Evaluating the overall suitability of a life, annuity or mutual fund sale (including the associated investment options and allocations) is often a difficult and time-consuming process. Yet suitability is a key ingredient in complying with the letter and spirit of regulatory rules and procedures.
Effectively managing the market conduct risk of unsuitable sales is a key objective of all financial service organizations. While agents, managers and home offices all face different challenges in determining suitability, all can benefit from implementing an automated suitability monitoring system.
Challenges Faced In Assessing Suitability
For Agents. Determining suitability is difficult for agents because of the uniqueness of each sale and the judgment needed to evaluate a wide range of factors. Agents may not know which information is needed to determine product suitability or may not use proper judgment in assessing the information they have.
Difficulties may also arise if agents do not have full or complete information about their clients. Agents may be unwilling to ask their long-standing clients for updated suitability information and clients may be unwilling to provide information unless they have a specific reason to do so. Sometimes customers only provide additional information if the agent has a specific purpose for requesting it.
Agents are often frustrated when their management or home office questions a sale they thought was suitable. Questions must be answered which can often delay application processing and underwriting. Agents want applications to be processed quickly, without having to answer additional questions or contacting clients again.
For Managers/Registered Principals. Evaluating and monitoring suitability is difficult for field managers because of the large number of applications to review, the time involved in reviewing, the potential lack of information, the need to tailor the review to each product and the need for experience and judgment. The knowledge and experience needed to supervise suitability often makes it difficult to delegate the responsibility to others.
Managers are sometimes frustrated by the task of gathering explanations from agents regarding questionable sales. Managers alerted by the home office of potentially unsuitable sales often feel caught between the company and the agent regarding how to answer questions about suitability.
Home Office. Home offices face the same challenges that field managers face, but have the added challenge of doing their review without slowing down the application process. The volume of applications to review requires a high level of efficiency.
In addition, unlike managers, the home office cannot stop an agent in the hall of the agency and ask for clarification of a question. The home office must contact the agent and wait for a reply. If the reply is not sufficient it must ask for more information. All of this slows down the application process and delays in processing apps can have significant ramifications regarding handling money in a timely fashion, according to NASD regulations.
Is It The Answer?
An automated suitability review system can help agents, managers and home offices determine suitability more effectively and more efficiently.
For agents, an automated system identifies what information is needed to determine product suitability for a specific product-client combination. It provides a standardized process for collecting and assessing client information. It gives the agent an idea of documentation necessary to have a potentially unsuitable sale make sense to management. Most important, it allows the agent to immediately identify potentially unsuitable sales situations and resolve issues before submitting an application for processing.
For managers and the home office, an automated system standardizes input data and provides for immediate review and evaluation of applications. If questions arise, they can be quickly answered, since the specific client information needed can be highlighted. Also, the task of screening suitability can be delegated, so that other than ongoing supervision of the process, the manager can invest his time dealing with exceptions or red-flagged apps.
Those companies that have assigned responsibility to managers or general agents to assess suitability can have greater confidence they are carrying out their responsibilities since an automated system increases accuracy while reducing effort. Monitoring managers and GAs reviews can also be automated as part of the overall system.
An added benefit of using an automated review system is that the home office must review all its suitability standards so that uniform rules can be implemented to conduct assessments. This review process often leads to more consistency in assessing suitability across product lines. Finally, the monitoring of suitability trends and patterns can be done, since all of the data is stored in the system.
How Does It Work?
Automated suitability review begins when client and product (transaction) information is entered into a data capture system. Data capture can occur at the agent level through an automated application or Web-based system, or can occur at the home office with manual application entry into home office systems or databases.
Based on when data is entered into the system, the automated review can be performed real-time, before the app is submitted or in batch-mode after the sale has occurred. By reviewing product recommendations early in the sales process, the organization can minimize unnecessary processing functions and any agent embarrassment.
Once data is captured, client and product data is then fed into a rules-engine that evaluates the product-client combination based on the companys suitability rules.
These rules allow the computer software to evaluate the recommendation and identify where there are potential mismatches between company and industry standards and the proposed sale. Several suitability issues can be reviewed (see chart on this page).
Typically an agent or manager would consider some of these factors in their suitability review, while an effective system will evaluate all of them as well as the potential interactions between the factors in evaluating the suitability of the sale.
If implemented in real-time, an automated system can provide immediate results to the agent, identifying questions or potential issues, the reasons these issues were identified and the information needed to resolve them. This allows the agent to make adjustments at point of sale, such as changing the recommended product, gathering additional information about client needs or documenting unique client circumstances that satisfy questions raised by the automated system.
Once the agent has submitted a sale, the agency manager, general agent or a staff person can quickly review sales that were flagged for further review.
Since an automated system highlights potential problems, the reviewer can spend the majority of time researching and reviewing–not identifying–them. Once any outstanding questions have been answered, the agency manager or GA can endorse or reject the sale.
For monitoring and trending purposes, the home office should have all of the information it needs to evaluate the agency managers or GA’s review. If the company deals directly with the agent, it carries out the agency managers or GAs review at the home office.
The Challenges Of Automating
Since automated review systems are dependent on data, product and client profile information needs to be entered and stored by the company. Therefore, any system implemented must be able to easily capture, link to or manage existing client data. If systems are not in place to capture application data in the field, the home office will need to assume this responsibility.
The automation of suitability rules can be challenging because each sale may serve various client and financial needs. Automated rules must be robust enough to consider complex financial issues and flexible enough to be changed if needed. No computer system can replace the human element–the agent, manager and underwriter–in the suitability assessment process, but it can provide a tool to make the review process more efficient for insurance professionals.
From an agent perspective, proper training and change management need to occur to minimize negative reactions toward a system. An automated system should provide explanations for suitability decisions, not act like a “black box” that continually raises red flags for their sales. Agents need to be shown that an automated review system protects both them and their book of business.
From a managers perspective, there is sometimes the tendency to overly rely on an automated review system. A manager must remain involved in the process, and manually review identified issues.
From a company perspective, there is often a significant initial investment in purchasing, developing and implementing an automated system as well as updating it when new products are introduced. There is also the challenge of overcoming resistance from agents and managers who may assume that suitability is not a critical factor or who object to the standardization imposed by an automated system.
Despite the challenges, implementation of an automated suitability review system can have significant benefits for agents, managers and home offices alike.
An automated system benefits agents by helping them avoid potentially inappropriate recommendations at point of sale. Post-sale, it helps by speeding up the review process, which decreases delays in transaction processing and underwriting. This can increase both the speed of the sales and the commission process. Additionally, agents are notified immediately of potential problems and allowed to correct or justify their decisions, thus minimizing interaction with the home office or changes to product configurations.
Automation allows managers to decrease time and effort spent on identifying potential problems, and instead allows them to focus on resolving those problems and training agents to avoid them. It can also substantially reduce the number of individuals involved in reviews and the cost of training them.
The home office benefits from automation through increased consistency of the review process and ensuring that reviews are sufficiently detailed for each product sold. This can reduce the liability of an organization, potentially protecting them against fines, arbitration and judgments. Automation also provides a uniform method for suitability report generation and statistical analysis.
From a pure financial standpoint, the reduction of internal processing costs, protection against legal action and review time savings more than justify the automation of suitability reviews. However, the confidence alone that a major source of market conduct risk is being managed effectively far outweighs any costs associated in developing an automated review system.
Denny Groner is a principal in Groner & Associates, a Livingston, N.J. consulting firm providing compliance and market conduct support to the financial services industry. He can be reached by e-mail at GronerAssociates@aol.com.
Steve Sabin is a Senior Knowledge Engineer with SunGard. He can be reached at firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, March 11, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.