The Financial Industry Regulatory Authority has suspended a Supreme Alliance representative for two months and ordered him to pay $5,000 for recommending six variable annuity exchanges to older customers without a reasonable basis to believe that the transactions were suitable.
According to FINRA's order, between July 2021 and December 2022, Robert Settimio Cupello recommended that six senior customers exchange their existing deferred variable annuity contracts to purchase new deferred variable annuities.
Cupello failed to conduct a reasonable comparative analysis of the customers' existing and prospective living benefit riders to determine whether the customers would benefit from the new riders, the order states.
"Each of the six customers owned existing variable annuities with riders that had guaranteed a lifetime withdrawal rate ranging between 4% and 5%," FINRA states. "This rate was calculated against living benefit bases that had accumulated value greater than the actual values of their contracts. The exchanges resulted in the loss of that excess value."
For each of these customers, Cupello recommended an exchange into a variable annuity with a maximum guaranteed withdrawal benefit rider, according to FINRA.
The maximum guaranteed withdrawal benefit rider provides a conditional annual withdrawal rate of up to 8%, with annual step-ups to the withdrawal benefit base for up to 10 years or the first lifetime withdrawal, whichever is earlier, the order explains.
"Once a lifetime withdrawal is made, the withdrawal rate and the benefit base are locked in, and the customer receives the higher withdrawal rate (around 8%) only if the underlying contract value exceeds $0. Once the contract value is depleted, the withdrawal rate is reduced to 3% or 3.15%," the order continues. "There are various factors that can impact a contract value's depletion rate and the length of time before the contract reaches $0, including the length of time that the income benefit base receives annual step-ups, unanticipated excess withdrawals, subaccount performance, and fees and expenses."
Maximum guaranteed withdrawal benefit riders are thus generally intended to maximize a customer's withdrawals in the earlier years of retirement and assume the customer has other sources of income to fund later retirement years, FINRA explains.
"Each customer intended to rely on income from these variable annuities for their retirements, most within or around a year of making the exchange," the order states, and most of them had already started taking income from their existing annuities.
"Capello thus did not have a reasonable basis to believe that the customers would benefit from the new rider's step-up feature," according to FINRA, and Cupello also "failed to reasonably consider the risk and impact of a reduction in the withdrawal rate when the contract value reached zero."
"Rather, Cupello assumed that the customers would not outlive their contract balances without reasonably considering various factors that could affect that assumption, including market performance, unanticipated needs and life expectancy," FINRA said.
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