Morningstar Advisor - Summer 2007 - 23

“I use a personal checklist, and everything goes through the suitability desk,” she says. She considers the individual’s age, investment goals, risk tolerance, tax situation, as well as how the annuity fits in with a client’s overall investment portfolio. “It’s not a problem for me,” she says. Her attention to suitability, she says, resulted in obtaining repeat business from the client. Regulators Crack Down broker-dealer. Waddell & Reed agreed to pay a $5 million NASD fine and an additional $2 million to a coalition of state regulators. The company also agreed to repay up to $11 million to policyholders to settle charges involving the unscrupulous use of 1035 exchanges. The settlement, affecting more than 5,000 customers, stemmed from NASD charges that the firm violated suitability rules regarding recommendations to exchange annuities. It claimed an aggressive national switching campaign was motivated by the company’s own business interests and not those of its clients. It caused investors to incur substantial unnecessary expenses. New Suitability Systems VA Best Practices: Stay Informed, Be Upfront 1 Disclose when a variable annuity is not an appropriate investment for the individual. Know all product specifications, including how death and living benefits work, as well as fees, annual charges, subaccount choices, withdrawal privileges, and tax consequents. Discuss other retirement savings options such as 401(k)s, IRAs, and Roth IRAs. Consider a client’s retirement income needs. Be sure to review cash flow, other assets, and liquid net worth in deciding if a variable annuity fits into a retirement income portfolio. Discuss variable annuity retirement distribution methods. Retirees can take systematic withdrawals from their variable annuities, annuitize the contract, or use guaranteed minimum lifetime withdrawal benefits. Make sure the customer receives a prospectus and other documents before a sale is consummated. 2 The proposed rule comes in the wake of a number of high-profile cases involving unsuitable sales of variable annuities and inadequate supervision by broker-dealers. Recent fines highlight the importance of good record-keeping and supervision of variable annuity sales. In February, the NASD fined Raymond James Financial Services, a Florida-based brokerdealer, $2.75 million for failing to adequately supervise sales. The NASD said the problem with Raymond James, the third largest independent broker-dealer, was it failed to have an adequate supervisory system in place to monitor sales. In May, the Minnesota attorney general sued American Equity Investments Life Insurance for selling annuities with long surrender periods to 1,200 people over the age of 75. The attorney general alleged that the maturity date of the annuities in some instances was longer than the life expectancies of the seniors who purchase the products. American Equity responded that its annuity products were approved in Minnesota and the products carried specific warnings about surrender charges and the ability for the policyholder to make penalty-free withdrawals of 10% per year. Penalties also were waived for withdrawals for nursing home care or in the event of terminal illness. In one of the largest cases, the NASD announced in April 2004 a settlement with Waddell & Reed, an Overland, Kan., 3 4 The new variable annuity suitability rules are designed to help financial advisors and the broker-dealers navigate this insurance and investment minefield. And broker-dealers are already responding by putting new systems into place. “We are doing a lot more quality assurance testing,” says Walter White, chief operating officer of Woodbury Financial Services, a Woodbury, Minn., broker-dealer with 1,800 registered reps. “The principal review asks questions outside the stated guidelines. We want additional information from the registered rep before the transaction is deemed suitable.” Woodbury has established suitability guidelines and a centralized suitability review process, White says. Every piece of business gets reviewed by a principal. Some business gets reviewed by multiple people, which is determined on an individual-case basis. There is general oversight of the process and random screening of business as well. Since 2005, the suitability review team has doubled, driven by pure business growth and changes in the principals’ obligations. White says his firm, with $240 million in annual revenue, is particularly scrutinizing 5 6 1035 exchanges into new products with accelerated benefits. Also under heavy scrutiny are products with investment bonuses. The company carefully reviews the investor’s age, health status, and investment time horizon before approving a transaction. The investor’s goals and the time he or she expects to hold the variable annuity also are carefully considered—particularly for those older than 70 years of age. “We have made some changes to our training, added some paperwork on product specifications, and added plain English documents on how the product works,” White says. He says that the broker-dealer has beefed up staff in the compliance department. Next year, plans are under way to implement a new MorningstarAdvisor.com 23
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Morningstar Advisor - Summer 2007

Table of Contents 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 - Intro
Morningstar Advisor - Summer 2007 - Morningstar Advisor - Summer 2007
Morningstar Advisor - Summer 2007 - Cover2
Morningstar Advisor - Summer 2007 - Contents
Morningstar Advisor - Summer 2007 - 2
Morningstar Advisor - Summer 2007 - 3
Morningstar Advisor - Summer 2007 - 4
Morningstar Advisor - Summer 2007 - Letter from the Publisher
Morningstar Advisor - Summer 2007 - 6
Morningstar Advisor - Summer 2007 - 7
Morningstar Advisor - Summer 2007 - Get to Know the Bond “All-Stars”
Morningstar Advisor - Summer 2007 - 9
Morningstar Advisor - Summer 2007 - Research Briefs
Morningstar Advisor - Summer 2007 - 11
Morningstar Advisor - Summer 2007 - Our Stewardship Test Gets Tougher
Morningstar Advisor - Summer 2007 - 13
Morningstar Advisor - Summer 2007 - Save It for Later
Morningstar Advisor - Summer 2007 - 15
Morningstar Advisor - Summer 2007 - Too Many Oranges
Morningstar Advisor - Summer 2007 - 17
Morningstar Advisor - Summer 2007 - Best of Both Worlds
Morningstar Advisor - Summer 2007 - 19
Morningstar Advisor - Summer 2007 - 20
Morningstar Advisor - Summer 2007 - No Two Clients Are Alike
Morningstar Advisor - Summer 2007 - When It Comes to VAs, It’s Seller Beware
Morningstar Advisor - Summer 2007 - 23
Morningstar Advisor - Summer 2007 - 24
Morningstar Advisor - Summer 2007 - 25
Morningstar Advisor - Summer 2007 - 26
Morningstar Advisor - Summer 2007 - 27
Morningstar Advisor - Summer 2007 - 28
Morningstar Advisor - Summer 2007 - Hands On: Finding the Suitable Fund Share Class for Your Client
Morningstar Advisor - Summer 2007 - 30
Morningstar Advisor - Summer 2007 - 31
Morningstar Advisor - Summer 2007 - 32
Morningstar Advisor - Summer 2007 - 33
Morningstar Advisor - Summer 2007 - Fund Style Can Drift Off Course
Morningstar Advisor - Summer 2007 - 35
Morningstar Advisor - Summer 2007 - 36
Morningstar Advisor - Summer 2007 - Sticking to Their Style, Through Thick and Thin
Morningstar Advisor - Summer 2007 - 38
Morningstar Advisor - Summer 2007 - 39
Morningstar Advisor - Summer 2007 - 40
Morningstar Advisor - Summer 2007 - 41
Morningstar Advisor - Summer 2007 - 42
Morningstar Advisor - Summer 2007 - Marathon Man
Morningstar Advisor - Summer 2007 - 44
Morningstar Advisor - Summer 2007 - 45
Morningstar Advisor - Summer 2007 - 46
Morningstar Advisor - Summer 2007 - 47
Morningstar Advisor - Summer 2007 - Growth, With a Chaser
Morningstar Advisor - Summer 2007 - 49
Morningstar Advisor - Summer 2007 - 50
Morningstar Advisor - Summer 2007 - 51
Morningstar Advisor - Summer 2007 - A Menu of Ideas to Fill Five Market Baskets
Morningstar Advisor - Summer 2007 - 53
Morningstar Advisor - Summer 2007 - 54
Morningstar Advisor - Summer 2007 - 55
Morningstar Advisor - Summer 2007 - 56
Morningstar Advisor - Summer 2007 - 57
Morningstar Advisor - Summer 2007 - Funds: Finding Funds with Conviction
Morningstar Advisor - Summer 2007 - 59
Morningstar Advisor - Summer 2007 - Stocks: So You Say You Want Income?
Morningstar Advisor - Summer 2007 - 61
Morningstar Advisor - Summer 2007 - 62
Morningstar Advisor - Summer 2007 - All Eyes on China
Morningstar Advisor - Summer 2007 - 64
Morningstar Advisor - Summer 2007 - 65
Morningstar Advisor - Summer 2007 - 66
Morningstar Advisor - Summer 2007 - 67
Morningstar Advisor - Summer 2007 - Mutual Fund Analyst Picks
Morningstar Advisor - Summer 2007 - 69
Morningstar Advisor - Summer 2007 - 70
Morningstar Advisor - Summer 2007 - 71
Morningstar Advisor - Summer 2007 - Undervalued Stocks
Morningstar Advisor - Summer 2007 - 73
Morningstar Advisor - Summer 2007 - Most Popular Variable Annuities
Morningstar Advisor - Summer 2007 - 75
Morningstar Advisor - Summer 2007 - What’s New at Morningstar and on the Web
Morningstar Advisor - Summer 2007 - 77
Morningstar Advisor - Summer 2007 - 78
Morningstar Advisor - Summer 2007 - 79
Morningstar Advisor - Summer 2007 - The Advisor’s Economic Moat
Morningstar Advisor - Summer 2007 - Cover3
Morningstar Advisor - Summer 2007 - Cover4
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