February 13, 2014

The Truth About Insurance Brokers Who Sell Annuities

I must say I was somewhat surprised by the reaction from the advisory community in regard to my recent articles about index and guaranteed annuities. I received some expected feedback from those who strongly disagreed with my views, while also getting many positive comments from fiduciary advisors who see the same factual logic I illustrated in these past articles relative to annuities. The discussion has obviously touched a nerve. 

(My previous articles on this topic were 3 Logical Insights Into the Notion of ‘Guaranteed’ Annuities and What I Wish Every Prospect Had Considered Before Asking ‘Can I Retire?’)

What concerns me is the anger behind the disapproving emails since, as advisors, I believe we should be open to criticism and differing opinions in what we do every day for our clients. Aren’t we supposed to focus on the end client’s needs first and foremost, regardless of our own financial benefit?

However, what was not surprising about the negative emails was that after further research on my part, it was evident that the individuals sending these messages make a living selling these canned products, rather than from fiduciary advisors. It does tell me that their personal compensation is likely tied to their sales-based advice, which I believe drastically blurs their objectivity. 

I often wonder if these insurance brokers objectively and logically read the annuity prospectuses and assess them in the same way fiduciary advisors do, while actually mapping out a strategy with the client’s comprehensive financial situation in mind. Do they plan for issues such as cash flow, income and estate taxes, wealth transfer, wealth creation, investment flexibility/control and generational legacy family planning? Do they practice risk/return optimization planning, which includes the consideration of total cost?

I’m one of those advisors who actually read all the annuity prospectuses and contracts that a new client brings to me after losing a decade of investment life in a so-called “guaranteed” canned product, because it took 10 years for their surrender charge period to finally expire.

So what does logic teach us about insurance brokers who sell financial products?

The Broker Business Model

Who wouldn’t like a business model where a large company creates all the products and pays for an annual luxury conference to teach you how to sell their products as effectively as possible, then offers more free luxury vacation incentives if you become a top sales person?

Additionally, the insurance company even manages the daily, monthly and annual operational administration for its sales force: from investment selection and strategies, portfolio rebalancing and contract uptick lock-in riders to income floor calculation riders, actuarial risk management, death benefit rider updates and so on. All the brokers have to do is sell the products, based on understanding the marketing materials rather than the full explanation that accompanies them—often a 100-page prospectus which neither the salesperson nor the investor will likely ever read.   

Most insurance brokers are paid a 3% to 5% upfront commission (if not more), based on the initial contract value, with perhaps an annual 0.25% to 0.50% trail fee. They literally have no liability, and the validity of the transaction is based only on whether it was a suitable investment at the time of sale. The plain logic is that they work in an industry that allows them to legally advertise themselves as financial advisors, rather than salesmen.  

It’s understandable why many advisors might flock to this business model, given all the upside income potential that carries no liability and no work to be done after the initial paperwork processing; all while getting to call themselves financial advisors and keeping investors confused as to the true difference. Personally, I believe that being a true financial advisor is to always do what’s in the client’s best interest, even when you risk losing business by telling the truth.   

Are They Providing Advice?

Is selling canned products the same as providing financial advice? Can any product created be the best, most efficient income tax planning option for an investor over the next 10 or 20 years of income tax law changes? Furthermore, does that same product have everyone’s ultimate retirement planning, wealth creation planning or estate tax/wealth transfer planning benefits contained within?

For a moment, let’s assume all canned products ever created do address these goals for every investor. If so, how would the broker know what the product actually can or can’t do objectively for a client’s comprehensive needs, if he or she hasn’t obtained industry credentials or education such as CPA, CFP, CFA or a law degree specializing in estate planning? Personally, I believe at least one of those education credentials should be required to qualify an advisor to  make any product-based financial recommendations to investors.

Furthermore, what about providing ongoing advice in the best interest of the client’s true financial needs? Why would an insurance broker be interested in helping a client further, in a pro bono manner, after getting paid their sales commission, without the urge to sell them something else, to generate additional compensation?

That’s the way this model works; their advice is always tied to their compensation. It’s similar to a Coke or Pepsi product salesperson with various flavors to offer their clients; the only difference is in America we call our financial product salespeople financial advisors, rather than salesmen.  

As a fee-only fiduciary advisor, I believe investors deserve to know the difference. The investment world should focus on teaching clients about the truth and the logical investment management returns hierarchy. When given the right information, people are smart enough to decide what’s best for their own situation. Honesty, integrity and logic are what real financial advice is all about.

If you’re an insurance broker, break the mold and explain to your clients, “I’m not a financial advisor; I’m a salesman who sells financial products.” I promise you those clients will become some of your best clients, because what they’re really looking for is an advisor who’s willing to tell them the truth, rather than sell them something.

“Trust” will always be what motivates the purchase of a product or fee-only advice, and telling the truth—regardless of whether or not you win the business—is what earns the trust that actually does win business and then helps you keep it. 

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