Documentation & Doughnuts

by Paul McGillivray, Senior Vice President, Advanced Marketing - Creative Marketing    

"I bought a doughnut and they gave me a receipt for the doughnut… I don’t need a receipt for the doughnut. I give you money and you give me the doughnut, end of transaction. We don’t need to bring ink and paper into this. I can’t imagine a scenario that I would have to prove that I bought a doughnut. To some skeptical friend, ‘Don’t even act like I didn’t get that doughnut, I’ve got the documentation right here… It’s in my file at home. …Under ‘D’." - Mitch Hedberg (American Comedian, 1968-2005)

While the idea of documenting the purchase of a doughnut seems silly, we see it happening everyday. Is there anything that goes undocumented anymore? When it comes to annuity and life insurance sales, the short answer will soon be "no" for a number of different reasons.

With the defeat of SEC 151 via the Harkin Amendment, the Fixed Indexed Annuity industry has been able to breathe a collective sigh of relief. Fixed Indexed Annuities are firmly defined as insurance products, and rightfully so. Our victory over excessive Federal regulation, however, is not without consequence. In order for Fixed Indexed Annuities to qualify for the Harkin "safe harbor" and remain state regulated, the carrier must supervise annuity suitability according to the most recent National Association of Insurance Commissioners suitability regulation (NAIC 2010 Suitability Model 275).

New Suitability Requirements Bring Greater Responsibility

What this means to producers is that the paperwork required when submitting Indexed Annuity applications will continue to grow. You have probably already noticed numerous announced changes to applications and suitability forms from carriers. This places the onus on producers to keep better records of their interactions with clients and the reasons for their recommendations. The information that annuity applications will require and producers should keep: the client’s age, annual income, financial situation and needs (including the financial resources used for the funding of the annuity), financial experience, financial objectives, intended use of the annuity, financial time horizon, existing assets including investment and life insurance holdings, liquidity needs, liquid net worth, risk tolerance and tax status. As a result, of the information required for producers to gather, we suggest that producers maintain a comprehensive file for each client.

Keeping a good client file will not only help with documenting suitability but is also invaluable when dealing with client complaints. Client complaints are often the result of miscommunication, misunderstanding, or clients simply changing their minds after the fact. Good documentation allows a producer to go back in time and accurately explain the circumstances surrounding a recommendation to buy an insurance product. In our experience, producers that have documented the suitability of their recommendations at the time they made them have been able to quickly, and often harmlessly, resolve client complaints. If you don’t have a well developed client file, you are merely left with a customer and a potential liability.

Due Diligence Maximizes Client Relationships

A list of the items in a comprehensive client file would include the following:  

• A record of all written correspondence with the client.
• A log of calls to clients – just one line for each successful client contact mentioning the purpose of the call and any decisions made during the call. For example, "called client to verify beneficiaries" or "contacted client to discuss annual annuity withdrawal – client did not want to take one this year."
• A summary of each meeting with the client or brief meeting notes mentioning items discussed and decisions made.
• Detailed client fact finder.
• Any illustrations presented to the client (IMAX, LAPS, etc).
• A record of recommendations made to the client and the client’s decision regarding them. This is particularly critical if, for example, an agent recommends something like long term care, it is declined, and the client exhausts his assets in a nursing home.
• Copies of all applications for products, statements of products received through your office, first few pages of issued policies.
• Separate file for securities that follows broker dealer recommendations if agent is a registered rep. In these types of situations, an agent needs to determine which file is their "master file," in order to avoid duplicating too much. This would usually depend on where the bulk of the agent’s revenue came from or what product he generally sells more of.

While such a file may seem to be overkill, when dealing with compliance and legal matters, you simply don’t want to cut corners. Don’t leave a doughnut hole in your documentation. If the need to prove suitability or respond to a complaint arises, the better documentation usually wins.

For more on creating well documented cclient files, check out the Compliance section of Creative Marketing’s Agent Website at www.creativemarketing.net/compliance for fact finders and forms you can use in building client files.  

Related Articles

Framing your case: The art of suitability Navigating murky waters

FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 11460 - 2010/12/14 | 17319 3490310

Agents may not give tax, legal, accounting or investment advice. Individuals should consult with a professional specializing in these areas regarding the applicability of this information to his/her situation. Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.