Massachusetts Regulators Charge Royal Alliance and Rep Over Unsuitable Annuity Exchange
The Massachusetts Securities Division has charged broker-dealer Royal Alliance Associates Inc. for failing to supervise one of its brokers who allegedly made unsuitable investment recommendations to a Massachusetts couple.
The Massachusetts Securities Division has charged broker-dealer Royal Alliance Associates Inc. with failing to supervise one of its brokers who allegedly made unsuitable investment recommendations to a Massachusetts couple. Stephen F. Davis of Barrington, Rhode Island has also been charged with breaching his fiduciary duty to his clients. Royal Alliance is one of four independent wealth management firms in the Advisor Group network.
According to the complaint, Davis took over the Royal Alliance account of the two investors after their previous adviser retired. The sexagenarian couple had been Royal Alliance clients since 2007 and had a moderate risk tolerance and an investment objective of long-term growth.
Davis is accused of advising the couple to exchange an annuity product three years prior to its expiration for another product with a lower interest rate.
In June 2015, Davis contacted the couple to inform them that their 10-year annuity with American General Life Insurance Company with a 4.75 percent interest rate had an upcoming anniversary date and offered to assist them in a 1035 exchange for a different annuity offered by Delaware Life Insurance Company.
Davis proposed a 5-year Delaware Life fixed annuity with an interest rate of 2.40 percent, nearly 50 percent less than they were previously earning. The complaint claims that the investors told Davis that the anniversary date was not up until June 2018, but Davis believed the product only had a 7-year term due in June 2015.
“Davis firmly but falsely believed that Delaware Life was offering a better rate because no other available products were currently offering such a high interest rate,” the complaint states. “By failing to review a provision in their annuity agreement with American General which guaranteed their contract value for another three years while maintaining the interest rate of 4.75 percent until June 2018, Davis failed to act in the best interest of the investors.”
The complaint further alleges that Davis failed to file the correct paperwork for the exchange in a timely manner which caused the couple to be charged more than $15,600 in early withdrawal penalties, while Davis received more than $17,000 in commissions for the transaction. Additionally, the early exchange of the lower interest rate annuity resulted in the couple losing more than $43,000 in interest, the complaint states.
The regulators claim that Royal Alliance allegedly “failed in its duty to supervise its agent while he was providing unsuitable investment advice and continued in their failure to supervise after they denied responsibility for Davis’s actions when the couple complained.”
The complaint also states that Royal Alliance did not enforce its own internal policies and procedures, which require an agent to demonstrate an economic justification for recommending that a client switch from one product to another.
“Royal Alliance has also opted not to file the required disclosure forms regarding the complaint against Davis,” the regulators said.
The Massachusetts Securities Division is seeking an administrative fine and an order requiring Davis and Royal Alliance to disgorge their profits and make restitution to compensate the investors. Sanctions and censure are also being sought.
