The Question Is: How Can You Not Offer Equity Products?

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“We (financial advisors) dont have any choice any more about whether to offer equities to clients or not,” says Ben G. Baldwin Jr. “If you only sell insurance, youre a dinosaur.”

The president and owner of Baldwin Financial Systems, Arlington Heights, Ill., gives voice to a view held by increasing numbers of financial professionals today.

This is the conviction that equity and equity-enhanced products can help grow a financial practice, that clients benefit from access to full financial services and full product choices including equities, and that producers are at risk, professionally and legally, if they dont work with these products.

Equity and equity-enhanced products refer to the full palette of products with financial value inside or attached. Most people consider these to be the staples of the securities worldmutual funds, stocks, bonds, wrap fee programs, managed accounts, and the like.

A broader definition might also sweep in many favorites of insurance professionals–variable policies, securities-based retirement and college savings programs, and perhaps certain fixed contracts like equity indexed policies.

A still a broader perspective might also include certificates of deposit (especially brokered), and mortgages (home equity, refinances, first mortgages, etc.).

The financial industry has changed so much over the years that advisors have to stay open to new ideas and product opportunities, maintains Baldwin, who started out in 1964 as a life agent.

“If you only offer some products, your approach might be misleading to the client or create inappropriate expectations,” he cautions.

For instance, say a producer is not licensed to talk about securities but then goes ahead and compares his or her own products to security products. If the client acts on the advice but then runs into problems later on, “the advisor could find him or herself in an awful box,” Baldwin says.

His suggestion: “If you only work with one type of productlife insurance, say–then make full disclosure of that fact to your client.”

Better yet, affiliate yourself with a network or big company that can provide the expertise and access you lack. “One producer just cant do it all,” he explains, especially with the complexity and expenses brought about by technology.

Its legally risky for planners not to offer the full range of products, Baldwin cautions. “Ive signed a document that says Im a fiduciary to my client. That means my clients interests come first. It means the product(s) I put on your back should be the best for you in your situation. If its not, you have a legitimate complaint against me.”

Peggy Everson is a planner who has taken the expand-into-equities message to heart. A senior financial advisor with American Express Financial Advisors in Richardson, Texas, she has made wrap-fee programs a cornerstone of her full financial services practice.

Her conclusion is that “its wonderful.”

She always determines the clients goals, objectives, and risk tolerance before recommending any product, she stresses.

If that analysis points up a need for investment in securities, and if the need is long-term, Everson says she often includes a wrap fee recommendationas an alternative or an addition to a traditional brokerage account program.

“In most cases, my new clients do take the wrap,” she says. Among all her mutual fund clients, roughly 50% are in wrap programs.

Wrap programs are investment accounts in which clients agree to pay an annual feea percentage of portfolio valuein exchange for the right to trade securities inside the wrap without paying per-trade transaction costs.

By contrast, in the traditional brokerage account, the client does not pay a percent of portfolio fee, but does pay fees on every trade.

The wrap product Everson offers has over 250 retail mutual funds and allows purchase of individual stocks and bonds, too. It also includes asset allocation and auto-rebalancing programs, which “help clients stay on track to meet goals,” Everson says. There is no front-end sales charge to start the account.

All those things appeal to clients, she says. “They like the flexibility (i.e., trading with no up-front and no transaction costs). They also like having many funds to choose from and the ability to invest in any stock or bondbecause its diversified, not all American Express.”

Although the actual dollars clients pay for the wrap fee do rise as the account value rises, Everson says clients dont mind thatbecause the amount they pay also falls if the investment value falls.

But Eversons repertoire is broader than wraps. She also recommends brokerage accounts–for instance, if the client doesnt want to sell a particular stock. (Putting that stock into a wrap might expose it to the risk of being sold via the wraps auto-rebalancing program, she explains.)

And sometimes she recommends both a wrap and a brokerage accountfor instance, when wealthier clients seek to build a more balanced portfolio.

Do variable annuities and variable life products fit into the picture? “Yes, they do,” says Everson. “We often use them alongside the wrap,” especially in tax planning scenarios.

When clients turn age 50, she also approaches them about buying long-term care insuranceto help them address the risk of funding nursing home care later in life.

“Thats the beauty of financial planning today,” says Everson. “We can use different products to meet different needs and goals. And clients see how all the planning and the products work together.”

Meanwhile, in the Chicago office of Raymond James & Associates, reps have become keenly interested in selling VAs with living benefits guaranteesparticularly, a guaranteed retirement income benefit that assures the account value will grow by at least the minimum amount specified if the owner annuitizes the policy.

“All our reps are doing this now, using it to help clients plan for the future,” says Steven Schwartz, senior vice president-equity research.

The clients tend to be traditional mutual fund buyers, not day traders, he says. They are people who have perhaps come into some money and now want to use it to buy securities at todays lower values. But they are also people who have future long-term care and income needs in mind, he says. For this market, “some of the luster is off mutual funds,” due to the stock market slide this year, so they are taking greater interest in VAs with living benefit guarantees.

The appeal is, “they are in the market, and they guaranteed theyll have growth, if they annuitize,” Schwartz says. “They like that.”

Reps who have seen their clients mutual fund values fall, in some cases by 40% to 50%, like it too, he says. “For them, its a matter of, how can we not offer it to our clients?”

“Reps today have gone well beyond being stock jockeys,” explains Schwartz. “They look at the clients total wealth plan, including insurance, annuities, and long-term care.”

Some reps are even adding mortgages to their portfolios. Mortgages?

Thats right, says Kathy Gilliland, owner of Gilliland Financial Group, Dublin, Ohio. A mortgage is an ideal product for full financial planning, she says, because it helps clients build equity in their homes and/or borrow against that equity to meet other planning needs.

The products can play a “huge role” in the life of a client, she says, so planners should try working with them.

How did she come to this realization? Gilliland says she started bringing mortgages into her practice in 1990, when she noticed that the mortgages her clients took out from local banks where she had made referrals didnt always produce good results.

“Some clients paid too much for the mortgage. Others were allowed to take out too big a loan for their situation; werent offered enough product choice; encountered too many restrictions; etc.”

That propelled her to learn the mortgage ropes herself. To do it, she teamed up with a mortgage broker whom she trusted. Later, she became licensed as a mortgage broker in her own name.

The results, she says, have been amazing. “First, my clients are getting better mortgages. Second, I am obtaining, from the loan process, all the needs analysis and asset/liability information thats necessary for handling my clients other financial planning needs.”

In doing the mortgage, she explains, she inquires into client goals, objectives, risk tolerance, etc. She also sees the clients credit card debts, auto and home loans, employment history, savings, college plans, family structure, employment, and related financials.

The financial plan often “spirals up from the mortgage,” she says.

Sometimes, the process leads to setting up a Roth IRA. Sometimes, a VL or VA policy (if the 401(k) is maxed out). Sometimes, mutual fund purchases. Sometimes, combinations of those.

In some cases, she discourages a mortgage or suggests a smaller one, as when one young couple asked for a huge mortgage for which they qualified, but which she felt would have strapped them financially. Or shell refuse to do a mortgage altogether, as when one client wanted to put a second mortgage on his house so he could invest the proceeds in stocks. (“He has thanked me several times since then for talking him out of it,” she laughs.)

An unexpected result: “Theres a constant stream of people coming here for mortgages and financial planning,” Gilliland says. “Some days, I cant return all the calls.” Many are referrals from clients, and others are referrals from other planners and attorneys.

Are mortgage brokerage fees higher than mortgage fees charged by local banks?

“They can be, depending on the broker,” Gilliland allows. “But I keep my costs down, because I want to do lots of things with my clients for the rest of our natural lives. I want them to benefit so theyll stay with me.”

Some producers are frustrated by the broader roles financial professionals are being asked to assume today, Baldwin says, with a tinge of sadness. “They say, Im out of here.”

But then he brightens up. “That makes room for the younger people to come in. They have the education about the new products and systems, and dont know the way it used to be,” he says. “For them, this is opportunity.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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