Due to changes in the regulatory enviornment stemming from the Department of Labor, Regal has updated its Fixed Indexed Annuity Policy to reflect the need for pre-approval of all fixed indexed annuity business. Effective February 1st, 2018, Regulus/Regal will require that all fixed index annuity business be conducted through and approved by the broker dealer (if RR/Hybrid) and RIA (if IAR). The COMET system will continue to be the conduit for submitting FIA business for suitability review and approval.
Regal / Regulus has worked diligently to provide the compliance with and suitability within the scope of the DOL guidelines.
We have taken the stance that fixed indexed annuities (FIA’s) will NOT flow through our payout grid on the RIA or broker dealer. ALL annuities that are placed with an affiliated IMO, listed on Appendix A, are to be paid on “street level” commission as long as our policies/rules/guidelines listed below are adhered to. Regal and Regulus have agreements in place for supervisory and suitability guidelines with the individual IMO. This one of the reasons that we have selected the IMOs listed in Appendix A. Other criteria include but are not limited to due diligence, corporate culture, corporate vision and integrity. We have been careful to align our firm with industry leaders that have a full complement of products and services to serve your clients in attaining their goals.
We reserve the right to change this policy due to changes in industry guidelines, insurance company economics, corporate culture, and or the enforcement of rules and regulations within the industry.
This policy will not change your compensation level with the product sponsors but will instead allow for the streamlined workflow process to meet the DOL Rule and the use of the best interest contract exemption (BICE).
FIA’s Suitability Guidelines
The factors that need to be considered in determining suitability of FIA’s are much the same as any other product that you are considering for a client. Some considerations are:
1. Client’s Objective
2. Client’s Liquidity Needs
3. Client’s Age
4. Client’s Risk Tolerance
5. Client’s Investment Time Horizon & Holding
6. Client’s Best Interest
Despite the existence of the “index” element, whether it is S&P, Nasdaq100 or even Russell 2000, FIA’s should not be positioned as growth or “investment” vehicles. They are most suited to clients whose objective is preservation of capital. While FIA’s can act as an excellent income vehicle for the future, they are not good income vehicles for the near-term, especially for those under age 59 ½. index annuities’ may be deemed suitable for clients who show growth and income as their objective (or secondary objective) as long as there are true growth and/or growth and income elements in their portfolio.
The main disadvantage of FIA’s is their relative non-liquidity. IRS penalties for early withdrawals before age 59½ and long (Contingent Deferred Sales Charges) CDSC exposure periods are the reasons for this. The CDSC percent is also higher than what would be found in most other annuities, fixed or variable. Therefore, FIA’s should not be recommended to clients where early liquidity needs are anticipated. Examples of unsuitable index annuities’ sales would be to fund college savings where access will be needed during the CDSC period, even when the contract offers partial free withdrawals and especially if the withdrawal is needed prior to the owner turning age 59½ , or, if the funds are being accumulated for the purchase of a home. That being said, it is unreasonable to assume that a client’s entire investment portfolio need be 100% liquid and so FIA’s can be suitable for many clients with longer term goals.
When recommending FIA’s, age, as it relates to the penalty period for withdrawals and whether that exceeds the purchaser’s life expectancy, needs to be considered. Annuities are not inherently bad for seniors, even when the CDSC period runs beyond life expectancy, provided the senior:
1. has a sufficient source of liquid funds besides the annuity?
2. understands the CDSC provisions and,
3. the contract is one that pays the beneficiary 100% of the account value when the annuitant dies.
Providing these conditions are met and benefits to the client are realized, an index annuities sale can be an acceptable investment.
4. Risk Tolerance
FIA’s are most appropriate for clients with a “savings account” mentality. They are not, and should not be presented as an “investment that gives the potential of the stock market without the risk”. If there were an “ideal” client for the purchase of FIA’s it would be someone between the ages of 50 and 60, (young enough where liquidity is constrained by income tax considerations yet old enough for liquidity to not be affected by CDSC), looking to supplement their available funds at retirement and unwilling to take market risk.
However, there are many “non-ideal” clients for whom FIA’s may be suitable. People who are above the age of 60 but are not looking for near-term liquidity can take advantage of the benefits offered by index annuities’. In fact, some of the products have excellent liquidity for death and/or need for long term care, and these products can be suitable for a much older target market, especially if there are other assets that are sufficient to meet their liquid cash needs.
5. Investment Time Horizon & Holdings
Much of the issue regarding the suitability of FIA’s is driven by the high commissions and long CDSC’s associated with these products. In many cases, this is completely accurate. It is important to recognize, however, that some products with the long CDSC provide greater value to the client because of the way the company can invest when they know that the money will be with them for a longer period of time. If a product offers better benefit to the client in exchange for the longer CDSC, the product can be appropriate if the client is able to withstand the longer holding period. Remember that as with any other product, the case for suitability is more difficult to make when a large percentage of your client base is invested in one particular product. Thus, it is also important to understand the client’s overall portfolio composition.
6. Client’s Best Interest
The overriding factor in judging the suitability of an FIA’s is if it answers a client’s needs as well or better than other vehicles and/or will the purchase add to the diversification of a client’s portfolio. In other words, for what use is an FIA’s being recommended? Once some FIA’s are determined to meet the client’s needs, two other questions need to be answered:
1. Can a product with greater liquidity meet the client’s needs as well?
2. Is the client aware of the provisions of the policy, especially the CDSC and lack of short term liquidity?
Liquidating Securities to Purchase FIA’s
If a client is liquidating securities to purchase FIA, it must be also determined that the selling of securities is both suitable and in the “client’s best interest.”
FIA Carriers and Products Criteria
The general criteria for acceptance of carriers and products will be as outlined below.
Acceptable Carriers will:
1. Maintain a minimum rating of A- with AM Best and or equivalent ratings with S&P, Moody’s and Fitch. Exceptions can be discussed prior to advisor recommendation on an individual case ONLY.
2. Be approved to do business in 49 states and/or NY.
3. Meet other, non-specified requirements that are deemed acceptable by the Regal/Regulus product principal.
4. A special exception may be requested for carriers that do the meet these criteria. Any exceptions must be approved
by senior management of Regulus or Regal Investment Advisors.
Acceptable FIA’s will:
1. Have surrender charges (CDSC) that do not exceed 10%, unless the product includes a “vested” bonus that would
reduce the actual charge to below 10% of the client’s invested amount.
2. Have CDSC that terminates no longer than 10 years from purchase.
3. Will not be two-tiered (forced annuitization) have a forced annuitization as the sole distribution of clients funds.
4. Not offer different CDSC exposures based solely on commission. If so, the shortest CDSC exposure period will be
the required option.
5. Additional incentive compensation or soft dollar remuneration is prohibited.
Please note that these guidelines, processes and procedures will be adhered to in order to comply the policies and procedures of Regal RIA and Regulus. Termination and or sanctions will be instituted to protect client interests.