Q: Recently my manager gave me a warning about switching a client from one variable annuity to another. The client did incur a surrender charge, but the annuity I moved him into has higher returns with lower premiums. Even with the additional commission the client paid, he’ll still come out ahead in the long run. I thought this was a no-brainer. Why would my manager take issue with this?

A: While it’s all well and good to get a client a better return for less cost, the fact is that the commission you earned created a financial incentive for you to make that switch. This alone sends up a red flag to regulators who will look very closely at the transaction to see whether, in fact, it was in the client’s best interests.

Variable annuities can differ greatly from one to another, and it can be challenging sometimes to compare differences between variable annuities. A return versus cost analysis may not always tell the entire story.

LIMRA annuity sales chart

I’m not a mind reader, so it’s a little difficult for me to know for certain why your manager might take issue with the 1035 exchange. Although these are fairly standard, it’s possible that the phrase “in the long run” might have something to do with your manager’s concern.

Regulatory authorities could find that the time frame for the client to recoup the surrender charge and commission is unreasonably long and they could conclude that the client would have been better off staying with their original annuity.

There could be other reasons (such as tax issues, the diversification of available funds within the annuity, etc.) that could have made the original annuity more attractive and a better deal than the one you moved the client into.

I would suggest that you have a discussion with your manager to get a better insight into what, exactly, his concern was.

If you have a question for compliance expert Alan Foxman, please send it to: fpeditor@sourcemedia.com

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a senior consultant and vice president at NCS Regulatory Compliance, and a partner at the law firm of Dew Foxman & Haugh in Delray Beach, Florida.