Annuity Suitability Guide

Transcription

1 Annuity Suitability Guide Factors to consider when selling an annuity VARIABLE ANNUITIES: ARE NOT A DEPOSIT OF ANY BANK OR BANK AFFILIATE ARE NOT FDIC INSURED ARE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY ARE NOT BANK GUARANTEED MAY LOSE VALUE not be reproduced or quoted to, or used with, members of the general public A (8/10)

2 Table of contents Page Instructions 3 Easy reference guide 4 What is suitability? 5 Your role 6 New business Step 1: Determine client s profile and investment goal 8-9 Step 2: Review annuity product features/issues Step 3: Review annuity tax issues Replacements What is an annuity replacement? 15 Why are replacements important? 15 Existing contract considerations: Factors to consider 18 Tax issues for annuity replacements 19 Replacement forms 20 not be reproduced or quoted to, or used with, members of the general public. 2

3 Instructions The purpose of this guide is to provide you with written suitability guidelines to help you determine when an annuity sale is appropriate. Refer to the Table of Contents above, which provides you with an overview of this Annuity Suitability Guide. The information in this suitability guide will help you provide full and fair disclosure to clients. It provides you with the basic information to help clients make the right decision when considering buying an annuity. It covers both New Business (i.e. non-replacements) and Replacements for fixed and variable annuities. Follow the three steps outlined below to identify (for the client), the key considerations for buying an annuity. Complete the process by documenting the reasons for your recommendation in your client file. Step 1 Determine client s profile and investment goal Step 2 Review annuity product features/issues Step 3 Review annuity tax issues The same 1,2,3 step process should be used for both New Business and Replacements. The factors to consider for replacements are in addition to those for New Business. These are shown below in the Easy Reference Guide. not be reproduced or quoted to, or used with, members of the general public. 3

4 This guide identifies certain factors to be considered when selling an annuity. For your convenience, issues relating to New Business are shown separate from Replacements. However, for replacement transactions, you should combine the factors for both New Business and Replacements. Below is an easy reference guide, which helps you to do this. Easy Reference Guide Steps New Business Page(s) Annuity Replacements Page(s) 1 Determine Client s Profile & Investment Goal FITS Factors 8 & 9 FITS Factors 8 & 9 2 Review Product Features/Issues New Annuity Product Features/Issues New Annuity Product Features/Issues Existing Contract Considerations 3 Review Annuity Tax Issues General Taxation Issues General Taxation Issues Tax Issues for Annuity Replacements Replacement Forms not be reproduced or quoted to, or used with, members of the general public. 4

5 What is suitability? Suitability is about matching. Match the financial needs of the client to the features of a product. The sale of an annuity is suitable when the client buys the right product for the right reasons, with full understanding of the balance that product carries between risk and return. Finding a suitable product for a client involves judgment. What is suitable for one client may not be suitable for another. It depends on a client s individual facts and circumstances. Consequently, it is important to gather client-specific data to determine suitability. Client s Financial Needs Product Features & Benefits = Suitable Sale Finding a suitable product to meet a client s financial goal creates a WIN-WIN-WIN situation. A WIN for the client, a WIN for you and a WIN for RiverSource Life! Clients are generally more inclined to buy financial products from sales people who explore the client s financial situation, explain the product features and make sure that the client understands why the product is appropriate for their financial goal. Taking the time to inform and educate the client reduces misunderstanding and potential complaints later down the road. Annuities are complex investment vehicles. Before your clients invest, be sure you discuss the annuity s features, benefits, risks and fees, and whether the annuity is appropriate for them based upon their financial situation and objectives. not be reproduced or quoted to, or used with, members of the general public. 5

6 Your role You play a very important role. You are responsible for providing the client with full and fair disclosure. Before the client buys an annuity, it is important to help him/her understand the following: > Product features and the implications of the proposed transaction; and > How the product meets the client s financial goal. The client is responsible for the ultimate investment decision. Typically, if clients understand both the product they purchase and how it helps them to meet their financial goal, they will be more satisfied and be more likely to continue to work with you in the future. Annuities Sold by Registered Representatives As a Registered Representative, both you and your Broker-Dealer are charged with the responsibility of verifying that the RiverSource annuities you sell to clients are suitable under the FINRA Conduct Rules. FINRA Rules 2310 and 2330 require you to have reasonable grounds for believing that the sales of such annuities are suitable for customers. At a minimum, you need to document the following information about the customer: > Financial Status; Income, Age, Financial Experience, Time Horizon, Existing Assets, Liquidity Needs, Liquid Net Worth, Risk Tolerance > Marginal Tax Rate; Tax Status > Investment Objectives; Source of Funding, Financial Objectives, Intended Use of the Annuity, and > Other information you used or considered in making your recommendation. You must obtain customer profile and suitability information prior to the sale of a RiverSource annuity. The information you obtain should be maintained in your client file, and be in accordance with applicable laws and regulations on record keeping. Documenting the suitability of each sale protects you, the client and the company against unnecessary errors and miscommunications. not be reproduced or quoted to, or used with, members of the general public. 6

7 New Business not be reproduced or quoted to, or used with, members of the general public. 7

8 Step 1: Determine client s profile and investment goal Factors to think about when considering an annuity. To ensure a good discussion with the client when an annuity is being considered, you should begin by examining the FITS factors. F Financial Profile I Investment or Financial Goal T Tolerance for Risk S Situational Profile Financial Profile: Gather specific financial information including: net worth, income and major anticipated expenses, tax situation, cash reserves and other holdings. Generally, an annuity is appropriate for someone with no immediate foreseeable need for liquidity from the annuity. Clients should have sufficient income and penalty-free assets to cover living expenses and emergencies throughout the withdrawal charge period and until they are 59½ (IRS 10% penalty for early withdrawals). Investment or Financial Goal: Generally, an annuity is suitable for clients with a long-term time horizon, such as retirement, or other long-term goal. withstand market fluctuations. Many variable annuities provide a wide range of investment choices, which may be used to help diversify risk. The underlying investments for variable annuity subaccounts are typically a diversified portfolio of securities. Additional diversification may be achieved through asset allocation between the different subaccounts or through the use of a model portfolio structure. Situational Profile: Other factors which may affect a client s financial situation include: > Current income and the stability of the source of that income > Level of investment sophistication and experience > Client s age, general health, long-term care needs, and existence of health insurance > Other investment advisors (e.g. family member, CPA, Attorney) > Dependents Generally, annuities are appropriate for someone with moderate investing experience. However, the most important factor is ensuring that the client understands what he or she is purchasing, rather than his or her level of investing experience. Tolerance for Risk: Clients who are unwilling to risk principal are generally more comfortable with a fixed rate product such as a fixed annuity. In contrast, a variable annuity is more suited for someone seeking capital appreciation, and who is both financially and psychologically able to not be reproduced or quoted to, or used with, members of the general public. 8

9 Additional Considerations for Mature Clients: Generally defined as someone age 65 and older Inflation Many new retirees can expect to live for an additional years. It is important to recognize that inflation may erode the purchasing power of a client s assets. A variable annuity provides the potential for capital appreciation, which may help offset the effects of inflation, but should only be considered if the client is both financially and psychologically able to withstand the risk of market fluctuations. Medical Emergencies/Long-Term Care (LTC) Medical expenses are often paid from savings. Ask about the client s general health history and if he/she has current health or LTC insurance. These are important factors when considering a client s need for liquidity. Client Competency This is often an extremely difficult issue to address. If you have doubts as to whether the client is competent to make his or her own financial decisions, do not complete the sale, even if you believe the product is suitable for the client s goal. Complaints from family members that his or her relative was not competent when buying the product are relatively common in the financial services industry. There are two simple steps you can take to better protect yourself if faced with this difficult situation. First, ask the client what other financial products he or she has purchased in the previous 6 to 12 months. Second, ask him or her if anyone else helped with those decisions (e.g. trusted family member or someone holding a Power of Attorney). This will give you an indication of whether the client routinely makes his or her own financial decisions. Keep notes of these responses! Involving Other Family Members With the client s consent, consider involving a spouse or adult child in the sales presentation. It is often wise to have these individuals involved in the decision to purchase an annuity to ensure it fits with the customer s overall financial picture. This is primarily because any recommendations often entail considerations that extend beyond the client s own lifetime. Involve Your Manager If you have any doubt about an elderly clients ability to fully understand the annuity product or it s features, talk to your manager. He/she can help guide you in how to best present the product and can offer a second opinion about your recommendation. not be reproduced or quoted to, or used with, members of the general public. 9

10 Step 2: Review annuity product features/issues 1. General Features: Fixed Annuities > Long-term Product > Safety of principal > Guarantee of principal* > Guaranteed minimum interest* > Withdrawal charges > Tax deferred interest > Life-income product > Not FDIC or SIPC insured * This guaranteed is based on the continued claims-paying ability of RiverSource Life Insurance Company or RiverSource Life Insurance Co. of New York. Variable Annuities: > Investment choices & potential capital appreciation > Long-term investment > Fluctuating principal > Withdrawal charges > Earnings not guaranteed > Purchase Payment Credits > Return of premium or enhanced death benefit (i.e. insurance product) > Living benefits: GMIB, GMWB, Accumulation Protector Benefit (APB) > Tax-deferred earnings > Life-income product > Not FDIC or SIPC insured > Expenses: Annual Contract Administrative Fee; Mortality & Expense Risk Fee; and Variable Account Administration Charge. 2. Specific Features: Fixed Annuities > Refer to RiverSource Product Profiles At a Glance & Sales Literature Variable Annuities: > Refer to RiverSource Product Profiles At a Glance & Sales Literature not be reproduced or quoted to, or used with, members of the general public. 10

11 Example: Lump Sum Purchase Mike, age 50, inherits $75,000. His existing investments include: CDs, a money market mutual fund and Treasury Bonds. He wants to save more for retirement and does not anticipate needing this money until he retires at age 62. Mike is risk averse and wants income in retirement to supplement his company pension plan. Recommendation: A Fixed Annuity Example: Regular Investment Sue is a successful sales person for XYZ Corp. She has already contributed to her company s 401K plan and an IRA. Sue plans to retire in 20 years, wants to use part of her monthly bonus to supplement her retirement savings and is seeking tax deferral. She does not anticipate needing this money until retirement. She already owns several equity investments and is bullish on the long-term prospects for the stock market. Having lived through several market downturns including the technology bubble of 2000 and the recession of , she is comfortable with market fluctuations. Recommendation: A Variable Annuity not be reproduced or quoted to, or used with, members of the general public. 11

12 Step 3: Review annuity tax issues This section identifies key tax issues for annuity purchases, excluding replacements (shown separately). It identifies Federal Income Tax issues only. State income tax or other Federal Tax issues are not included. RiverSource does not provide tax advice. Final determination of specific tax implications rests with the client s and their tax advisor. General Tax Issues RiverSource sells both non-qualified and qualified (i.e. IRA) annuities. The following matrix summarizes important Federal Income tax issues. Issues Non-qualified Annuity Regular IRA Annuity Roth IRA Annuity 1 Tax Deductible Premiums No Yes (subject to usual IRA Income and contribution limitations) No Unlimited Contributions Tax Deferred Earnings Yes (subject to Insurer limits) No, normal IRA limits apply. No, normal IRA limits apply. Yes Yes Yes, but ultimately tax free if taken in a qualified distribution IRS Penalty for early withdrawals Annuitized No, unless annuitized for less than life expectancy and owner under age 59½. Not Annuitized Yes, (10% on earnings withdrawn before age 59½) unless substantially equal periodic payments or other specific exceptions apply. Annuitized No, unless annuitized for less than life expectancy and owner under age 59 ½. Not Annuitized Yes, (10% on amount withdrawn before age 59 ½ ) unless substantially equal periodic payments or other specific exceptions apply. Guidelines similar to the Regular IRA guidelines apply. Taxation of Withdrawals Earnings Taxed at ordinary income tax rates. Earnings are withdrawn before premiums invested, unless annuitized. Taxed at ordinary income tax rates and basis (if any) is pro-rated to each withdrawal. All principal is deemed distributed before earnings. If earnings do not qualify as non-taxable, they are subject to ordinary income tax rates. 1 Refer to RiverSource s Roth IRA Tool Kit for specific details. not be reproduced or quoted to, or used with, members of the general public. 12

13 Tax-Deferred Growth The contract holder will not pay current income taxes on interest or any earnings in an annuity contract, so long as it accumulates inside the contract. The money normally used to pay taxes continues to earn interest and potentially more earnings. The funds invested keep working for the client until withdrawn. Managing Income Tax Liability The client may decide when to withdraw money from the annuity in order to manage their potential income tax liability (subject to the IRS s Required Minimum Distribution rules for IRAs, and the required distribution at death rules for non-qualified annuities). Tax-Deferred Retirement Plans Most annuities have a tax-deferred feature, as well as many retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax deferred, your annuity will not provide any necessary or additional tax-deferral for that retirement plan. However, annuities do have features other than tax-deferral that may help your clients reach their retirement goals. Clients should consult with their tax advisor prior to making a purchase for an explanation of the tax implications. not be reproduced or quoted to, or used with, members of the general public. 13

14 Annuity Replacements not be reproduced or quoted to, or used with, members of the general public. 14

15 Replacements It may not be advantageous for your clients to purchase an annuity as a replacement for, or in addition to, an existing contract. This section will help you understand what you and your clients need to know about replacement transactions. What is an Annuity Replacement? An annuity replacement is the purchase of an annuity when an existing annuity contract is surrendered, partially surrendered or assigned to the replacing company. An internal replacement occurs when a client surrenders one RiverSource annuity to purchase another RiverSource annuity. This also includes replacements to or from another insurance company owned by Ameriprise Financial. An external replacement, on the other hand, involves replacing an annuity contract issued by another company, with a RiverSource annuity. If an annuity is partially surrendered (i.e., a client surrenders a portion of his or her annuity, investing the proceeds in another annuity), this transaction is also considered a replacement. Why are replacements important? First, replacements represent both an opportunity and a risk for you and the client. Potentially, there is an opportunity to better position clients to meet their financial goals. It is important that clients understand both the features of the new annuity and the impact of a replacement (e.g. a new withdrawal charge schedule, new features, costs or fees, etc.). This is where the risk arises. To protect both the client and you, it is important to verify the clients understanding of these factors, and to document that fact in your client file. Using a replacement form provides solid documentation, and will reduce the potential for misunderstanding and complaints. Second, providing full and fair disclosure to clients is the right thing to do. It provides them with the information they need to make an informed investment decision. Keeping them well informed and knowledgeable about their investment decisions will create a strong bond between you and the client. Generally, it also improves persistency and may result in future business. Third, both federal and state regulators are looking at replacements with increased scrutiny. State Insurance Departments and the Securities and Exchange Commission have made it clear that their audits will focus on all issues surrounding replacements. Their concerns include: potential inappropriate replacement activity, suitability and the number of 1035 exchanges at the firm and branch office level. You may be required to demonstrate that any replacement was suitable. Regulators place a great deal of importance on documentation created at the time of the sale. Good documentation and sound sales practices are important assets in protecting you and your livelihood. not be reproduced or quoted to, or used with, members of the general public. 15

16 Existing contract considerations The replacement of one annuity contract with another will almost certainly result in a change in annuity features. Whether the client is considering a fixed to fixed, fixed to variable, or some other type of replacement, there are many factors to consider in determining if that transaction is appropriate. The following must be fully understood by the client prior to proceeding with replacing an annuity. Any replacement decision is generally a question of weighing the tradeoff between the positive features and benefits of the new contract and any negatives that must be overcome, such as a new surrender period (reduction in client liquidity), increased fees or contract charges, and any existing benefits or guarantees (product features or guaranteed values) that are given up in replacing the existing contract. While the new contract may provide many enhanced features and benefits, the positives should outweigh any negatives in replacing the existing contract, both in the short and long term. It is important to discuss these factors in clear and specific terms the client can understand. A good test of this understanding is asking the client to explain, in their own words, why the replacement makes sense. Making certain they can really articulate what they are giving up in the existing contract not only helps solidify the clients understanding, but will help solidify the rationale for replacing the existing contract. A replacement that is truly suitable for the client should meet this standard. Documentation of this discussion and articulation of this understanding by the client will help protect the client and advisor making the recommendation. Investment Options The investment options present in a new annuity may be substantially different from those in the one being replaced. If one of the motivating factors for a replacement is better investment performance, performance data from multiple time horizons (1, 3, 5 and 10 years) should be evaluated. The increased potential for performance through a wider or different selection of investment options should be discussed with the client in a balanced fashion. Surrender Charges Clients should fully understand any surrender or withdrawal charges that may be assessed when replacing their existing contracts. The new contract may also have a new surrender charge schedule of which the client must be aware. Clients should understand that, even with potential Purchase Payment Credits that may be seen as offsetting any incurred surrender charges, over the long term, the costs for these credits may outweigh the credit received. Living Benefits Living Benefits have changed dramatically in variable annuities in the last ten years. While living benefits provide potentially powerful protection for contract owners, it is important to carefully consider all facets of the benefit when determining suitability. When considering a living benefit as part of an annuity replacement factors that should be considered and discussed with the client are the following: - How does the client benefit from the living benefit, and if one already exists, how does the new benefit differ/provide increased value? Is the benefit appropriate for the age and time horizon? - Does the existing contract have a living benefit base amount (sometimes referred to as a high water mark) that would be lost in the replacement, even if the new contract provides a different living benefit? As discussed before, does the positive of the new benefit outweigh the downside of anything the client may be giving up in the existing contract? not be reproduced or quoted to, or used with, members of the general public. 16

17 Existing contract considerations (continued) - Make sure the client understands the rules and structure of the new benefit and, if applicable, how they differ from existing benefits. - Provide the client with a clear presentation of the fees for the living benefit and how they are calculated/assessed. If applicable, a clear comparison of the fees associated with the new living benefit versus the existing contract is ideal. Death Benefits Death benefits have also changed dramatically. While many newer contracts provide beneficiaries with an increased level of asset protection and estate planning flexibility, certain factors relating to death benefits in the replacement should be considered: - How are the client s beneficiaries affected by changes in the death benefit? Is the benefit appropriate for the clients age and time horizon? If the replacement involves a senior client, it may be to have the potential beneficiary(s) involved in the decision. - Does the existing contract have a death benefit base that would be lost in the replacement, even if the new contract provides a different death benefit? - Make sure the client understands the rules and structure of the new benefit and if applicable how they differ from existing benefits. Fees and Contract Charges up-front costs, on-going fees such as Mortality and Expense charges and Investment Fees, and any line item or annual charges for items such as living benefit riders. The financial advisor that makes certain their client understands both how they are paid and what the new contract costs on an on-going basis builds confidence that the replacement is a win-win-win for all parties involved. Clients are willing to pay for value they understand, and for product solutions that help move their financial plan forward. Annuity Features Generally, annuities are appropriate when an agent can demonstrate they are well suited to meeting the customer s long-term financial goals. Before your clients invest, be sure to discuss all of the annuity s features, benefits, risks and fees and discuss whether an annuity is appropriate based upon the client s financial situation and investment objectives. Annuity products are not federally insured and should not be presented as such. Needs-Based Selling A fixed to variable annuity replacement may be appropriate when the client has an objective of long-term capital appreciation. There may also be other product features available in a variable annuity that a fixed annuity does not provide that will better help a customer to achieve his or here financial goals A simple language comparison of the fees and charges of the existing versus the new contract goes a long way toward ensuring client understanding and satisfaction. As mentioned previously, a good test is asking the client to explain the way they pay for their contract, both not be reproduced or quoted to, or used with, members of the general public. 17

18 Factors to consider for annuity replacements For clients to make an informed decision, it is important for them to consider the changes in insurance company strength and stability and in product benefits and features resulting from a proposed replacement. The table below identifies some general product features applicable to annuities. Annuity Type Fixed only Variable only Fixed & Variable Insurance Company Rating Investment Portfolio (e.g. Junk bonds) Broad investment options Purchase Payment Credits and other Bonuses Liquidity: > Penalty free withdrawal feature > Withdrawal charges: Percentage and period on new contract Amount payable on existing contract > Nursing Home or other Waivers Issues Interest Rate: > Current Rate > Interest Renewal Rate Period > Minimum Guaranteed Rate > Bonus Rate > Bailout Clause Fees and charges Death Benefit Options Living Benefit Options Add-on Premiums allowed General Contract Issues: > Maximum Deferral Period > Annuitization options > Loans [403 (b) only] Guaranteed product features not be reproduced or quoted to, or used with, members of the general public. 18

19 Tax issues for annuity replacements Non-Qualified Contracts Under tax law, the replacement of one non-qualified annuity for another is covered by IRC 1035, as long as it is done by transferring values directly between insurance companies. Generally, the new annuity contract picks up current tax law treatment applicable to newly issued contracts. The tax benefits of older contracts (based upon their date of issue and the tax laws applicable at that time) may be lost once a replacement is completed (see below). Tax-Deferred Annuity Contracts (e.g. IRAs) Replacing an older tax-qualified contract with a new tax-qualified contract generally has no impact on the taxability of the contract s value, provided the replacement complies with the rollover, direct rollover, or plan-to-plan direct transfer rules applicable to the plan. Loss of Tax Benefit on Older Annuities (Non-qualified only) > No tax benefits are lost if the original annuity was issued after October 21, > Older Non-qualified annuities (i.e. issued prior to October 22, 1988) have various more favorable Federal Income Tax treatment (based on their date of issue) than annuities issued today. These tax benefits are likely to be lost if the client replaces an older annuity with a new one. Some of the tax benefits that could be lost (depending on issue date) include, but are not limited to, the following: Step-up in basis at death of owner (applies only to certain variable annuity contracts). IRS 10% penalty-free withdrawal of earnings, if owner is age under 59½. Not subject to required distribution at death rule. Continued tax deferral of earnings if annuity is owned by nonnatural person. Income-tax-free transfer by gift of the annuity contract. Serial Annuity rule does not apply for multiple annuities purchased in same calendar year from the same insurer. The phase-out of these tax benefits occurred at different dates, on or before October 21, It is important for you to: a) Make the client aware of these issues. b) Inform clients that they are responsible for consulting their tax advisor on individual tax consequences from the proposed replacement before proceeding with the replacement. not be reproduced or quoted to, or used with, members of the general public. 19

20 Use appropriate replacement forms Arriving at a decision to replace the annuity The decision to replace an annuity will not always be clear-cut. As you have seen from reviewing all the above information, there are many factors to consider. The final decision must be the client s. Your job is to identify the factors/issues the client needs to consider in order to make a prudent decision. The client should fully understand the effect of each investment choice he or she makes. Replacement forms The appropriate replacement form (any state-mandated form, your employer s required form if approved by RiverSource, or any other carrier required form(s)) must be completed for any annuity replacement, whether you are replacing another company s annuity contract (external replacement), or another RiverSource contract (internal replacement). not be reproduced or quoted to, or used with, members of the general public. 20

21 RiverSource Life Insurance Company, 9549 Ameriprise Financial Center, Minneapolis, MN RiverSource Life Insurance Co. of New York, 20 Madison Avenue Extension, P.O. Box 5144, Albany, NY riversource.com/annuities RiverSource Distributors, Inc. (Distributor), Member FINRA. Insurance and annuity products are issued by RiverSource Life Insurance Company and in New York, by RiverSource Life Insurance Co. of New York, Albany, New York. Only RiverSource Life Insurance Co. of New York is authorized to sell insurance and annuities in New York. not be reproduced or quoted to, or used with, members of the general public RiverSource Life Insurance Company. All rights reserved A (8/10)