A registered representative (RR) is contacted by a client who expresses concern about a new investment recommendation. The client states, 'I don't understand how this variable annuity works, and I'm worried about the fees mentioned in the prospectus, which seem very high.' The RR previously provided the client with the prospectus. What is the RR's most appropriate next step?
- AReassure the client that the product is highly recommended by the firm and the fees are standard for the benefits offered.
- BOffer to meet with the client to explain the variable annuity's features, risks, and fees in clear, understandable language.
- CAdvise the client that if they are uncomfortable, they should consider a simpler, less complex investment product instead.
- DSuggest the client review the prospectus again, highlighting the sections on fees and product mechanics for their convenience.
Show answer & explanationAnswer & explanation
Correct answer: B. Offer to meet with the client to explain the variable annuity's features, risks, and fees in clear, understandable language.
RRs have an ethical and regulatory obligation to ensure clients understand the investments they recommend. Simply providing a prospectus is not enough; the RR must clarify and explain complex products and their associated costs until the client comprehends them.
Why the other options are wrong
- A. This avoids addressing the client's lack of understanding and promotes the product without clarification.
- C. This is premature; the first step is to ensure the client understands the proposed investment before suggesting alternatives due to lack of comprehension.
- D. While reviewing the prospectus is good, simply telling the client to reread it doesn't fulfill the RR's duty to *explain* and ensure comprehension.
Client Understanding (Disclosure)
Registered representatives must ensure that clients fully understand the features, risks, and costs of recommended investments. Providing disclosure documents is necessary but not sufficient; RRs must be prepared to explain complex information in an understandable manner.
- Disclosure alone is not comprehension.
- RR must explain complex products.
- Ensure client understands risks and fees.
- Part of suitability and ethical conduct.
Memory trick: Don't Just Disclose, Explain and Show, So Clients Truly Know.