Variable Annuities - Suitability Requirements
While variable annuities are useful financial planning tools, they can be abused if a needs analysis does not precede the recommendation to buy or sell variable annuities. Industry rules provide that the needs assessment conducted prior to the sale of annuity products meet the suitability requirements indicated in the NASD's Notice to Members 86-96 from December, 1986:
Notice to Members 86-96 (December 1986) requires that sales of variable annuity contracts be governed by suitability requirements, including the following:
- customer's need for liquidity
- customer's investment sophistication
- customer's ability to understand the allocation of costs
Care must be used with annuities to be certain that the desire to avoid current taxes does not interfere with wealth transmissions to the next generation. In a case that is presently pending in Court, a grandfather purchased exclusively fixed annuities, and named his children and grandchildren as annuitants. He achieved tax-free accumulation within the annuity policies. However, upon his death, income taxes that were deferred during the grandfather's lifetime became due, and the wealth that the grandfather had accumulated and intended to be passed to the grandchildren was dramatically diminished by income and estate taxes.
Financial planners must be registered with a broker-dealer if they sell variable annuities. The duty to supervise financial planners extends to the supervision of financial planners.In matter of Royal Alliance Associates, Inc., the SEC found that failure to document variable annuity and other transactions should have raised a "red flag" alerting those in authority to deficient supervisory practices. A branch manager must inspect and supervise the financial planner's variable annuity or other investment product recommendations. The duty of supervision requires that compliance personnel review the actions of their representatives, and that systems of internals controls be effective to prevent improper sales practices.