7 steps to a suitability safe haven

The 2006 provisions adopted by the NAIC are pretty clear, as are the updates that followed. The NAIC states that:

“Specifically, in recommending to a consumer the purchase of an annuity or the exchange of an annuity, the insurance producer, or the insurer if no producer is involved, must have reasonable grounds for believing that the recommendation is suitable for the consumer. This is based on facts disclosed by the consumer as to his or her investments and other insurance products and as to his or her financial situation and needs.

To ascertain the product’s suitability, prior to the execution of a purchase or exchange of the recommended annuity, the insurance producer, or insurer if no producer is involved, must make all reasonable efforts to obtain information concerning: (1) the consumer’s financial status; (2) the consumer’s tax status; (3) the consumer’s investment objectives; and (4) any other information used or considered to be reasonable in making the recommendation to the consumer.[1] “

In 2010, the NAIC provided additional guidance in three specific areas:

• Clarify that the insurer is responsible for compliance with the model’s requirements, even if the insurer contracts with a third party;
• Require the review of all annuity transactions; and
• Establish both general and product-specific training requirements for producers.

Clear or not, it’s a lot to take in, and easy to see how advisors and agents could inadvertently stumble. Not to worry, said Seawright, who frequently speaks around the country on the topic.

“No matter the provisions, if you adhere to the following principles and practices, you’ll significantly reduce any chance of sanctions,” he said.

They are:

1. Do the right thing. Doing the right thing primarily means putting the interests of the client first. Someone with that commitment and mindset will avoid the vast majority of suitability problems.
2. Develop a relationship. The days of the “one call close” are essentially over. Indeed, if would-be mentors brag about how often they close business at a first appointment or about how quickly they get business done, look out.
3. Discover the story.Finding out those details means finding facts, but it also means figuring out the “story;” what drives the client and where they are trying to go. What we’re really talking about here is analysis that is (a) needs based; (b) objectives driven; and (c) comprehensive. The sale of a single product can only be suitable when it fits properly into the client’s comprehensive needs and goals.
4. Discern the right approach.One size doesn’t fit all. Every client is different, so the client’s situation must be approached individually.
5. Deliver the right solution.If you are predominately selling one or two products, you might ask yourself whether the product is driving your proposed solution or whether the client’s situation and story are driving your solution.
6. Document the decisions made.Suitability, in a nutshell, is doing the right thing with proper documentation. Nobody likes paperwork, and the mountain of required paperwork in today’s financial services universe is enormous.
7. Defend your actions (when necessary and appropriate). It’s the rare advisor that never has a recommendation or sale questioned at some point. When that happens, having done the right thing under the circumstances is your best defense. But you will also need to have access to the proper documentation. Having a written explanation of what you did and why is invaluable in such a situation.