Financial Industry Regulatory Authority examiners may be thinking more this year about registered index-linked annuities.
FINRA has recognized the rise of the RILA by changing the name of the annuities section in its latest annual oversight report to "Annuities Securities Products," from "Variable Annuities" in the 2024 report; adding many references to RILAs; and including an analysis of RILA market trends.
"Unlike other investments, such as mutual funds, RILA investors periodically realize gains and losses at the end of each crediting period, essentially forcing liquidation (the sale of the investment option) at a specified date, even if market conditions are unfavorable," FINRA officials note in the RILA trends analysis.
RILAs typically have no explicit fees and may offer some protection against market losses, and the tradeoff is that the investor often faces limits on gains and on what actions they can take at certain times without facing the risk of investment-related losses, officials say.
What it means: Agents and advisors who help clients with RILAs need to find out what their compliance people think about the new FINRA oversight report.
Variable Annuities and RILAs: A traditional variable annuity is a product that can tie part or all of the crediting rate to the performance of funds that resemble mutual funds, is registered with the U.S. Securities and Exchange Commission as a security and can expose the holder to investment-related loss of principal.
A RILA is an annuity that ties the crediting rate to the performance of an investment index or other benchmark, is registered with the SEC as a security and can expose the holder to investment-related loss of principal.
Many regulators and insurers once seemed to classify RILAs as a kind of variable annuity, because of the fact that a RILA, like a variable annuity, is registered with the SEC.
The SEC now seems to be treating the RILA as a separate type of product, and FINRA also seems to be treating the RILA as a registered annuity that's distinct from the variable annuity.
FINRA examiners' thoughts: In a section on examiner findings and views, officials say some firms need better written procedures to keep investors from ending up with too much of their assets locked into variable annuities, RILAs or other relatively illiquid asset classes.
Some firms also need better written procedures for making sure that reps consider an investor's age when recommending annuities, officials say.
Other things FINRA examiners have seen, and disliked, out in the field:
- Sales representatives recommending annuity exchanges that led to the loss of material benefits, such as the loss of access to living benefit riders.
- Reps telling customers to exchange existing annuities for RILAs without considering whether those transactions were in the customers' best interests.
- Failures to keep annuity transaction records.
- Firms asking reps to document and sign their rationales for RILA transaction recommendations.
- Firms looking at whether associated persons have unusually high rates of RILA-to-RILA exchanges or efforts to replace variable annuities with RILAs.
- Firms giving associated persons advice about how to tell whether RILA features are in a retail customer's best interest.
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