferral, fees, other charges, and how death and living benefit guarantees work. Ensure that the client has a long-term investment objective. Determine that the variable annuity and its underlying subaccounts are suitable for the client, based on risk and liquidity. Document the reason a variable annuity is suitable for a client. 1 1 2 2 3 26 Morningstar Advisor Summer 2007 http://www.navanet.org

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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