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A follow-up letter should be sent after every major sale and most meetings with clients. This letter is particularly important when selling a product that is often misunderstood and has received unjustified criticism, like variable annuities.

Failing to meet client expectations and address unpleasant surprises are the main reasons investors file actions against their advisors. But the follow-up letter is a simple tool that goes a long way to establish reasonable expectations and to make certain that clients are not surprised.

Here are some considerations for creating a follow-up letter to a VA sale:

1) With every letter, always picture the worse-case scenario and imagine how it will sound to regulators or an arbitration panel, say at the Financial Industry Regulatory Authority. If it is not what you would be proud to say in public to that group, leave it out of the letter.

It helps to keep this basic in mind: If you can’t say anything nice to a client, don’t say anything at all.

Make the letter warm and friendly and express gratitude that your clients have selected you to assist them with their financial future. Start it with something that builds bridges: “Dear Bill and Suzie, it was great to meet you yesterday. It was fun to get to know you and I am sure we are going to enjoy working together.”

One advisor I know did not do that. Some of his long-suffering clients got upset with his less than stellar treatment and sent him a soft letter, asking for an explanation and very little money to compensate them. Piqued, the advisor sent back a scathing letter, attacking the clients in the worst way, even saying they were ungrateful! He left no slur unstated on the written page. The clients became outraged and filed claim with the NASD, asking for–and receiving–a boat-load of damages. I believe the right letter at the right time could have saved the advisor from all of this.

2) Never ever make any promises or guarantees, other than promises for great service. This is not the time to promise a 6% return, even if the VA provides for a minimum 6% guarantee. The reason: The language for guarantees is contractual, conditional and written in the greatest of legal prose to keep regulators happy. Describing the guarantee in a letter could create problems for you or your firm–it could, for instance, have the unhappy consequence of you becoming the personal guarantor of an investment’s success.

Though you don’t want to create additional, unwitting guarantees, you could, toward the end of the letter, say something like this: “As you know, it is illegal for me to personally promise any investment returns. Regrettably, none of us know what the market will do. However, I can promise you great service. Our firm is dedicated to helping you achieve a bright financial future. If there is anything we can do to improve this relationship, please let us know.”

3) Do not add to the information that is contained in the prospectus. Also don’t say things like, “my experience with the company is that they pay their death benefits within two weeks.” You don’t want to add to your liability. In fact, most attorneys say the letter should not even cite certain pages of the prospectus. Instead, say something like this: “For more information about the XYZ Variable Annuity, please read the prospectus carefully.” Most compliance departments will not want you to say, “For an explanation of the guarantees, please check out the language on page 6.”

4. Review and confirm the client’s goals and objectives. A great way to start off the letter is to confirm the client’s goals and objectives. You might say: “Congratulations on your $1,000,000 inheritance. I know you are serious about investing these funds wisely so we spent some time reviewing your goals and objectives. You indicated the most important goals for this money are to create a steady stream of income in retirement, and to have a dependable death benefit for your heirs if you died before you could start taking an income.” If the client has listed other goals for these funds, be sure to list them.

5. Mention that you reviewed different investment options. Remind the clients that you reviewed, in detail, a number of different investment products that might fit their goals. Here is some sample language: “We reviewed a number of different options for these funds including mutual funds, REITs and variable annuities. We discussed the pros and the cons, and the expenses of each investment.”

Note: I do not recommend listing here all the pros and the cons of each investment. The reason is as sure as you list some here, you might leave something out. Those minor omissions are normally not a problem until you get in front of plaintiff’s counsel at the arbitration table. Opposing counsel might try to make you look bad for forgetting a minor advantage or disadvantage. Better: state in general that you reviewed the options with the client.

Also mention that you and the client reviewed the fees and expenses of every recommendation. You don’t have to state them here, but do remind the client that you did discuss them. This is particularly important in VA transactions, because VAs have received press, much of it unjustified, for their fees being too expensive.

6. Confirm that the client, not you, made the investment choice. A key concept of this letter is that you presented a number of different options to the client, and the client, not you, made the investment decision. One way to phrase this is: “Based on reviewing the options, you chose a variable annuity…”

7. List the why’s. Review at least two reasons why the client selected the VA. Frankly, the more reasons you can list, the better. To pick up from the last sentence: “Based on reviewing the different options, you chose a Variable Annuity for the following reasons:

o You wanted to create a stream of income you could not outlive in retirement.

o You wanted a “safety net” in this portfolio.

o You wanted the certainty of knowing your retirement income could not be reduced.

o You wanted tax-deferred growth.

It is vitally important that the reasons listed here match the goals stated earlier. You don’t want the only goal to be tax-deferred growth and then list the only reason as optimizing money to heirs. In that case, it would be apparent that you have not met the objectives, because the reasons this investment is appropriate would be completely different from the stated goal.

8. Ask the client to get back to you with any misunderstandings. The closing part of the letter is most important. It should express how delighted you are to be working together, and confirm that you expect the client to get back to you immediately about any misunderstandings. Example: “Bill and Suzie, if I have misunderstood anything, please get back to me immediately. If there is anything else I can do to make this relationship better for you, please let me know.”

I like to underline the sentence– “If I have misunderstood anything, please get back to me immediately”–because it draws attention to this key concept. Also, by implication, if the client did not get back to you immediately, you assumed the client was happy with this purchase and it addressed their needs. It is difficult for clients to say, at a later date in arbitration, that “this investment was not suitable for me because I didn’t care about steady income in retirement or certainty of an inheritance for my heirs.” The client had a chance to object shortly after purchase but didn’t do so. Yes, clients can object later, but it becomes much harder for them to prove they wanted to do other things with this money when you have a letter saying otherwise.

9. Run it by compliance. Technically this letter is customized for every client and is not considered sales literature or advertising. However, to be on the safe side, I would run a template by your compliance department and get its input. This should also protect you from stating something in writing that you shouldn’t.

10. Keep a copy in your files. Sometimes advisors get a little too anxious to purge their files. This is a letter that I would keep until my compliance department forced me to purge. In this current digital age, you can always scan it as you might need it later. This is particularly true as some arbitration panels have ignored the statute of limitations.

Once you get the hang of this, it becomes quick and easy to send a follow-up letter. Your clients will perceive it as extra service and “notes” of their meeting with you. Your compliance department will love you for taking the time to document the suitability issues. It is a win-win situation.

Katherine Vessenes., JD, CFP, RFC, is president of Vestment Advisors, Chanhassen, Minn., specializing in legal and ethical issues of financial advisors. Her e-mail address is [email protected].


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