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Ask National Ethics Association…

Q: My compliance department talks a lot about suitability. How important is selling suitable products and what suggestions do you have for doing so?

A: Your compliance colleagues are right to be focused on suitability. It’s one of the biggest issues in the business right now and a big target for regulators. So here are a few ideas for complying with our industry’s suitability standards.

Tip #1. Focus on being a true professional.

True professionals make suitable recommendations to their clients. If they recommend products or services that serve other agendas, they are no longer true professionals. Professionalism implies they have listened to their clients’ desires, financial goals, and constraints. It also implies their recommendations fall within generally accepted standards of best practices. Finally, being a true professional implies they strive to meet client needs first, never their own needs.

Tip #2. Rediscover the joys of fact-finding.

True professionals don’t rush to close a sale in the first meeting. They patiently take the time to thoroughly assess the unique needs of their clients before making any product recommendations This may include following a measured process, spanning several interviews, of obtaining relevant client data.

They do this by asking pertinent questions that encourage prospects to speak freely about their personal and financial lives and to define their hopes and dreams for the future. They also see the importance of protecting themselves by getting family members involved in discussions, including potential heirs who may complain about current decisions that affect future inheritances.

They should also drill down deeply enough (within the scope of their professional license type) to uncover data about a prospect’s financial situation, tax status, investment objectives, and any other information a responsible professional needs in order to make a suitable product recommendation.

Tip #3. Become very familiar with your suitability forms.

Yes, they can be annoying to fill out. But if you use them with every client, and make sure to follow their guidelines, you will almost always be on safe ground. But don’t be hamstrung by black-and-white rules. When a specific matter falls into a gray area, try to resolve it in favor of the client.

Tip #4. Fully document your client meetings.

First, take very good notes during all client meetings, being careful to record any information that supports your product recommendation. Also, be sure to ask and then record answers to questions such as when clients will need access to their money and/or when any income distributions will be needed. Then document their clear understanding of guaranteed features, including living benefit options. What the client tells you will help you select a financial product with a suitable surrender period, among other features.

Tip #5. Maintain your client records for five years or longer if your state requires it.

This applies especially to information that supports your product recommendation.

Tip #6. Broaden your in depth knowledge of multiple financial products to properly meet the diverse needs of your clients.

In other words, avoid becoming a “one-trick product pony.” Instead, master a variety of product solutions that address a broad range of prospect needs.

Once you’ve selected your products, learn about all their moving parts, know how to explain them in layman’s terms, and avoid marketing materials blatantly designed to help the seller sell versus helping the buyer make an informed decision.

Tip #7. Help your clients understand how to get access to their money.

In the case of annuities, make sure clients know when and under what terms they can access their money. Be doubly sure they sign off on and fully understand all surrender period definitions and potential surrender charges.

Tip #8. When in doubt about whether a recommendation is suitable, just do the right thing.

The best defense against being charged with unsuitable sales practices is to simply treat your clients ethically. This will demonstrate that you have their best interests at heart and will minimize the odds that they will file a complaint or suit against you in the future.

Brought to you by National Ethics Association, sponsor of Preferred Risk E&O insurance for qualified financial professionals.