An investment adviser representative (IAR) is approached by a client who expresses interest in purchasing a variable annuity. The client is 80 years old, has significant liquid assets, and states their primary goal is to maintain access to their capital for potential medical expenses and to avoid probate. The IAR recommends a variable annuity with a 10-year surrender charge and complex riders for guaranteed income, emphasizing the annuity's tax-deferred growth potential. This recommendation is most likely a violation of:
- ASelling Away
- BMarket Manipulation
- CUnsuitable Recommendation
- DChurning
Show answer & explanationAnswer & explanation
Correct answer: C. Unsuitable Recommendation
Given the client's age (80), need for liquidity for medical expenses, and desire to avoid probate, a variable annuity with a 10-year surrender charge and complex income riders is highly unsuitable. The long surrender period restricts access to capital, and the tax-deferred growth benefits are diminished for someone with a short life expectancy. Avoiding probate can be achieved through other, less restrictive means.
Why the other options are wrong
- A. Selling away involves transactions outside the firm; this is a product offered by the firm.
- B. Market manipulation involves artificially influencing prices.
- D. Churning involves excessive trading, not typically applicable to a single annuity purchase.
Suitability in Annuity Sales
The ethical and regulatory requirement that variable annuity recommendations align with a client's age, financial situation, investment objectives, and particular needs, especially considering liquidity, surrender charges, and long-term horizons.
- Variable annuities are long-term investments.
- Surrender charges can significantly restrict liquidity.
- Tax-deferred growth benefits less for older clients with shorter time horizons.
- Complex riders may not be understood or needed by all clients.
Memory trick: Don't lock up grandma's cash for a decade.