Chapter 4 — Ethical Guidelines for Reviewing the Sales Process

• The most serious ethical issue in the approach step is claiming skills, credentials, or experience not actually possessed
• Never imply affiliation with a government agency, or use a trade name that obscures the practitioner’s company identity
• Do not refer to a life insurance policy as a “plan” or “private pension” — these terms obscure the product’s true nature
• The Gramm-Leach-Bliley Act (1999) and Florida Rule 4-128 require privacy notification and opt-out rights at policy inception and annually thereafter
• Product suitability is the overriding ethical concern in the presentation step — FINRA suitability rules apply (formerly NASD Rules of Fair Practice; NASD merged with NYSE Regulation to form FINRA in 2007)
• Do not describe dividends as “investment return” or premiums as “investments” — this incorrectly positions a policy as a security
• Florida’s General Life Insurance Solicitation Law (FS 626.99) requires delivery of a Buyer’s Guide and Policy Summary for individual life insurance and fixed annuities
• Approximately 35% of all property & casualty E&O claims arise from failure to obtain or failure to maintain proper coverage
• Applications and premiums should be submitted to the insurer within one business day of being taken

The ethical requirement in the approach step is that information imparted to the prospect be balanced and complete. Key principles:

• Avoid product discussion on the telephone — adequate explanation of complex products in a brief call often creates more confusion than understanding
• Do not use a trade name to disguise company affiliation
• Never imply government affiliation to suggest governmental approval of the practitioner or products
• Do not call a life insurance policy a “plan” or “private pension” — these obscure the true nature of the product
• If products involve tax advantages, state that only a thorough review of the client’s situation would determine if those advantages apply to them

The most serious ethical issue in the approach step is claiming skills, credentials, or experience not actually possessed. This includes using titles such as “financial planner,” “financial consultant,” or “investment adviser” without the required licensure or registration.

Full disclosure requires that the prospective client be fully informed of the practitioner’s status as a product advocate. If the practitioner represents a particular company, disclose that; if a registered representative, identify the company and broker/dealer. Unless an RIA, do not represent yourself as a financial planner, investment planner, consultant, or adviser.

Testimonials must be genuine, reflect the endorser’s current opinion, and disclose any financial interest (labeled as “paid endorsement”). The title of the fact-finding form should not imply services not provided — a form titled “Comprehensive Financial Planning Form” could mislead the prospect about the scope of services being rendered.

The overriding ethical issue is suitability. FINRA’s suitability rules (which replaced the former NASD Rules of Fair Practice when NASD merged with NYSE Regulation to form FINRA in 2007) require that any recommended transaction be suitable in light of the prospect’s financial situation and needs. Key principles:

• Do not describe participating policy dividends as “investment return” — this incorrectly positions the policy as a security
• Do not use the term “investment” when referring to a life insurance premium
• Product comparisons must cover all important features: risk, guarantees, insurance, tax features, and any other material area
• Statistics used must be substantiated and referenced
• Make appropriate risk disclosure — failure to advise the prospect of inherent risks is unethical and creates malpractice exposure
• Do not make analogies to other financial products when explaining how insurance products work

The illustration must be complete, balanced, and presented so the prospect can make an informed decision. Key requirements:

• If illustrating dividends paying premiums at some future point, also illustrate how the policy would perform with a lower dividend scale
• Any mention of tax advantages must include a full explanation of the conditions required, including the risk of modified endowment contract (MEC) status if premiums are overfunded
• Only use insurer-provided illustrations unless the company has specifically approved the agent’s own materials
• Supporting illustrations comparing competing products must be submitted to those companies for their input and review

The phrase “vanishing premiums” is inherently misleading and must be avoided. Premiums do not vanish — they are being paid by dividends that reduce the policy’s cash value. If dividend scales are subsequently reduced, out-of-pocket premiums may resume.

Approximately 35% of all E&O claims for property & casualty agents arise from two implementation problems:

• Failure to obtain proper coverage: Caused by failing to properly analyze the client’s situation, failing to request the correct coverage, processing delays, or the insurer not issuing the coverage requested
• Failure to maintain proper coverage: Caused by failure to renew coverage on a timely basis or failure to notify the insured of non-renewal

Applications and premiums should be submitted within one business day of being taken. Delays in submission can expose both the client and the agent to unnecessary risk. The agent has a fiduciary duty to ensure that coverage is in force as quickly as possible after the application is completed.