1035 exchange trades

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Aug 13, 2012 4:52 pm


Would you take this trade?  will this pass the mustard with FINRA?



Client has a year left on his annuity to come out of surrender, and he has an m&e of 1.55% per year.  The surrender charge is less than the m&e charge (don't know how this is possible, but that's what the carrier says).  Client is a senior and not articulate.  He is timid with the markets, but he wants to invest to make money.  In 2008 he pulled a sizable amount of cash from his bank, because he was afraid of the banks folding.  He wants to get back in.  He doesn't need income, so a withdrawal or income rider is not suitable for the current contract.  The choice is either to put him into a fixed account within his current contract which will earn 3% or to move him to another product like an index annuity which has buffers and caps to control losses yet give him a modest but better return.  25% of his assets were placed on a fixed fund within his va.  Current contract I am considering consists of 45% of his liquid assets.  



Will FINRA question the surrender charge even though the M&E charge is higher?  new contract has no M&E, only buffers and caps.


Aug 13, 2012 11:20 pm

1st: Read up on Glenn Neasham and re-read your post: "Client is a senior and not articulate."

2nd: Put the costs in terms of dollars and sense. The remaining surrender charge is probably 1%. Write up a switch letter and outline how the client will be better off - even with paying the surrender charges vs M&E charges. It needs to be very clear so that your firm's compliance department can show that proper due diligence was done before the 1035 exchange is done.

3rd - have you talked with other family members about his investments? Because you mentioned that the client is a senior, you need to be very careful with recommending annuities, particularly when paying a surrender charge. Involving family members is one way to lower the possibility of a complaint.

4th - Be sure you have completed a full fact-finder and know about all his assets, and leaving plenty of cash for liquidity. Even so, this does not rule out the Glenn Neasham situation - because he did that too.