Sales Practices, Suitability, and Ethics
Sales Practices, Suitability, and Ethics
This domain tests conduct: know the customer, recommend suitable products, disclose conflicts, document the basis for recommendations, and avoid unfair or deceptive practices. For variable contracts, suitability is both an insurance and a securities obligation.
Core rules
- Suitability requires collecting accurate financial and personal information, including goals, time horizon, risk tolerance, liquidity needs, existing coverage, and tax status. Recommendations must be reasonable for that customer.
- Replacement and exchange transactions require comparison of benefits, costs, surrender charges, and loss of guarantees. “Buy term and invest the difference” is not a universal suitability answer.
- Communications must be fair, balanced, and not misleading. Guarantees must be described precisely. Illustrations must be labeled hypothetical where required.
- Conflicts of interest, commissions, and production incentives must not override the customer’s interest. Senior investors and customers with diminished capacity need extra care and documentation.
- Privacy, anti-money-laundering, and recordkeeping rules apply. Firms must supervise, review, and retain evidence of recommendations.
Worked example
A 72-year-old retiree with a three-year liquidity need and low risk tolerance is offered a deferred variable annuity with a seven-year surrender charge and equity subaccounts. The representative should recognize that the product’s horizon and risk conflict with the client’s needs. Even if the client signs a suitability form, the recommendation may be unsuitable. The representative should document alternatives considered, explain fees and surrender charges, and escalate or decline the sale if the conflict cannot be resolved.
Traps
Do not treat a signed form as proof of suitability. Do not assume a replacement is always unsuitable, but never omit the comparison. Do not describe hypothetical values as guarantees. Do not let a commission conflict override documented customer needs.