CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. ANONYMOUS CASE HISTORIES NUMBER 27406

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1 CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. ANONYMOUS CASE HISTORIES NUMBER This is a summary of a decision issued following the June 2013 hearings of the Disciplinary and Ethics Commission ( Commission ) of Certified Financial Planner Board of Standards, Inc. ( CFP Board ). The conduct at issue in this case occurred after January 1, The Rules in effect at that time under the Rules of Conduct were Rules 1.1 through 6.5. I. Issues Presented Whether a CFP professional ( Respondent ) violated CFP Board s Standards of Professional Conduct when he: 1) relied on a non-guaranteed 12% gross rate of return in a Variable Universal Life ( VUL ) Insurance policy illustration to determine how long the product would remain in force; 2) recommended that his client purchase a VUL with a limited no lapse period when the client s goal was life insurance paid up for life; and 3) told a client that a VUL would almost triple her money. II. Findings of Fact Relevant to the Commission s Decision On October 15, 2009, Respondent met with LE, a 77-year-old widow who had questions regarding an existing approximately $27,000 insurance policy. According to Respondent s meeting notes, LE wanted a life insurance policy that would last until she turned 100, if possible. An account statement from October 2009, indicated that Respondent managed approximately $200,000 of LE s assets. The assets were in IRA s and trusts and allocated in equities including Putnam Emerging Equities, American Funds ( AF ) New Perspective Fund, and AF New World Fund. At the bottom of the statement, Respondent indicated that LE had assets at other companies. Respondent did not indicate the value or investment type of LE s other assets. Respondent recommended that LE purchase a VUL policy from WRL. In November 2009, LE completed a VUL New Account Application. LE indicated that she had both a net worth excluding her primary residence and investable/liquid assets between approximately $100,001 and $500,000. LE s stated objectives were capital appreciation and speculation with a moderate risk tolerance and a long-term time horizon. The application also indicated that 100% of LE s assets were in mutual funds. In November 2009, LE also completed a WRL Individual Life Insurance Application. LE indicated that she had an approximately $450,000 net worth and a $40,000 annual gross income. The application indicated that LE was going to fund the new policy through a 1035 exchange of the approximately $27,000 in her existing insurance policy and the addition of $9,000. In March 2010, WRL issued the VUL policy to LE with an approximately $28,000 initial premium and a planned additional premium of $9,000. In March 2010, LE sent a check to WRL to add approximately $5,000 to the VUL. Respondent presented LE with an illustration of the VUL dated March The illustration used a hypothetical gross rate of return of 12.00% and indicated that an initial premium of approximately $33,000 and a premium of $3,500 in year two would fund that policy through LE s 100 th birthday. The illustration also stated that, at a 0.00% gross rate of return and guaranteed charges, the policy would lapse in year seven. The VUL annual statement indicated that the no lapse date was March 2015, five years after LE purchased the policy

2 In May 2011, LE filed a complaint with WRL. In the letter she stated that she received a premium notice for $9,000 while she believed she had an insurance policy paid up for her lifetime. LE stated that Respondent misled her into believing that she would not have to pay future premiums for lifetime coverage. In May 2011, Respondent sent a letter to LE in response to her complaint. Respondent attached a copy of the illustration he previously provided to her. Respondent told LE that the premium notice could be ignored and that to retain the policy Respondent and LE would have to take immediate action to counteract her complaint letter. In support of the policy, Respondent stated: There isn t anything that you could invest this amount of money in and almost triple the value. In June 2011, WRL sent a letter to LE in which it denied LE s request to cancel the policy and refund her initial premiums. In an August 2011 letter to the State Insurance Division, Respondent stated that the WRL VUL looked like it would last LE until age 100. In September 2011, the State Insurance Division sent a letter to WRL regarding LE s complaint. The State Insurance Division stated that while LE requested a single pay policy, Respondent recommended a VUL, which is never paid up. The State Insurance Division concluded that Respondent did not provide information that would allow the client to understand the product being offered. Additionally, the State Insurance Division found that Respondent s statement that LE could triple her money was not factual, misleading, and a misrepresentation as supported by the Code of State. The State Insurance Division questioned the suitability of selling a 78-year-old client a variable product. Finally, the State Insurance Division stated its belief that WRL should void the VUL and refund LE s premiums. In September 2011, WRL sent a letter to LE and the State Insurance Division informing them of WRL s decision to cancel the VUL and refund LE s premium in the amount of approximately $33,000. In November 2011, Respondent sent a letter to his broker-dealer explaining the complaint. Respondent stated: The illustration indicated that she could probably put approximately $36,000 of premium into this policy and end up with an ultimate Death Value of $100,000. This is just about triple the amount of premium she would have submitted to this policy. It is shown clearly in the illustration. In October 2012, Respondent wrote an unaddressed letter where he stated that LE s objective was to provide the greatest benefit to her beneficiaries at her death. In his January 2013 response to CFP Board, Respondent stated that LE s objective was to put a single premium in a policy that would be in existence until she died. Respondent stated that he relied on the illustrations for guidance that the premium and 1035 exchange money would support the VUL without additional premiums. Financial Planning In determining whether a CFP professional is providing financial planning or material elements of financial planning, factors that may be considered include, but are not limited to: the client s understanding and intent in engaging the CFP professional, the degree to which multiple financial planning subject areas are involved, the comprehensiveness of the data gathering, and the depth and breadth of the recommendations. Respondent stated in his January 2013 letter to CFP Board that LE was a client of his for over 30 years. Respondent advised LE on her investment in mutual funds, health plans, and life insurance. Based on - 2 -

3 LE s age, the length of the relationship, and breadth of the relationship; LE had a reasonable belief that Respondent was providing her with comprehensive financial planning services. Respondent involved investment planning by managing LE s IRA and trust accounts. Respondent involved retirement planning by considering LE s retirement income needs. Respondent involved estate planning by discussing with, and ultimately selling, LE a VUL for its death benefit. According to meeting notes, Respondent also helped LE with Medicare Part D. Therefore, Respondent involved multiple financial planning subject areas in his relationship with the client. Respondent had LE complete multiple applications and had data gathering from 30 years of working with LE. Therefore, Respondent engaged in comprehensive data gathering. Respondent s recommendations and management covered approximately half of the client s net worth. Respondent s recommendation of the VUL was designed to last the duration of the client s life. Therefore, Respondent s recommendations spanned the breadth and depth of the client s financial life. Based on these four factors, the client had a reasonable belief that Respondent was providing her with financial planning services. III. Commission s Analysis and Conclusions Regarding Rule Violations A. Rule 1.4 Violation A certificant shall at all times place the interest of the client ahead of his or her own and when the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board. The Commission determined that Respondent failed to place LE s interest ahead of his own and failed to act with the duty of care of a fiduciary when he: 1) relied on a 12.00% gross rate of return in a VUL illustration to determine how long the product would remain in force; 2) recommended that LE purchase a VUL with a limited no lapse period when LE s goal was life insurance paid up for life; and 3) told LE that a VUL would almost triple her money. simply engaged in the sale of an insurance product to have any merit or support in the record. The Commission relied on the insurance illustration demonstrating the hypothetical 12% return and the findings of the State Insurance Division to support its finding that Respondent failed to act in the best interest of LE. Thus, Respondent violated Rule 1.4 of the Rules of B. Rule 2.1 Violation A certificant shall not communicate, directly or indirectly, to clients or prospective clients any false or misleading information directly or indirectly related to the certificant s professional qualifications or services. A certificant shall not mislead any parties about the potential benefits of the certificant s service. a certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients. The Commission determined that Respondent communicated false and misleading information to LE when he told her that her investment could almost triple in value. The State Insurance Division considered Respondent s statement not factual, misleading, and a misrepresentation as supported the Code of State

4 The Commission determined that the 12% rate of return in the illustration was not realistic, which was Finally, Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. Thus, Respondent violated Rule 2.1 of the Rules of C. Rule 4.3 Violation A certificant shall comply with applicable regulatory requirements governing professional services provided to the client. The Commission determined that Respondent failed to comply with applicable regulatory requirements governing professional services provided to the client when he made a statement to LE that was not factual, misleading, and a misrepresentation as supported by the Code of State. The Commission determined that the findings by State Insurance Division were credible and supported by the record. Thus, Respondent violated Rule 4.3 of the Rules of D. Rule 4.4 Violation A certificant shall exercise reasonable and prudent professional judgment in providing professional services to clients. The Commission determined that Respondent failed to exercise reasonable and prudent professional judgment when he: 1) relied on a 12% gross rate of return in a VUL illustration to determine how long the product would remain in force; 2) recommended that LE purchase a VUL with a limited no lapse period when LE s goal was life insurance paid up for life; and 3) told LE that a VUL would almost triple her money. The Commission determined that the 12% rate of return in the illustration was not realistic, which was Finally, Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. Thus, Respondent violated Rule 4.4 of the Rules of E. Rule 4.5 Violation A certificant shall make and/or implement only recommendations that are suitable for the client. The Commission determined that Respondent failed to make and implement only suitable recommendations when he sold LE a VUL with a limited no lapse period when the client s goal was life insurance paid up for life. The Commission determined that the 12% rate of return in the illustration was not realistic, which was Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. Additionally, given LE s advanced age, the complexity of the VUL and the risk involved if the VUL failed to perform, Respondent should have ensured that LE had an understanding over and above providing an illustration. Respondent should have known whether LE could afford additional premiums, if necessary. Thus, Respondent violated Rule 4.5 of the Rules of F. Rule 6.5 Violation A certificant shall not engage in conduct which reflects adversely on his or her integrity or fitness as a certificant, upon the CFP marks, or upon the profession - 4 -

5 The Commission determined that Respondent engaged in conduct that reflects adversely on his integrity and fitness as a CFP professional, upon the CFP marks and the profession when he: 1) relied on a 12% gross rate of return in a VUL illustration to determine how long the product would remain in force; 2) recommended that his client purchase a VUL with a limited no lapse period when the client s goal was life insurance paid up for life; and 3) told a client that a VUL would almost triple her money. The Commission determined that the 12% rate of return in the illustration was not realistic, which was Finally, Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. Thus, Respondent violated Rule 6.5 of the Rules of G. Practice Standard Violation The financial planning practitioner shall analyze the information to gain an understanding of the client s financial situation and then evaluate to what extent the client s goals, needs and priorities can be met by the client s resources and current course of action. The Commission determined that Respondent failed to use client-specified, mutually-agreed-upon, and/or other reasonable assumptions to analyze and evaluate LE s situation and goals. Respondent used an unreasonable assumption when he relied on a VUL illustration that had a 12% gross rate of return. simply engaged in the sale of an insurance product to have any merit or support in the record. The 12% rate of return in the illustration was not realistic, which was supported by the State Insurance Division findings. Given LE s advanced age, Respondent should have illustrated a more conservative return and considered a smaller face value or a smaller whole life policy. Finally, Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. Thus, Respondent violated Practice Standard H. Practice Standard Violation The financial planning practitioner shall develop the recommendation(s) based on the selected alternative(s) and the current course of action in an effort to reasonably meet the client s goals, needs and priorities. The Commission determined that LE s goal was to purchase an insurance policy that would be effective until she turned 100 years old without premiums other than what she planned to pay in the first two years. Respondent failed to develop a recommendation that was reasonably designed to meet LE s goal when he recommended that LE purchase a VUL with a 5-year no lapse period. simply engaged in the sale of an insurance product to have any merit or support in the record. Respondent failed to present any documentation to support the alleged rationale for purchasing the VUL rather than maintaining the current policy. In addition, Respondent had no rationale to support that LE had a cash flow that would allow her to support any future policy premiums while maintain her current lifestyle if the VUL failed to increase at 12% per year. Thus, Respondent violated Practice Standard

6 I. Practice Standard Violation The financial planning practitioner shall communicate the recommendation(s) in a manner and to an extent reasonably necessary to assist the client in making an informed decision. The Commission determined that Respondent failed to communicate his recommendation to LE to an extent reasonably necessary to assist her in making an informed decision when he failed to communicate that the VUL was not guaranteed for LE s lifetime and may require additional premiums to remain in force. simply engaged in the sale of an insurance product to have any merit or support in the record. The 12% rate of return in the illustration was not realistic, which was supported by the State Insurance Division findings. Given LE s advanced age, Respondent should have illustrated a more conservative return and considered a smaller face value or a smaller whole life policy. Finally, Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. The record clearly reflected that LE did not understand the policy and her planning needs were not met by Respondent s recommendations. Thus, Respondent violated Practice Standard J. Practice Standard Violation The financial planning practitioner shall select appropriate products and services that are consistent with the client s goals, needs and priorities. The Commission determined that LE s goal was to purchase an insurance policy that would be effective until she turned 100 years old without premiums other than what she planned to pay in the first two years. Respondent failed to select an appropriate product when he recommended that LE purchase a VUL with a 5-year no lapse period. simply engaged in the sale of an insurance product to have any merit or support in the record. The 12% rate of return in the illustration was not realistic, which was supported by the State Insurance Division findings. Given LE s advanced age, Respondent should have illustrated a more conservative return and considered a smaller face value or a smaller whole life policy. Finally, Respondent s statement that LE would triple her money was unrealistic given the unrealistic rate of return that she would have had to earn to do so. Thus, Respondent violated Practice Standard IV. Discipline Imposed The Commission found grounds for discipline under Articles 3(a) and 3(b) of CFP Board s Disciplinary Rules and Procedures ( Disciplinary Rules ). Article 3(a) of the Disciplinary Rules provides grounds for discipline for any act or omission that violates the Rules of The Commission found grounds for discipline under Article 3(a) because Respondent violated Rules 1.4, 2.1, 4.3, 4.4, 4.5, and 6.5 of the Rules of Article 3(b) of the Disciplinary Rules provides for grounds for discipline for any act or omission that violates the Practice Standards. The Commission found grounds for discipline under Article 3(b) because Respondent violated Practice Standards 300-1, 400-2, 400-3, and Pursuant to Article 4.3 of the Disciplinary Rules, the Commission issued a four-year suspension. The Commission cited as a mitigating factor that Respondent did not have any prior disciplinary history

7 The Commission cited as an aggravating factor that: 1. Respondent had substantial experience as a CFP professional, which meant that he should have known that the VUL was not suitable for LE; 2. The client was of advanced age; 3. Respondent misrepresented the State Insurance Division findings by stating that the only thing he did wrong was represent to LE that she would have a $100,000 death benefit by paying 1/3 of that in a premium. The State Insurance Division order clearly reflected that there were substantial issues relating to suitability and misrepresentation; and 4. Respondent did not appear to understand the VUL policy, including the fact that the 12% rate of return was unrealistic and may have forced LE to pay additional premiums. Given Respondent s lack of understanding, the Commission was concerned that he will repeat this type of practice of causing financial harm to clients due to his unsuitable product recommendations While considering the degree of sanction to impose, the Commission consulted Anonymous Case Histories 15094, and The Commission also consulted Sanction Guidelines 5 (Breach of Fiduciary Duty), 20(d) (Misrepresentation to Clients or Prospective Clients) and 31 (Suitability). While each of these categories of conduct when considered individually resulted in sanction less than a four-year suspension, the Commission determined the aggravating factors listed above warranted a more severe sanction