Compliance challenges hit financial professionals

By Susan Rupe

Annuity sales are gaining momentum in the midst of economic and market uncertainties. Yet the industry is challenged by potential regulation and legislation that could change the sales and compliance landscape.

Advisors must be confident that their processes and procedures are keeping their practice and their clients protected, said two compliance experts during a recent webinar for the National Association for Fixed Annuities.

Maureen James and Roger Hayashi, principals at Summit Compliance, discussed regulatory trends and potential compliance pitfalls.

Advertising can trigger compliance risks

Enhanced regulatory focus on advertising means that advisors “accept a lot of risks when you advertise your products and services,” James said. “There’s risk in advertising because it’s written documentation, it’s visible to regulators, it’s an easy way to potentially let a regulator in your door.”

Three areas related to advertising “create some real risks for annuity producers,” she said.

Professional capacity disclosure, which James described as “holding out who you are, what you offer, what you don’t offer.”

James said advisors must understand what their license permits and prohibits. They must disclose whether they are insurance licensed, a broker-dealer representative or an investment advisor representative.

“Make sure people know who you are and what you do,” she said. “But I think the bigger issue we’re seeing regulators pick up on is how we hold ourselves out to the consumers. In your advertising, do you say you are insurance licensed only and not licensed to sell securities? Do you know what your state allows and doesn’t allow when you’re holding yourself out?”

One key issue compliance experts see in the industry is the use of the term “advisor,” James said. “It’s used pretty loosely in the industry. But if you’re not an investment advisor, it really has a specific meaning and there are responsibilities that are associated with that term.

“Some of the things that are often the starting point for an enforcement action from the state or an investigation are heavy use of term ‘advisor,’ ‘financial advisor,’ ‘planning,’ ‘financial planning,’ ‘retirement planning,’ talking about services being ‘wealth management services,’ or ‘comprehensive’ or holistic. Those are some trigger words that key a regulator into, ‘Hey! This person is offering investment advice.’”

Product representation. James described this as “How do you describe the products you’re selling and the features they have and how they work?”

One of the issues that arises around product representation, she said, is when a product is described and discussed but the actual product name (an annuity or an insurance product) is not specified.

“Another thing we see is annuities being promoted as a replacement for bonds or CDs. In many cases, they may be a good fit for the fixed income part of the portfolio. But we want to make sure we understand and appreciate the differences.”

Insurance products are not a program or a retirement plan, James said. “You want to make sure when you are explaining these products to consumers, you’re doing it the right way.”

Setting reasonable expectations. James described this as “setting expectations for consumers so they understand what they can expect and that we’re not over promising and under delivering.”

James advised avoiding words such as “gain,” “yield” and “market return.”

When it comes to product illustrations, James advised “showing the mechanics of how the product works, not how much you’re going to get.”

Documentation is crucial

The continuing movement away from the suitability standard toward a best interest or fiduciary standard means that proper documentation is more important than ever, Hayashi said.

“More documentation is being required to demonstrate you followed the regulations,” he said. “But more important than that, it’s to protect yourself and your practice.”

“You need to create documentation to prove you complied with the regulations, but having good documentation can save your business if you are faced with a lawsuit or a regulatory investigation or a customer complaint. The documentation you create will help create the evidence of what you did. So it’s important to understand how you’re going to document things and how you’re going to document things with each client.”

A client file should include all aspects of the solicitation, sale and servicing, Hayashi said. Documentation should include all information about the client as well as the client’s financial situation, insurance needs and financial objectives.

An advisor must document the analysis of the products that were considered for the client, why those products were considered and how they meet the client’s needs and objectives. In addition, the advisor must document the product that was selected for recommendation for the client and the analysis used to select the recommended product. The recommendation and the basis for that recommendation also should be documented.

“Compliance requirements are becoming more complicated now,” Hayashi said. “But a lot of them are simply what good producers have been doing for years: informing the client about what they offer, getting to know the client, determining the right product for the client, and explaining why that recommended product will benefit the client.

“The bottom line is, take credit for the work you did by documenting it.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.