When trying to explain pornography, Supreme Court Justice Potter Stewart said, "I shall not attempt to define it, but I know it when I see it." In today's ever-competitive, fast-moving market environment, we can easily apply that same logic to the subject of suitability.
While there are over-aggressive salespeople who make presentations that go too far on one end of the spectrum, compliance departments, with a true goal of protecting the company rather than the client, increasingly put unrealistic hurdles in front of salespeople. Surely we can find a middle ground that protects clients, producers, and companies and that is rooted in some semblance of common sense.
The definition of "suitable," at least according to Funk & Wagnall's Standard Desk Dictionary, is something that is appropriate to a particular occasion, condition, etc.
Doing what is appropriate in a particular occasion or condition is not only a good idea, but it also seems like it should be a fairly easy rule for salespeople, compliance departments, and government regulators to follow.
However, when dealing with insurance or investment products, personal opinion and bias tend to generate arguments that make cases for a particular occasion or condition. These in themselves can be very persuasive. Herein lies the problem, as these arguments have a tendency to allow rhetoric to shift our focus from the main issue, that being suitability. In other words, suitability should always be the driving force for occasion and condition, rather than an occasion or condition justifying suitability.
Here's an example: A retired couple went to a producer for advice on their post-retirement planning. As part of the overall plan, their producer suggested a multi-generational annuity (stretch IRA) for the husband's retirement money, which was a very good and sound suggestion. The couple put a legacy annuity in place as part of their overall plan. Unfortunately, a little over a year later, the gentlemen passed away. Shortly thereafter, the producer set up an appointment with the wife to review the estate and address any concerns she might have. During this meeting, the producer reviewed all of her positions and suggested that she visit her attorney to re-title assets and review her will and other legal documents. The surprising thing was that the producer also suggested that she take the death benefit from the stretch IRA and move it to another company to fund a new multi-generational annuity in her own IRA. When I questioned the producer about this suggestion, he explained that he did it because he was able to get her into a new annuity that had a shorter surrender period. Apparently it never dawned on him that when it comes to a legacy, surrender periods are, for the most part, moot. After all, they are designed to pay out as slowly as possible with their greatest effect occurring over longer periods of time. Also, since the multi-generational concept and suitability had not changed, the only realistic reason for the producer to make that transfer was to generate a new commission.
From my point of view, this is a very good example of using the occasion (the death of a spouse) and the condition (ability for a surviving spouse to transfer an IRA into their own name) to justify suitability.
When I asked him what his compliance department thought of this, he responded that it was OK with them. Which leaves us with one of two possibilities: Either they didn't know what the agent had done, or in spite of the lack of reason behind his suggestion, they found his actions suitable. This brings us to the other side of the equation. With all the regulation going on around us, who is regulating the compliance departments and government regulators?
This reminds me of ships in fog before radar was invented. They keep blowing their horns, but in reality, they have no idea what's in front of them. Although both compliance departments and government agencies seem to think that protecting the general public requires heavy regulations, they have so far failed to produce anything that resembles a logical approach. One such example is the NASD's continual efforts to have FIA regulation fall under their control when, in fact, they haven't been able to find a solution to the ever-increasing number of complaints from clients who have purchased variable annuities.
In far too many cases, the regulators' desire to cover themselves instead of coming up with logical, effective solutions to problems has ended up painting as villains the overwhelming majority of honest, hard-working professionals who happen to hold insurance and security licenses.
It appears that under the present system, we will always be hard pressed to find a definition for suitability that will be universally accepted by salespeople, compliance departments, and government regulators.
We might be well served by thinking about the following before we recommend any products in our everyday business:
1. Suitability should be appropriate to a particular occasion or condition.
2. There should never be a conflict between what is suitable and what is ethical.
3. Commission should never be a consideration when determining suitability.
Jonathan Neal is the senior partner at CCG-Capital Consulting Group, an Atlanta-based sales and marketing consulting company. He can be reached atjneal@ccgcap.com.
