This will be the first of three articles relating to FINRA’s (previously NASD) NTM 07-43, published in September, 2007. This article will focus on the issue of suitability as it relates to seniors.

Depending on which state you live in, an “Elder” or “Senior” could be defined as “any person residing in this state who is 65 years of age or older.” FINRA points out that it does not have special rules for senior customers, however the NTM lays out a number of important factors that should be considered when working with a senior.

NASD Rule 2310 requires that in recommending “the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable” for that customer, based on “the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.” The rule also requires that, before executing a recommended transaction, a firm must make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives and “such other information used or considered to be reasonable by such member or registered rep in making recommendations to the customer.”

I can imagine that right now those of you who are not registered are saying, “so what, this doesn’t apply to me.” Well think again. Did you get your Series 65? Are you in a state that has determined that merely recommending the sale of a security (such as a mutual fund) to purchase a fixed product constitutes engaging in a securities business, which requires a license? Are you in a state that has adopted or beefed up the NAIC’s suitability requirements for seniors?

If so you have a duty to consider the following: All clients are different, but as they age situations change. As an advisor you should do your best to continually (at least every three years) make an effort to update in writing the client’s time horizon, goals and objectives, risk tolerance, tax status, need for liquidity, age, life stage, and long term care needs or desires.

Advisors should consider these other factors as well: Is the customer employed? If so, for how much longer? What are the customer’s primary expenses? Any mortgage left? What are the sources of income? How much income does the customer need to meet expenses? How much has the customer saved for retirement? How are those assets invested? How important is the liquidity of the investment to the customer? What are the customer’s financial and investment goals? How important is generating income, preserving capital or accumulating assets for heirs? What health care (and long term care) insurance does the customer have? Will they be relying on the investment assets to pay for anticipated or possible care costs?

Always keep in mind that you are required to fully understand the product(s) you are recommending to the client and to give your clients a fair and balanced picture of the risks, costs and benefits associated with the product(s). Additionally, you should only recommend those product(s) which are suitable in light of the customer’s financial goals and needs.

FINRA is evidently focusing on products that have withdrawal penalties or otherwise lack liquidity, such as EIAs, deferred variable annuities, some real estate investments and limited partnerships, variable life settlements, collateralized debt obligations, mortgaging home equity for investment purposes, and taking withdrawals from IRAs to invest in high risk investments under rule 72(t) or otherwise. Moreover, the article points out that just because a client is accredited, doesn’t necessarily mean that a product is suitable. Currently the SEC is looking into increasing the Reg D accreditation standard. This is due to the fact that with the appreciation of real estate, many investors meet the 1,000,000 asset requirement, yet have little liquid net worth outside of their real property. Common sense will go a long way, as clients age, liquidity needs will or could become a big concern for possible long term care needs. Make sure you and your clients have a plan to deal with these needs and concerns.

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