Variable Annuities a Focus in Protecting Elder Investors

Guest Post by Expert Geoff Winkler

Variable Annuities

Variable Annuities (“VAs”) are attractive to many investors that would traditionally invest in mutual funds because they offer three distinct features unavailable in mutual funds: tax-deferred treatment of earnings; a death benefit; and annuity payout options that can provide guaranteed income for the life of the investor. In fact, total annuity sales have averaged $226 billion annually over the last twelve years, and total net assets held in annuities climbed to over $2.6 trillion in 2014 (Insured Retirement Institute Fact Book 2015, 14th Edition).

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According to the SEC and FINRA’s National Senior Investor Initiative, VA sales are one of the top five revenue generators in 68% of all advisory firms.

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National Senior Investor Initiative - A Coordinated Series of Examinations, SEC Office of Compliance Inspections and Examinations and FINRA, April 15, 2015.

Protecting Older Investors

In 2012, the U.S. Census Bureau estimated 43.1 million people living in the U.S. are aged 65 or older, making up more than 13 percent of the population of the U.S. as a whole. This number is expected to almost double to 83.7 million by 2050, due in large part to the baby boomer generation (those born between 1946 and mid-1964), which began turning 65 in 2011, and will make up over 20 percent of the U.S. population.

The combination of this demographic shift, along with findings by the North American Securities Administrators Association that over one-third of its member’s enforcement actions since 2008 involve elder investors, has pushed many regulators to begin to address elder investors. (We discussed some of these initiatives as part of our two-part blog in May 2016 and September 2015.)

FINRA issued Rule 2330 which includes additional requirements specifically aimed at VA sales that must be met in addition to FINRA Rule 2111 (which covers Suitability).

Under FINRA Rule 2330(b)(1)(A), before recommending the purchase of a VA to a customer, firms and their advisors “must have a reasonable basis to believe” that:

-        the customers have been informed of beneficial and restrictive features of the VA;

-        the customer would benefit from the features of the VA; and

-        the particular VA, including any sub-accounts, is suitable.

Exchanging VAs is subject to these same rules, but also requires the advisor and firm to take into consideration, under FINRA Rule 2330(b)(1)(B), whether the customer would:

-        incur a surrender charge;

-        be subject to a new surrender period;

-        lose existing benefits (death, living or other contractual benefits, etc.);

-        be subject to increased fees or charges (mortality, expense, advisory, rider, enhancement, etc.).

-        the customer would benefit from product enhancements and improvements; and

-        the customer had another VA exchange in the last three years.

The Fiduciary Rule Twist

In addition to regulations from the SEC and FINRA, firms must also comply with the Department of Labor’s (“DOL”) Fiduciary Rule, which is going to alter the way firms do business in the VA market. Bates Group expert Greg Wimmer recently stated that the anticipated DOL Fiduciary Rule will likely result in a "decline in the number of variable annuities (VAs) sold by financial advisors (FAs).”

For more insight on the DOL’s new Fiduciary Rule and its impact on financial markets, please visit our Fiduciary Rule page.