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Charles L. Ratner | Sep 28, 2022
I’ve recently noticed an uptick in chatter, both in print and conversation, advancing the point of view that investment advisors who don’t offer cash value life insurance to their clients are missing the boat. In some cases, the boat is revenue from the sale of products. In other cases, the boat is a shortfall in an advisors’ obligation to bring their clients such a fundamental tax planning tool. In some cases, it’s both.
The source of the chatter is most often those who would, in whole or in part, facilitate or somehow be involved in the expansion of the advisors’ practices to include life insurance. There are variations on the theme of expansion. At one end of the spectrum, advisors would gear up, get licensed, sell the insurance themselves and keep the revenue. At or near the other end of the spectrum, advisors would call in the cavalry and let them sell it. The revenue will sort itself out in one way or another. In either case, advisors are being told that clients who are looking for ways to take what the lax law legitimately gives them will be happy to find it in the advisors’ shops!
There’s an important and, I think, sensible contextual component to the suggested expansion. Advisors should offer life insurance primarily in the context of tax-efficient investment planning for or in retirement, which is where they focus today. It shouldn’t be done in the context of tax-oriented estate or wealth transfer planning, which is probably not where they focus today. So, in that context, advisors would just be rounding out their current service offerings to include life insurance as another investment vehicle. For a broader discussion on this topic, see my recent article.
Robust Infrastructure
I understand the expansion point of view. At first blush, it makes perfect sense, if for no other lesson than it would fill in some of the holes that I see in holistic planning today. I just don’t agree with it as a general proposition, at least not yet. Why? In a word, “risk.” In more than a word, it’s risk that most advisors don’t know how to assess or manage and shouldn’t bother trying. I just don’t see the percentages in it for those who already make a nice living from constructing and managing portfolios. Yes, I know the tune or, better said, the sirens’ song about the tax benefits of life insurance. But I still think that most advisors who hear that song should lash themselves to the nearest mast. Here’s why:
Every seasoned investment advisor who I know has built a robust infrastructure to support the key elements of their practices, namely portfolio construction, management and ongoing maintenance and service. Regardless of the way they manage clients’ money, meaning whether they’re selecting securities, funds or managers, these advisors have the programs, systems and resources to generate a quality deliverable and support it thereafter, comply with applicable rules and regulations and, importantly, manage their own risks. The advisors’ infrastructure is the mirror image of the infrastructure you’ll find supporting any seasoned life insurance professional. The point is that without an infrastructure, there’s no way that either can be in business today or stay in business.
Don’t believe that? Then ask any advisor or life insurance professional if they could do what they do without a good “back room,” which is my shorthand term for all that infrastructure I described. Either will look at you and ask, “Are you serious? Do you have any idea how complex our business is today, how much information we have to sift through on a daily basis, how rapidly products are evolving and how nuanced and complex they’ve become, how much foment there is in the distribution system, how much compliance we have to deal with, how service-intensive our business is and how expensive it is to provide that service, how many people make a business of second guessing our recommendations, how litigious it is out there, etc., etc., etc.? No, we couldn’t do what we do without our back room!”
If seasoned life insurance professionals, meaning those who know a thing or two about underwriting, products, carriers and policyholder service, say they need a good back room to conduct their business of selling and servicing life insurance, how is an investment advisor who already has plenty on their plate and no comparable back room for life insurance sales, going to try to pull that off and not regret it?
Now, of course, those who urge advisors to widen their net to include insurance would respond by saying that, “Hey, advisors don’t have to build their own back room. We can do it for them or we can be their back room!” Here again, I advise caution, mainly because I doubt that most advisors know enough about the life insurance business to assess the credentials of those who would put them into the life insurance business.
Due Diligence
Over the years, I’ve encountered one advisor after another and, incidentally, one corporate trustee after another, who’s told me that they refer their life insurance work to given agents or brokers. Some play it safe by “giving three names.” I ask them if they do the same due diligence for these referrals that they do for investment products or managers. I ask if they could show an inquiring client (or their own counsel if it comes to that) the criteria they apply for that referral. Almost invariably, the response I get is along the lines of, “Well, no formal due diligence, but we do a lot of business with them or they work with a lot of wealthy people.” To which I respond, “Are you serious?” I bet you would too.
The more astute among the many capable firms who would help advisors incorporate life insurance into their practices will begin to acknowledge that they won’t get there from here by banging the drum of life insurance’s tax benefits. They’ll begin to recast their message so that it’s one part life insurance marketing and one part life insurance practice and risk management. They’ll also begin to appreciate the extent to which some of their own marketing to the life insurance community at large actually undercuts their efforts to bring investment advisors onboard. Indeed, I often find myself asking, “Don’t they read their own stuff?”
Realm of Specialists
Life insurance plays a vital and valuable role across the entire spectrum of financial and estate planning. But more than ever before, it’s the realm of specialists. Those without adequate expertise and support to sell and service life insurance or the experience and savvy to vet those to whom they would refer the work, should leave well enough alone.
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