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Get it in writing: Proper documentation is key when it comes to annuity sales

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In October a law firm in Chicago representing a former client of a financial advisor ran an ad seeking to find other investors who may have lost money with this particular advisor as a result of “annuity switching.”

The advisor is accused of improperly switching the former client from indexed annuities to variable annuities, causing the client to incur substantial surrender charges, and allegedly mismanaging the transfer of the client’s funds, resulting in substantial tax liability and penalties in addition to the surrender charges.

Law firms seeking to identify and represent other clients in cases such as this are becoming increasingly common in today’s litigious environment. The law firms offer no-cost reviews to see if an arbitration claim or lawsuit might be an option for recovering investment losses and related damages.

Whether or not the financial advisor in question is guilty of these allegations, the situation underscores the importance of the need for advisors who sell annuities to take the necessary steps to protect themselves when recommending an annuity to a consumer, and particularly when it involves liquidating one annuity in favor of another annuity.

The NAIC’s 2010 Suitability in Annuity Transactions Model Regulation requires that producers be trained on the provisions of annuities in general, and the specific products they are selling. The producer must make “reasonable efforts” to obtain the consumer’s suitability information, and have reasonable grounds to believe the transaction being recommended to the consumer is suitable.

And your efforts need to be very well documented.

Justin Bilyj, broker and owner of My Insurance Counselor Agency in Cleveland, says he learned early on to get all major decisions in writing. “If you make a recommendation, note it down, and if you make a recommendation to a client that can affect their financial outlook and they decide to not act on your recommendation—especially in the litigious culture we find ourselves in—definitely get it in writing that they decided not to take your recommendation,” Bilyj said.

“Not only should a broker take notes to defend against claims of unsuitability, but a broker should take notes in case a future beneficiary of the client needs to understand the context of their decisions,” he adds.

There are three key reasons that a broker should take notes, according to Bilyj. “The first is to prove suitability in case it is called into question; the second reason is to protect the broker in the event the client doesn’t act upon a recommendation and feels ill-advised; and the third reason is to make any future beneficiaries or inheritors understand the context of any client decisions that could limit the possible inheritance.”

Today’s indexed and variable annuity products are hard enough for the typical producer to completely understand, let alone explain to the average consumer. Obviously it is important to be able to explain how a product being considered works, but it is equally important to make sure you document that you covered key aspects like surrender charges and how they are triggered. Do not gloss over them – emphasize them and help the client understand. Explain why they exist.

If a producer tells a client about surrender charges but the client disputes this a year later, without proper documentation the producer could find himself the target of a troublesome ad from a law firm.

Don’t put your reputation and your practice at risk.