Finra Slams Indiana Independent Firm Over Variable Annuity Practices
An Indiana broker-dealer that promotes its commitment to “serving advisers in a Christ-like manner” has agreed to a censure and fine of $125,000 for failing to oversee the suitability of variable annuities sales, which comprise more than 40% of its total revenue.
Kokomo-based CFD Investments, which works with more than 190 independent brokers in about 140 branches, failed to address suitability issues involving the sale of high-fee “L” shares or to train brokers on the incongruities of selling the short-surrender contracts to customers with long-term time horizons or who were sold L shares along with riders that reward longer-term holding, the Financial Industry Regulatory Authority said on its disciplinary actions website on Friday.
Between July 2014 and July 2016, more than 18% of variable annuity sales made by CFD brokers were in L shares with three- to four-year surrender periods that often charge 35-50 basis points more than typical B-share contracts, Finra alleged in an acceptance, waiver and consent letter. A “significant” number were sold with guaranteed minimum income riders often requiring the annuities to be held at least five year to obtain full benefits.
Despite annuities comprising 41% of its sales during the two-year period, CFD had no supervisory system or procedures designed to ensure the suitability of various share classes, according to the consent letter.
CFD also had lax procedures for supervising brokers who encouraged switching of annuities to generate commissions, a deficiency “particularly unreasonable given that nearly 25% of the firm’s variable annuity transactions during the relevant period were exchanges,” the consent letter said.
Neither CFD President Brent Owens nor Paul Vink, an Indianapolis lawyer representing the firm, returned calls for comment on the fine or how it might affect the firm’s capital position.
CFD Investments, which operates alongside a registered investment advisory firm called Creative Financial Designs, agreed to the sanctions without admitting or denying Finra’s findings. The firms brand themselves to the public as Creative Financial Center,
Finra has long identified variable annuity sales as ripe for abuse, particularly among brokers who work as independent contractors. It fined eight independent brokerage firms a combined $8.7 million for failure to supervise unsuitable sales in July and another eight indie firms $6.2 million in November 2016.
On its website, CFD said its founder Mick Owens was “one of the early pioneers in the financial planning movement.” The site underscores the firm’s “mission” of recruiting and retaining Advisors “committed to placing the needs of their clients before their commission needs.”
In a section aimed at “Christian representatives,” it says: “Our goal is to have a team of Advisers that serve their clients in a Christ-like manner, and are good stewards with their time, talent, and treasure. Our intent is to share our love of Christ and our sense of family with our Advisers, with the idea that they may also share those sentiments with their clients.”