spotlight on variable annuity l shares dionne c. fajardo & robert jamieson september 3, 2015
TRANSCRIPT
Spotlight on Variable Annuity L Shares
Dionne C. Fajardo & Robert Jamieson
September 3, 2015
Variable Annuity Share Classes
B Shares:Longer surrender period, typically lowest M&E fees.
X Shares:“Bonus Shares” or “Premium Enhanced,” longer surrender period, moderate M&E fees, up-front bonus investment credit.
L Shares: Shorter surrender period, higher M&E fees.
C Shares:No surrender period, higher M&E fees.
A Shares:Up-front sales charge, typically no surrender period.
O Shares:No up-front sales charge, surrender period similar to B-Shares, progressively declining M&E fees.
Characteristics of L Shares
• No up-front sales charge.• Shorter surrender period (generally 3-4 years).• Relatively higher mortality & expense (M&E)
and administration fees.• Typically higher trail commissions.• May have higher surrender charges.• Underlying fund expenses typically similar to
other share classes.
Benefits of L Shares
• Shorter surrender charge period – earlier access to funds without penalty.
• Flexibility to reposition investments if needs or goals change, or in response to unexpected life events.
• Typically lower fees than C-Shares.• Implementing financial planning strategies, e.g.
laddering. • Possible that some “lower-cost” L Share variable
annuities may be available?
Concerns Regarding L Shares• Assessing and
documenting suitability.• Relatively higher M&E
fees (vs. B-Shares).• Impact of fees on overall
returns.• Benefits over other share
classes?• Commissions influencing
recommendations?
“FINRA will particularly focus on the sale and marketing of "L share" annuities as these shares typically have shorter surrender periods, but higher costs.”
- FINRA 2015 Regulatory and Examination Priorities Letter
Concerns Regarding L Shares
• L Share vs. Riders.• Incompatibility with “Premium Enhancement”
vesting.• Lack of L Share-specific guidance.• Marketing and disclosure issues.• Registered representative education and
training.• L Share variable annuities in IRAs.
Relevant Rules, Notices, and Laws
FINRA Rules• 2111 – Suitability• 2330 – Members’ Responsibilities Regarding Deferred Variable
Annuities (formerly NASD Rule 2821)
FINRA Regulatory Notices• 07-53 – Approval of NASD Rule 2821.• 09-32 – Amendments to NASD Rule 2821.• 10-05 – Responsibilities Under FINRA Rule 2330.• 11-02 – Approval of FINRA Rule 2111.• 11-25 – Additional guidance regarding FINRA Rule 2111.• 12-25 – Additional guidance regarding FINRA Rule 2111.• 13-31 – Examination approaches, common findings, and effective
practices for complying with the suitability rule.
Relevant Rules, Notices, and Laws
• State Specific Laws and Rules– Securities laws– Insurance laws, e.g. Fla. Stat. § 627.4554 • Fla. Admin. Code 69B-162-011 • Forms DFS-H1-1980 and DFS-H1-1981
Regulatory Activity
• Periodic guidance and customer “alerts” regarding variable annuities generally
• Specific statements from SEC in 2014 regarding growing prevalence of L Shares
• FINRA Examination Priorities Letter For 2015
Focus of Targeted Exams
• Investor Awareness • Appropriate Investment• Marketing • Conflicts of Interest
FINRA Guidance
• Monitoring– Investors with long-term time horizons– Representatives’ sales activities– Inclusion of riders
• Cost/Benefit Disclosure to Investors• Written Supervisory Procedures• Training
FINRA Examination Priorities Letter (2015)
• Sale and Marketing • Compensation • Suitability • Communications• Adequacy of disclosures• Training• Procedures
Targeted Exam Requests
• List of VA sales data– Client information– Investment amount– Selling representatives– Commissions
• Percentage of VA sales related to L Shares• Percentage of VA revenue derived from L Shares• IRA rollovers to L Share annuities• Interviews with Representatives
Recommendations to Investors
• Suitable for the investor’s situation• Educate investor regarding share class options• Assure investor awareness of fee differentials• Explain rationale for recommendation
FINRA Unsuitable Scenarios
• Riders Developed for Long-term Investment:– Income Benefit– Withdrawal Benefit– Death Benefit Step-Up– Spousal Continuation
• Premium Enhancements– May exceed surrender charge
period
• Surrender Charges
How to Address FINRA’s Concerns
• Point of Sale Disclosure– Conflict of interest– Comparison of fees– Rationale
• Consider Limiting Contract Riders
• Update Procedures
Procedures
• Specifically address L Shares• Due diligence • Address impact of riders• Principal review and approval• Monitoring• Training
Industry Activity
• Some firms no longer allow representatives to sell L Share if contract includes riders.
• Documenting Suitability • Range of Disclosures
– No discussion of L Shares versus other share classes.– “Each supplemental benefit is usually associated with a fee that will reduce the
total value of your account, it is important that you understand these charges before you invest.”
– “The share class selected will determine the fees and surrender charges associated with your variable annuity, you should familiarize yourself with all share class options before deciding to invest.”
– “The variable annuity is available in multiple share classes, which each have difference fees and charges described in the prospectus. The financial professionals’ commissions may also differ depending upon the share class selected.”
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Any Questions?
Dionne C. Fajardo
Email: [email protected]
Robert Jamieson
Email: [email protected]