With seniors more dependent than ever on their investments for retirement, regulators have found a number of broker/dealers may have recommended unsuitable products and not adequately disclosed risks.
With an estimated 10,000 Americans turning 65 each day for the next 15 years, the Securities and Exchange Commission, in conjunction with the Financial Industry Regulatory Authority, examined 44 broker/dealers’ policies and procedures around preparing for retirement and released a new report Wednesday.
“Broker-dealers are developing and offering a variety of new products and services that are intended to generate higher yields in a low interest rate environment. It is imperative that firms are recommending suitable investments and providing proper disclosures regarding the related terms and risks,” says Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations.
The regulators asked firms to list their top revenue-generating securities purchased by seniors. About 77 percent reported mutual funds were the top product sold, followed by variable annuities and equities.
Yet crafting suitability procedures around these product sales to seniors proved trickier for firms. Three-fourths have written supervisory policies for supervising advisors who work with seniors, with about 16 percent using age 70 as the target date to implement age-based procedures.
Examinations of these policies revealed that about 9 percent of firms still made potentially unsuitable recommendations of mutual funds. More concerning, in regards to sales of variable annuities, audits revealed one in three firms made at least one potentially unsuitable recommendation.
Unsurprisingly, alternative investments—options, BDCs and leveraged inverse ETFs—were another big product class where firms made potentially unsuitable recommendations. A third of firms have guidelines for seniors purchasing alternative investments, as these products can be difficult to value, involve high purchase costs, have limited historical data and often lack liquidity.
But despite having rules and guidelines on the books, the regulators found that 14 percent of b/ds made potentially unsuitable recommendations around alts.
“The culture of compliance at firms is key to ensuring that seniors receive suitable recommendations and proper disclosures of the risks, benefits, and costs of any investments they are purchasing,” Susan Axelrod, FINRA’s executive vice president and head of regulatory operations, said in a statement Wednesday.
