This article first appeared on Financial Advisor
Annuity sales are booming. So are regulators’ questions about how and why advisors recommend them.
With U.S. annuity sales topping $107 billion during the first quarter of 2026, compliance experts say the biggest risk is no longer the products themselves but whether advisors can prove each recommendation served a client’s best interest. Recent enforcement actions by the Securities and Exchange Commission and the Financial Industry Regulatory Authority increasingly focus on annuity exchanges, compensation conflicts, supervisory controls and the quality of firms’ documentation.
“The transaction that hurts firms isn’t the slow one—it’s the undocumented one,” said Rob Dearman, founder and chief innovation officer of DCG Insight, during a recent InvestorCOM webinar. “Speed will save you minutes, but a good evidentiary file will save you the settlement.”
Dearman urged firms to move beyond simply processing annuity applications faster and instead build recommendation workflows that automatically document alternatives considered, costs, lost benefits and supervisory reviews before recommendations ever reach clients.
This is good business especially when an annuity exchange has taken place, as many recent enforcement actions have questioned whether advisors adequately documented why replacing one annuity with another served a client’s best interest after accounting for surrender charges, higher costs, lost benefits and reasonably available alternatives.
“The cases frequently turn on the gap between the sales story and the documentary evidence,” said Brian Rubin, co-head of Eversheds Sutherland’s securities enforcement practice and a former SEC and National Association of Securities Dealers enforcement attorney. “The firm and the representative have to demonstrate why the recommendation was in the customer’s best interest.”
Rubin called the SEC’s recent Cutter Financial Group case a wake-up call for advisors. The SEC accused the Massachusetts advisory firm of steering advisory clients into fixed indexed annuities that generated commissions of roughly 7% to 8% without fully disclosing those conflicts. Earlier this year, a federal jury found the firm liable under the negligence provisions of the Investment Advisers Act after concluding the disclosures were inadequate. Rubin said the SEC has a number of similar ongoing annuities investigations.
The Cutter ruling also clarified another issue advisors continue to wrestle with, Issa Hanna said. Advisors cannot treat an annuity recommendation as separate from an advisory relationship if it is part of the client’s broader financial strategy.
“If you’re going to try to scope this out of the advisory relationship, it’s important to ensure that clients understand the capacity that you’re acting in,” Hanna said.
FINRA has been sending the same message. In July, Centaurus Financial Inc. agreed to pay $1.1 million to settle FINRA allegations that it failed to reasonably supervise variable annuity recommendations and exchanges.
The settlement included a $475,000 fine and some $634,000 in restitution after FINRA found brokers made higher-cost recommendations that triggered surrender charges and increased client costs. The regulator also suspended one registered representative for 10 months and fined him $10,000. The firm neither admitted nor denied FINRA’s findings.
The enforcement trend shows regulators increasingly are looking beyond whether firms collected signatures and disclosures to whether they can reconstruct the decision-making process behind each recommendation, Parham Nasseri, president of InvestorCOM, said.
“A completed form doesn’t necessarily tell you why this recommendation was in the client’s best interest,” Nasseri said. “That’s what regulators are asking for.”
Nasseri said the Cutter decision should prompt firms to rethink how they document annuity recommendations.
“The recommendation should be defensible before it’s submitted for approval,” he said. “You shouldn’t be trying to recreate the analysis after the fact.”
Hanna said firms should also evaluate whether an annuity belongs in a brokerage or advisory account.
“Start with the client’s needs,” Hanna said. “Do they want ongoing advice? Are they willing to pay an ongoing advisory fee?”
Advisors should also compare a client’s total costs—including product expenses and advisory fees—and document why less expensive or less complex alternatives were not selected, Hanna said.
Building a defensible recommendation starts long before an application reaches the home office, the panelists agreed. Firms should embed compliance into the recommendation process itself rather than relying on supervisors to catch problems after the fact.