It may come as no surprise that we make assumptions about our clients' beliefs and goals without realizing we are doing so. One of the hardest things we must do is be objective and listen. It's easy to advise a client based on what we would do rather than what is in the best interest of the client -- to do so, however, can often lead to unsuitable product recommendations.
Here's an example: Let's assume an agent has a senior couple who comes to your office. After a short conversation, the agent discovers they want to invest their money in something that offers a great rate of return while also offering safety. They immediately present to the client a fixed index annuity with a 10 percent bonus and a 14-year surrender charge. They do not ask any further questions and feel they have an understanding of what the client needs.
It's not that simple, however -- following are five faulty assumptions the agent made along with the implications of each.
Mistake #1: Assumed the clients do not need the money
Even though the clients did ask for an investment with a good rate of return and a low risk threshold, thus describing a fixed index annuity, the agent still made a huge assumption: They didn't ask about liquidity. Does the client anticipate they'll need any or all their invested money at any point in the future? By selling them an annuity with a 14-year surrender period, the agent is basically tying up the couple's money. Always be sure the client understands that their investment is long term, and don't avoid or skim over the surrender charges.
Mistake #2: Assumed the clients are healthy
This is important because, again, if the client is not healthy, they may need emergency access to their money only to find it's not available. Plus, it's important to know how Medicaid treats annuities in your state. Not all annuities are Medicaid friendly.
Mistake #3: Assumed the clients will not need future income
Will they need to convert any or all of this money into a stream of income in the future? If yes, how much will they need and for how long? By not asking, you're assuming the client has no future need for their savings. Though annuities can be converted into lifetime income, many limit the settlement choices available depending on when annuitization takes place.
Mistake #4: Assumed a 'decent rate of return'
The agent never asked what the client views as a "great rate of return." Many fixed index annuities limit the client's return. Be sure the client knows what to reasonably expect over the life of the annuity. Plus, be sure the client has a working knowledge of how the annuity arrives at the interest each year. If the client does not understand how the annuity works, it may not be the right product.
Mistake #5: Assumed what the client means by "safety"
What does the client mean by "offers safety"? Do they mean guaranteed principal, do they mean some risk but not a lot, or do they mean moderate risk? We assume that all seniors want safety of principal. Though this is commonly true, it is not true of all seniors. It's important to do a risk assessment even when not offering a registered product.
Finally, remember you have a fiduciary responsibility to your clients. You must recommend based on what is in the client's best interest, not your own. If you are selling products based on commission or do not conduct any form of needs analysis or fact finding, make sure your errors and omissions insurance is current, because at some point, you're going to get sued. Agents are coming under increasing scrutiny, not only by regulators but clients, as well. If you always do what's best for the client, it will come back to you in the form of referrals. By taking the time to ask the right questions, you can avoid the possibility of recommending the wrong product to the client and stay out of trouble.
Barry Taylor can be reached at barry_s_taylor@yahoo.com.
