COMMENT SUBMISSION: SR-NASD-2004-183
Dominion Investor Services, Inc. is generally in favor of the sales practice guidelines as proposed for NASD Rule 2821 with the following comments:
- We do not agree that each firm should be allowed or required to establish individual threshold levels for items such as “contract sales in excess of a stated percentage of client net worth” or to “client’s over a specific age.” We believe that the “standard” (or guideline) should be uniform among firms and that any requested exceptions to the uniform rules will be closely reviewed and approved by the principal supervising the transaction based upon written rationale obtained from the selling representative or the customer.
- We believe that the long term cost of insurance features and optional product riders (such as living benefits and principal guarantees) associated with long-term ownership of variable contracts needs to be addressed prior to or at the time of sale and placed in perspective with non-variable contract options. Depending upon the contract, optional riders and investments selected, these costs can quickly exceed 300 basis points per year (3.00%). Although these costs are fully disclosed in the applicable prospectus, they are not usually placed in perspective with alternative investments for the client to evaluate side-by-side, so that the buyer can evaluate the effect of the additional insurance costs over extended periods of time. If adopted, such disclosure should be standardized among insurance firms and become a part of the product vendor’s application process on which the client signs-off. We believe this factor is a primary concern for investors as some purchasers may not realize the long-term impact on contract returns. There would be much less issue with this product “if the insurance features were free.”
- We believe that the NASD should develop a Model Training Program which firms can utilize to meet their training obligations for representatives desiring to sell variable annuities.
There is one final issue involving the sale of Variable Annuities we believe is worth mention that involves commission options available to the selling representative. The vast majority of variable annuities sold today is of the “Class-B” variety, without breakpoints, and usually offer the selling representative several commission options to choose from. One commission option a representative usually has available is to obtain a maximum possible upfront payout and no trailing service commissions. Absent the potential for follow-on transactions, this commission option is inherently not in the best interest of the purchasing customer as there is no incentive to the selling representative to provide ongoing advice and service. In the event that the selling representative is no longer around to service the account, there is no incentive for any follow-on representative to service the account. Given these factors, the only incentive available to a potential follow-on representative would be to replace the current contract with a new one. It is possible for this cycle to be repeated more than once over the life of an investor. We find little to savor in a system whose very design could lead to the potential for such an outcome.
Kevin P. Takacs
CCO DOMI/DFA
Securities offered through Dominion Investor Services, Inc.
Member NASD/SIPC
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