Insurance Insights

Use fee compression as an opportunity to address life insurance concerns

Focus on the costs inside the life insurance policies of clients and prospects, where they need management and advisory services arguably even more so than in their investment portfolios

Oct 7, 2016 @ 2:33 pm

By Barry Flagg

Fees are tumbling in the investment advisory services industry, and the forces putting them under pressure aren't about to let up, according to a new survey.

The Money Management Institute and Dover Financial Research recently conducted the survey in which 90% of participant firms experienced fee compression of as much as 10% last year in investment advisory services involving investment products such as mutual funds, exchange traded funds and separately managed accounts. And costs for clients are expected to continue to fall due to more regulatory scrutiny and increased competition from robo-advisers, according to the findings.

For instance, low-cost distribution through robo-advisers will apply increasingly greater fee pressure on the traditional distribution channels like financial adviser networks. The Labor Department's new fiduciary rule will have “significant implications on fee levels” as regulators demand greater pricing transparency and firms reduce pricing to reduce conflicts between advisers and clients across products and business lines, the institute said.

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So with all this focus and pressure on fees and costs, what can advisers do to respond? Go with the flow. Apply this same focus on to costs inside the life insurance policies of your clients and prospects where costs are higher, often obfuscated, and far more varied. In fact, life insurance is almost always the last, largest, most-neglected asset on the balance sheets of clients and prospects, where very few know what they are being charged, and whether such charges are competitive or excessive.

In addition, because the largest costs in most life insurance policies are the cost of insurance charges (COIs), generally comprising up to 85% of total costs, and because such cost of insurance charges can vary by as much as 80%, financial advisers who focus on the costs inside the life insurance policies of clients and prospects can often identify considerable cost savings, and be compensated for the value of the costs savings they bring to clients and prospects.

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For example, let's say that cost of insurance charges for a client's current policy totals 20 cents for each dollar of death benefit, and that this cost is equal to representative benchmarks average costs. With an 80% variance around average costs, this means that best-available rates and terms (BART) would be 40% less than average costs, or only 12 cents for each dollar of death benefit. As such, measuring cost of insurance charges in this example saves the client eight cents for each dollar of death benefit.

Now let's contrast the above costs savings with other policy expenses comprising 15% of total policy expenses and generally consisting of Premium Loads, Fixed Administration Expenses (FAEs), and cash-value-based “wrap fees” (e.g., VUL M&Es) from which commissions and fees to the adviser are generally paid. Even if all these other policy expenses were used to pay commissions and fees (which they aren't), then the cost of the advice would be only four cents for each dollar of death benefit.

Think about that. What would existing clients say if you gave them eight cents for every four cents you were paid? Would they object to such compensation? On the contrary, I've had clients actually ask me if I could do it again. And think about this some more in terms of actual dollar savings for a $1 million death benefit for instance. How many new clients could you get if you offered them $80,000 in cost savings for each $40,000 you are paid?

(More: Too many people kept in the dark about life insurance costs)

Do well by doing good. With all the focus and pressure on fees and costs in the investment business, apply this same focus on the costs inside the life insurance policies of clients and prospects where they need management and advisory services arguably even more so than in their investment portfolios. Help clients and prospects understand what they are being charged. When charges are excessive, bring their life insurance under management and help them capture the cost savings.

Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.

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