The California Insurance Commissioner fined Jefferson National Life (owned by Nationwide) after an 86-year-old contract owner claimed that she didn’t understand the variable annuity that her Investment Advisor Representative had recommended.

In a recent Retirement Income Journal article, Publisher Kerry Pechter covers the news out of California regarding the settlement of a complaint against Jefferson National (now Nationwide) stemming from a series of 1035 Exchanges in 2017.

An IAR, on behalf of their 86-year-old client who filed the complaint, initiated three 1035 exchanges on their behalf. The 1035 Exchanges were likely transacted to lower fees and resulted in $16,000 in surrender penalties. After learning of the penalties, the annuity owner complained to the State of California that she didn’t understand what had happened.

Though there was no admission of guilt, Jefferson National agreed to refund $14k to the client of the IAR and pay a fine of $150,000. Perhaps because RIAs are not regulated by state’s Departments of Insurance, the IAR who oversaw the transaction was not fined or cited for misconduct.

Citing California Insurance Code §10509.910, The California State Department of Insurance said that JeffNat’s sales process “did not include an adequate independent review of the recommendations of [its] annuities by the non-insurance licensed investment adviser [or] …an independent analysis of Consumer’s insurance needs and of the financial objectives of the Consumer at the time of the transactions recited herein.”

This complaint shines a light on the Outsourced Insurance Desk (“OID”) model because, as David Stone points out in the article, “It is the OID rep/agent that determines if a transaction is in the client’s best interest and not the RIA. Every transaction goes through a full suitability/best interest assessment. All OID reps/agents are subject-matter experts in the solutions offered and are typically salaried employees of the OID and whose compensation is not tied to the sales of any particular solution or carrier.”

Even though the IAR may have saved the annuity owner nearly the same amount of money as they paid in surrender penalties to exchange them, the annuity owner clearly didn’t understand the potential benefits and drawbacks of the move. It would have been the FINRA member’s responsibility to follow the “Know Your Customer” rule established by the regulator, not the IAR. The Agent of Record in this case would have been a Registered Rep of the JeffNat broker-dealer who was ultimately responsible for the sale.

This complaint and settlement reveal a concerning vulnerability in the “direct” model that some RIAs follow when referring annuity business to insurance companies instead of OIDs. Not only are folks involved in annuity transactions working under the RegBI rules that require them to offer a variety of solutions from multiple providers, they must also know their lane(s), and follow the regulations that apply to their specific roles and registrations.

JeffNat was not an OID, and in this case, worked with the IAR in question to offer their advisory solutions directly. As such, the IAR in question may have unwitting exposed themselves to unnecessary regulatory issues.

An Outsourced Insurance Desk may offer the depth and breadth of solutions to comply with RegBI rules, and concurrently provide multiple layers of suitability review to ensure that the OID-recommended solution is not only suitable for each particular client’s needs, but that it serves their best interests. In that regard, the OID model is the gold standard for RIAs when considering insurance protections for their clients in the form of annuities, or otherwise.

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