Seeking suitability

Companies and advisors flustered by a suddenly intense focus on the industry have turned their eyes to more carefully verifying the notions of suitability. But a variety of new programs and some unique efforts on the part of providers will help everyone make sure that the right products are sold to the right people at the right time.

In the second part of our ongoing look at the most recent shakeups in the industry, we turn our focus to suitability. It's always been a part of a reputable advisor's approach to providing the best products for their customers - and the best companies have long had processes in place to allow a better second look at the appropriateness of the financial instruments sold to the public - but with the heat turned up on the business, everyone in the industry finds themselves anxious to address suitability in a new light.

Follow along as we examine suitability efforts which range from pilot programs run by industry organizations to the focused work of individual companies - and get a bit of perspective on the issue from those who have long been at the forefront of the suitability inquiry (and a perspective that the suitability issue may be a bit different than many would believe).


NAIC clearinghouse sends a lifeline to companies

While last fall's sudden nexus of self-reflection - Senate hearings and lawsuits included - sent a palpable chill through the financial services industry, the most frightening specter for a thriving field is that of more government intervention.

Instead, companies know and understand that suitability issues need to be addressed closer to home, and with the input and guidance of those in the business themselves.

To that end, the Insurance Marketplace Standards Association has opted to make a positive, proactive step by creating a new suitability clearinghouse program. Beginning last month, the clearinghouse offered IMSA members the opportunity to carefully vet their offerings with an eye to the model suitability in annuities regulations established by the National Association of Insurance Commissioners.

Don Walters, senior vice president and general counsel for the Bethesda, Md.-based IMSA, says the pilot program seeks to offer a unified front for the industry by simplifying the suitability oversight process in a venue somewhat closer to home.

"Life insurance companies will be able to get an annual certification for their third-party users, which will simplify things as they already have hundreds of relationships with those agencies," Walters says. "Working on their behalf, we've established a central location that companies can contact and only need to contact once."

While suitability oversight was previously delegated to third-party distributors (including broker/dealers, banks, general agencies and IMOs), the new clearinghouse will create a single point of contact for obtaining those certifications, avoiding unnecessary procedural interruptions of business for most companies.

Walters says the clearinghouse's first efforts will be run in concert with about 10 insurance companies, expanding to a wider swath as the process is refined.

"We'll be offering access to a Web-based technology program that they'll be able to use. We anticipate a high level of interest, especially among companies with 500 to 1,000 distributors."

Walters says he will be interested to gauge industry involvement in the plan, but hopes that the simplified and centralized nature of the offering will provide a certain appeal to companies.

An individual look at suitability

Advisors thrown into a tizzy about suitability, seminars suddenly vilified and credentials now looked at as a dubious jumble of letters: the past year was not a kind one for those in the financial services industry.

Or, as Westport, Conn.-based advisor and industry advocate Pasquale J. Sacchetta says, it was just another year in a complex business where many forces seek to shift the blame to those making the sales, rather than companies (and even customers themselves, as he somewhat controversially suggests).

"From a transactional point of view, there's definitely been more scrutiny, especially on the whole issue of client lunches and credentials, but I've seen good and bad with that," Sacchetta says. "Occasionally, it seems like clients are just as responsible as advisors for the blame in suitability. I've heard stories about advisors who've had dealings with multimillionaire professionals, really well-educated seniors who knew everything about the products they were getting involved in, who've still come back and complained about the suitability of the products sold."

Sacchetta, president of CFIG Wealth Management, says that he's seen some exceptionally dubious behavior on the part of potential customers.

"I've even had clients who've fudged their contact information to get around our own clearing processes just so they can come to more of our dinners, working very hard to circumvent the process, and that really irritates me. The bottom line, as I see it ... if you don't want to be sold, don't go to a seminar."

Sacchetta says that some of the responsibility should also be focused on insurance companies themselves, who have, at times, crafted products that don't always have the best interest of customers in mind.

"I think that insurance companies, quite simply, should not be allowed to design products for those over 65 where a commission is connected when they lock in their money or there's high surrender charges ... and to that end, I think the regulators are more at fault for not forcing companies to take responsibility. But the answer isn't national licensing for products ... we just need full disclosure. There's enough blame to go around for all parties, and everybody has to realize that they have a hand in this."

The regulator's look at the issue

Jim Poolman spent eight years as North Dakota's elected insurance commissioner. Now a private sector consultant, Poolman says regulators first began to take steps to enforce suitability in the late 1990s with the advent of products featuring very long surrender charges and high levels of complexity.

"Some misrepresentation to consumers started to occur - people weren't given all the facts," he says. "Even the commissioners had a heck of a time defining suitability. The whole thing only opened the door for more ambiguity and lawsuits."

Last year, Poolman and regulators from Iowa and Minnesota signed a joint statement with FINRA (formerly NASD) supporting the NAIC's Suitability in Annuity Transactions model. North Dakota subsequently adopted the model as legislation in August and it's been used as a blueprint for suitability regulations across the country.

Poolman's take? Clear rules should ultimately serve the industry itself, not just consumers.

"If somebody gathers the necessary suitability information up front, you've got a great defense on the back end. I think insurers understand that it now costs more to monitor, but they want to do the right thing ... or face lawsuits."

One company's innovative solution

In an environment where suitability issues have created claustrophobia and chaos, companies need to create cutting-edge endeavors that can help keep them one step ahead - and help bring a sense of security to clients.

In the fall, Allianz announced the creation of a unique new position, Chief Suitability Officer, which would oversee the multinational firm's ongoing developments in the suitability arena, interacting with the company's senior leadership and working towards advisor- and client-friendly solutions.

Thrust into that new job title was Patrick Nelson, a 13-year veteran of the Minnesota Department of Commerce's Market Assurance division. Nelson says his background on the regulatory side should provide him with a tough, realistic perspective.

"Really, this is like having a consumer advocate inside our business," Nelson says. "My principal job will be to report to our CEO and maintain and encourage a consumer focus. I'll be looking at how we evolve our system and procedures relative to improving that focus. Mostly, we're trying to make it easy for our advisors to do the right thing by their clients, and we're working to find the tools to help them do that."

Nelson says a big part of his role will be reinforcing Allianz's existing "Statement of Understanding," a feedback document distributed to customers which seeks to ensure a high level of visibility to the products sold and a spirit of clarity in each of the company's transactions.

And while we previously suggested that Nelson himself would have the clearly onerous task of contacting every single one of Allianz's customers aged 75 and over (part of the company's other suitability efforts), Nelson says he's not quite a call center Superman.

"I'm assembling a team and we will indeed be calling all our customers in the FMO distribution channel, and hope to be doing about 200 calls per week by the end of January."

More importantly, Nelson continues to work to help the company roll out the new "Code of Best Practices," a suitability training program couched in the form of a virtual code of ethics by which Allianz reps will abide. Online training and support will be provided to bring advisors up to speed; Nelson says the effort should again provide customers with a stronger sense that products sold will be sold for the right reasons.

Nelson will also work in concert with Tom Burns, Allianz's chief distribution officer, who will be upping the scrutiny paid to those who work on Allianz's behalf. To that end, Burns says the company recently ended its relationship with more than 65,000 agents who had not been regularly selling Allianz-related products.

Next in the series, Senior Market Advisor will further delve into the ongoing troubles in the business with an investigation into credentials and new rules from providers that might change the way you handle your practice.

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