A registered representative is approached by a client who wants to purchase a variable annuity. The client is 80 years old, has limited liquid assets, and expresses a primary need for immediate income. The representative recommends the variable annuity, emphasizing its growth potential. Which of the following is the most significant suitability concern?
- AThe potential for market volatility affecting the annuity's value.
- BThe representative's failure to explain the annuity's surrender charges.
- CThe client's age and need for immediate income versus the variable annuity's long-term nature.
- DLack of diversification in the client's portfolio.
Show answer & explanationAnswer & explanation
Correct answer: C. The client's age and need for immediate income versus the variable annuity's long-term nature.
Variable annuities are generally long-term investments not typically suitable for clients needing immediate income or those with limited liquidity, especially at an advanced age where the benefits of long-term growth may not be realized. The mismatch between the client's age/needs and the product's design is the most significant suitability concern.
Why the other options are wrong
- A. Market volatility is a characteristic of variable annuities, but the suitability concern is whether this characteristic aligns with the client's needs.
- B. Failure to explain surrender charges is a disclosure issue, but the fundamental suitability of the product itself is a more significant concern.
- D. While diversification is important, it's not the primary suitability concern for THIS product given the client's profile.
Variable Annuity Suitability (Elderly)
Variable annuities are generally unsuitable for elderly clients with limited liquid assets and a need for immediate income, due to their long-term nature, surrender charges, and investment risk.
- Designed for long-term growth and retirement planning.
- Often have surrender charges for early withdrawals.
- Investment performance is subject to market risk.
- Not ideal for immediate income needs or limited liquidity.
Memory trick: Annuities are for the long run; an elderly client with immediate needs should shun.