Fines imposed on the financial services industry more than tripled last year to $18.3 million from $5.6 million in 2015, according to FINRA Suitability Sanctions Statistics.
The increase in penalty fees has some advisors blaming the Department of Labor’s looming fiduciary standard, although two cases were responsible for a large percentage of the total.
“Suitability is becoming an issue now because the Department of Labor is rumored to be implementing severe restrictions on people’s retirement accounts,” said John C. Lindsey, certified financial planner with Lindsey and Lindsey Wealth Management in Westlake Village, California. “Some advisors in the lower echelon may have been putting people into investments that are inappropriate for their age group.”
It’s not uncommon for commission-based financial advisors to somehow suggest that their older 401(k) plan participants move their savings into an IRA account shortly before they are scheduled to retire.
Read the complete article here Fines Triple As FINRA Focuses On Suitability.
Here are the journalist's questions and my complete responses on four important points regarding suitability:
1. Why is suitability becoming an issue now?
Suitability is becoming an issue now because the Department of Labor is rumored to be putting in severe restrictions on people’s retirement accounts. Some advisors, in the lower echelon, may have been putting people into investments that are inappropriate for their age group. The suitability is becoming more of an issue with the aging Baby Boomer population. More and more people are becoming of an age where it’s not appropriate for them to have certain investments. That’s the reason that suitability is becoming an issue now.
2. What does the push for a “higher” fiduciary standard have to do with it?
The push for higher fiduciary standard is a big influence on the suitability issue. There has been a big push in the last four to five years for the fiduciary standard. This particular issue with suitability is becoming more prevalent because of products offered to aging Baby Boomers. And it’s tied closely with a higher fiduciary standard of doing what is in a client’s best interest.
3. What are the biggest offenses/violations by financial advisors related to suitability?
In the last 10-12 years, as the boomer population has been aging, more people are being exposed to alternative investments and a heavy concentration of annuities. In most cases, the biggest offense to a balanced portfolio has been an over concentration in a specific type of investment. For example, there should be no more than 50% of a person’s retirement account in an annuity, in most cases, unless the client absolutely insists on it. Another example would be too many "aggressive" equities. The older a client is, the less time they have to wait for an investment to come back from a downturn.
4. What's the significance or importance?
Another thing that other alternative investments include are Real Estate Investment Trusts (REITs) and business development corporations which are illiquid. Some brokers have put way too much emphasis on those investments and have over concentrated clients in it. That makes it very difficult to get funds when a senior, or any client, has an emergency, since those are illiquid investments. The significance and importance of this issue is particularly important as we get into this aging population. This age group was called “the pig in the python" as one looks at the generations going through the population life cycle. As they get older and move through pipeline, it’s becoming more important to make sure the investments selected for them are suitable. Having a high level of illiquid investments in a portfolio is inappropriate.
Please contact me if you'd like to dialog with me on this topic or any other matter in your advisory practice. I'm especially interested in speaking with advisors who are interested in going independent. I look forward to hearing from you, if you'd like a thought partner.