Bulletin #203 - Twisting and Churning
Effective January 1, 2004, Senate Bill 620 (SB 620) in California has set stricter rules for soliciting annuities to seniors age 60 and older and violators are now subject to stiff enforcement action for any “unnecessary replacements”.
Please note: This new law increases jail time to one year and monetary penalties to $50,000 for the "twisting" or "churning" of annuities.
SO WHAT EXACTLY IS “TWISTING” AND “CHURNING”?
- “Twisting” refers to the use of deceptive practices by a Financial Advisor to induce a client to lapse, surrender, or terminate an insurance product to effect a replacement for the purpose of generating a commission. Such deception may include false or misleading statements about the existing policy, its insurer or agent. Also included are misleading, incomplete or unfair comparisons of policies or insurers.
CAUTION: This practice is now a criminal offense in some states.
- “Churning” refers to the excessive trading by a Financial Advisor within a client’s account or the unnecessary replacement of a financial product primarily for the purpose of generating commissions.
CAUTION: This practice is prohibited by NASD Conduct Rules and is now a criminal offense in some states.
IS REPLACEMENT CONSIDERED “TWISTING” OR “CHURNING”?
Not necessarily. Depending on the circumstances, a replacement product MAY be in the best interest of a client. As with any transaction, financial advisors must disclose all of the necessary facts in order to determine whether a replacement product is justifiably suitable. For annuities, or any other life insurance product, disclosure would include accurate comparisons of the values, provisions, interest rates, surrender charges, fees and expenses, settlement options, death benefit, etc between the client’s existing product and the proposed product. In general, the factors to consider in determining replacement suitability are:
- The client’s investment objectives and risk tolerance;
- Comparisons of the minimum guaranteed rate of return;
- The degree of liquidity available under the proposed product;
- Whether the benefit amount can be increased for the same or similar premium;
- Whether the accumulation value will increase for the same or similar premium;
- The potential tax treatment of the proposed surrender or exchange.
CAUTION: California law now states that it is a violation to replace an annuity, for which a surrender charge is incurred, without providing a substantial financial benefit over the life of the replacement annuity.
WHAT CAN YOU DO TO AVOID PROBLEMS?
- Carefully assess the potential benefit of the proposed product when comparing it to an existing one.
If unsure, get a second opinion from a reputable source.
- DOCUMENT EVERYTHING! It is vital that Financial Advisors keep detailed records on ALL replacement recommendations. Therefore, we have attached a “REPLACEMENT DOCUMENTATION FORM” to assist you.
POINTS TO CONSIDER
Stricter laws that protect the consumer from financial abuse are long overdue in California and actually works to the advantage of financial advisors who maintain good business ethics. California’s problems with elder abuse are not isolated. The overall feeling throughout the industry is that California’s new regulations for selling annuities are setting the standard for other states to follow.
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