Over the course of my career, I learned that if I didn't define myself, then I was defined by what others said about me. Life insurance advisers distinguish themselves as advisers by first defining their role and responsibilities on the planning team.
For instance, in a real-life case last month, a client was considering the purchase of $1 million of life insurance for the dual purpose of family protection and wealth accumulation. As is too often the case, this conversation started with illustrations of hypothetical policy values for different products with different but undisclosed assumptions from each of his investment adviser and his insurance broker.
The product recommended by his investment adviser was a fee-only product that was most consistent with his assets under management compensation structure. On the other hand, the product recommended by his insurance broker was commission-based, but with commissions discounted by 50%. The initial comparison of hypothetical illustrations seemed to support the claim that the fee-only product offered lower costs due to the lack of commissions, but the all-too-often inevitable and unpleasant illustration "beauty contest" ensued.
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In the back-and-forth battle of the illustrations, it was discovered that hypothetical policy values were being calculated differently due to undisclosed hypothetical assumptions, through no fault of either the investment adviser or the insurance broker. No wonder such illustration comparisons are now considered misleading, fundamentally inappropriate and unreliable by financial, insurance and banking industry authorities. By this time, the client didn't know who to
trust and threw up his hands in despair.
In walked the life insurance adviser with reports that measured actual internal costs for both the fee-only and commission-based products against the universe of peer-group alternatives. The life insurance adviser revealed that cost of insurance charges, fixed administration expenses and premium loads were in fact 44% lower in the fee-only product. On the other hand, the life insurance adviser also revealed that cash-value-based "wrap fees" were more than 160 basis points lower in the commission-based product.
In other words, the product offering the lowest costs was not a function of fees versus commissions, but instead a function of the client's goals and objectives. If the client funds the policy at or near IRS limits for wealth accumulation, then the commission-based product offers the lowest costs. However, if the client funds the policy more like a traditional family-protection policy, then the fee-only product offers the lowest costs. Such advice is simply not possible by comparing hypothetical illustrations that do not disclose the composition or competitiveness of underlying costs.
In addition, with the measurement of how internal costs relate to best-available rates and terms versus worst-available rates and terms, the life insurance adviser was able to advise the client that other products with lower costs were available. In the end, the life insurance adviser earned the client's
trust by defining their role as an adviser, by behaving like an adviser supporting their advice with independent research instead of compensation bias and misleading illustration comparisons, and by talking about life insurance in familiar terms the client could understand.
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If you don't define yourself, then others will define you. Starting conversations about life insurance by defining roles and responsibilities in the planning process distinguishes the life insurance adviser from life insurance sales people, leads to better working relationships between the banker, CPA, attorney, trust officer and other members of the planning team, and ensures your clients' best interests are served.
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.
