Is your financial adviser talking to you about buying a variable annuity, or what the industry often calls a VA? If so, they have to follow the requirements of the Financial Industry Regulatory Authority (Finra) when determining if a VA should be part of a financial solution.
And those requirements are:
- Finra Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities). That rule was established to enhance firms' compliance and supervisory systems, and provide more comprehensive and targeted protection to investors who purchase or exchange deferred variable annuities.
- Finra Rule 2111 (Suitability). According to Finra, that rule requires, in part, that a broker-dealer or associated person "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile." In general, a customer's investment profile would include the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance. The rule also explicitly covers recommended investment strategies involving securities, including recommendations to "hold" securities. The rule, moreover, identifies the three main suitability obligations: reasonable-basis, customer-specific, and quantitative suitability. Finally, the rule provides a modified institutional-customer exemption.
And if those two rules are not followed and a VA sale takes place, the adviser could face litigation or arbitration.
So, how can you tell if the adviser is following those requirements? We asked Jim Petersen, an adjunct professor of ethics at the American College of Financial Services to share his thoughts.
Here's what he had to say:
"This is a very good question that is somewhat difficult to answer.
"The simplest way is to ask the financial adviser (FA) as to what process his or her firm goes through prior to making a recommendation. The lack of a process, or if the FA cannot answer the question, is a red flag.
"Another question is, 'how often do you offer VAs to your clients?' Again, hesitation or the answer 'most of them' is a red flag for the client. I refer to those who tend to offer just one product to a client as one-trick ponies. Generally there is a lack of thought when it comes to the recommendations, narrow thinking on the part of the FA or the FA's firm.
"The client can read over the materials provided (and should) which also should communicate the selection process but generally these are confusing to most clients and the clients probably won't discover the answer.
"The best way to know for sure is to contact the compliance department of the firm and ask the question about compliance with these rules. Most people in the field may be familiar with aspects of the FINRA rules but usually won't know them by the numbers associated with the rules. On the other hand, the compliance departments are held accountable for enforcement of the rules. Should the compliance department not exist or not know how the firm complies with the rules, again, steer clear.
"A VA does have a purpose in some comprehensive financial plans but is not for everybody and the reason for the rules. Those FAs who have many tools at their fingertips and who offer VAs on a periodic basis are likely the best in complying with the rules although even that is not assured. Those FAs who only offer a limited number of products or who get caught in the rut of providing the same solution to everyone are likely not in compliance with the rules or headed that way."
Arbitration and Litigation
If, by chance, you feel that your FA didn't follow the rules above, you can pursue arbitration. That process begins with a party filing a Statement of Claim with FINRA.
As for litigation, try searching on the internet for resources such as U.S. News & World Report's list of Best Law Firms for Litigation - Banking and Finance
Also ask a lawyer you trust or know to recommend someone in the local area that has expertise in financial litigation.
Got questions about the new tax law, Social Security, retirement, investments, or money in general? Email Robert.Powell@TheStreet.com.