According to FINRA, Arlington Securities, Inc. and its registered representative Robert Earl Hillard were sanctioned for recommending that customers liquidate lower-cost mutual funds to purchase higher-cost variable annuities without a reasonable basis to believe the transactions were suitable.
The investigation revealed a troubling pattern of self-interested advice. When certain Class C share mutual funds that Hillard had previously sold to customers began converting to Class A shares, these conversions resulted in a substantial decrease in Hillard's personal income through reduced trail commissions. Rather than acting in his customers' best interests, Hillard recommended they move into investment-only variable annuities that charged additional fees, increasing the customers' annual expenses.
FINRA found that Hillard provided substantially identical written rationales for all of these recommendations without considering the differences in individual customer profiles. This cookie-cutter approach to investment advice is a significant red flag that the recommendations were not tailored to each customer's unique financial situation and needs.
The firm's supervisory failures compounded the problem. Arlington Securities' written supervisory procedures failed to describe the steps supervisors must take to review the suitability of mutual fund sales or variable annuity purchases, including identifying potential red flags. The firm also failed to analyze whether there was any benefit to purchasing investment-only variable annuities in qualified accounts.
As a result of these violations, the firm was censured, fined $50,000, and ordered to pay $67,026.47 in restitution jointly with Hillard. Hillard was fined $10,000 and suspended from the securities industry for four months.
Investors should remember that when a financial advisor recommends selling existing investments to purchase new products, they should ask why the change is being recommended and whether the advisor will receive higher compensation from the new product. A legitimate recommendation should clearly benefit the investor, not just the advisor's income.
