Evaluating the overall suitability of a life, annuity or mutual fund sale (including the associated investment options and allocations) is often a difficult and time-consuming process. Yet suitability is a key ingredient in complying with the letter and spirit of regulatory rules and procedures.
Effectively managing the market conduct risk of unsuitable sales is a key objective of all financial service organizations. While agents, managers and home offices all face different challenges in determining suitability, all can benefit from implementing an automated suitability monitoring system.
Challenges Faced In Assessing Suitability
For Agents. Determining suitability is difficult for agents because of the uniqueness of each sale and the judgment needed to evaluate a wide range of factors. Agents may not know which information is needed to determine product suitability or may not use proper judgment in assessing the information they have.
Difficulties may also arise if agents do not have full or complete information about their clients. Agents may be unwilling to ask their long-standing clients for updated suitability information and clients may be unwilling to provide information unless they have a specific reason to do so. Sometimes customers only provide additional information if the agent has a specific purpose for requesting it.
Agents are often frustrated when their management or home office questions a sale they thought was suitable. Questions must be answered which can often delay application processing and underwriting. Agents want applications to be processed quickly, without having to answer additional questions or contacting clients again.
For Managers/Registered Principals. Evaluating and monitoring suitability is difficult for field managers because of the large number of applications to review, the time involved in reviewing, the potential lack of information, the need to tailor the review to each product and the need for experience and judgment. The knowledge and experience needed to supervise suitability often makes it difficult to delegate the responsibility to others.
Managers are sometimes frustrated by the task of gathering explanations from agents regarding questionable sales. Managers alerted by the home office of potentially unsuitable sales often feel caught between the company and the agent regarding how to answer questions about suitability.
Home Office. Home offices face the same challenges that field managers face, but have the added challenge of doing their review without slowing down the application process. The volume of applications to review requires a high level of efficiency.
In addition, unlike managers, the home office cannot stop an agent in the hall of the agency and ask for clarification of a question. The home office must contact the agent and wait for a reply. If the reply is not sufficient it must ask for more information. All of this slows down the application process and delays in processing apps can have significant ramifications regarding handling money in a timely fashion, according to NASD regulations.
Is It The Answer?
An automated suitability review system can help agents, managers and home offices determine suitability more effectively and more efficiently.
For agents, an automated system identifies what information is needed to determine product suitability for a specific product-client combination. It provides a standardized process for collecting and assessing client information. It gives the agent an idea of documentation necessary to have a potentially unsuitable sale make sense to management. Most important, it allows the agent to immediately identify potentially unsuitable sales situations and resolve issues before submitting an application for processing.
For managers and the home office, an automated system standardizes input data and provides for immediate review and evaluation of applications. If questions arise, they can be quickly answered, since the specific client information needed can be highlighted. Also, the task of screening suitability can be delegated, so that other than ongoing supervision of the process, the manager can invest his time dealing with exceptions or red-flagged apps.
Those companies that have assigned responsibility to managers or general agents to assess suitability can have greater confidence they are carrying out their responsibilities since an automated system increases accuracy while reducing effort. Monitoring managers and GAs reviews can also be automated as part of the overall system.
An added benefit of using an automated review system is that the home office must review all its suitability standards so that uniform rules can be implemented to conduct assessments. This review process often leads to more consistency in assessing suitability across product lines. Finally, the monitoring of suitability trends and patterns can be done, since all of the data is stored in the system.
How Does It Work?
Automated suitability review begins when client and product (transaction) information is entered into a data capture system. Data capture can occur at the agent level through an automated application or Web-based system, or can occur at the home office with manual application entry into home office systems or databases.
Based on when data is entered into the system, the automated review can be performed real-time, before the app is submitted or in batch-mode after the sale has occurred. By reviewing product recommendations early in the sales process, the organization can minimize unnecessary processing functions and any agent embarrassment.
Once data is captured, client and product data is then fed into a rules-engine that evaluates the product-client combination based on the companys suitability rules.
These rules allow the computer software to evaluate the recommendation and identify where there are potential mismatches between company and industry standards and the proposed sale. Several suitability issues can be reviewed (see chart on this page).
For monitoring and trending purposes, the home office should have all of the information it needs to evaluate the agency managers or GA's review. If the company deals directly with the agent, it carries out the agency managers or GAs review at the home office.
