Educate Your Clients To Avoid Compliance Problems

By Dennis M. Groner

Insurance and annuity concepts were always confusing to clients, but current products have become increasingly complex and have magnified clients’ confusion.

The permutations and combinations of features, costs, etc. can make choosing the right product a daunting task for some clients. The clients confusion often creates doubts, questions and uncertainties. Complicated sales– those that involve comparing and coordinating several products–also create the opportunity for confusion.

A client should understand what he is buying and why it is in his best interest. Only then can we hold the client fully responsible for his decision.

Regulators and courts have been sensitive to this issue. For example, in the NASDs Notice to Members 96-86, regarding variable life sales, an aspect of suitability was whether the customer had the ability to fully understand the complexity of the variable insurance product.

From the agents perspective, client understanding can have significant benefits. The less uncertainty and confusion, the more likely the client will buy and the more satisfied the client will be in the short- and long-term.

Client understanding also has a significant impact on compliance and market conduct. One of the most important things agents can do to forestall and avoid compliance problems is to educate their clients. Creating the proper expectations and level of understanding in the clients mind can dramatically reduce potential company and regulator complaints and accusations of improper market conduct.

Educating the client is something that has to be woven throughout the sales process. Educating the client from a compliance perspective must be integrated into an agents normal client education process. Questions, concerns and issues may surface after the sale and you want to be confident you prepared the client for them. If there are complaints to your company or a regulator, you want to be confident you did a fully professional job in selling the product. Educating the client is a part of that.

Key Educational Goals

The following are some of the key educational goals that apply to insurance and annuity sales in general:

–Clients should understand what the disclosures and disclaimers related to the product and sale mean. Simply reading them is often not enough to educate the client what they mean.

–Clients should understand their financial objectives and needs. The more they know about their needs, the more likely they will have confidence they made the right decision regarding what they bought.

–Clients should know that the fact-finding and analysis process provided a suitable, accurate and appropriate recommendation. Clients should understand why a recommendation is suitable and why other alternatives may not be suitable.

–Clients should have realistic expectations about product performance. Clients should know the short-term and long-term risks and benefits of investments in variable products or the performance of traditional participating products.

–Clients should know what their risk profile is, what it means and what it is based on.

–Clients should know how the product they buy operates and why. For example, the client should understand not only that surrender charges and management charges apply to their policies and contracts, but also why they exist.

–Clients should understand the issues involved in making an application for insurance. For life insurance, they should know that most companies check information on applications (e.g., answers to health questions), that based on the analysis by the company, the policy may be rated and increase in cost, etc. They should also understand that inaccurate information could lead to inappropriate risk profiles, recommendations, undisclosed replacements, etc. Finally, they should understand the meaning of their signature on the application; e.g., what it attests to.

–Clients should understand that they have specific rights regarding their purchase, such as a free look period beginning at product delivery, and who to contact if there are concerns or questions.

Review Your Client Education Process

Though many agents pride themselves on the job they do of educating clients, they could benefit from a review of their client education process to determine if they are accomplishing these objectives. The following are some ideas on how to accomplish that:

*Create a checklist of the key educational objectives you want to achieve in the sale and refer to it during the sale.

*Use a company provided buyer’s guide to help organize the education process. Review the types of questions that clients ask during and after the sale to you and your administrative associates. These questions demonstrate what they were confused about.

*Meet with established clients and ask them questions to gauge their understanding.

*Role-play your sales process with a peer and ask for his advice on where you may not have been as clear as you could be.

Tips on How to Educate Clients

The following are some specific tips to help you strengthen the compliance impact of your client education efforts:

–Consider the market you are selling in. Some markets–such as seniors, large sales involving advisors and work site marketing–may require additional care in educating the client.

–When selling in the business or estate planning markets where other advisors may be involved, do not assume they do not need to be educated. Test their knowledge with some questions about general concepts and specifics to determine how much time to spend and which areas to concentrate on.

–When doing worksite marketing, avoid the temptation to rush the education process because of time pressures.

–Some clients, especially ones you have worked with for a long period of time may feel that they dont need to spend the time being educated. Do not rely on their prior understanding.

–”Test” the client early in the interview so you can gauge the level of understanding and structure your approach accordingly. Ask questions about general concepts, such as how insurance companies can afford to pay benefits, and specific ones, such as, whether the client knows why management fees are charged.

–Confirm understanding of key concepts by asking questions at the end of each section of the sales process. Do not accept “I dont have any questions” from clients without additional probing to determine if they understand.

–Use company sales materials to help educate the client and leave them behind. Ask companies what they can provide to help educate consumers. Carefully review the various sales materials available and pick those that best support your sales and compliance objectives.

–Discuss hypothetical, but likely uses of the product and use these examples to explain the operation of the product.

–For variable products, dont write in the prospectus, but use it to indicate key points about the product.

–Explain the illustration using non-technical language.

–Review possible service issues to make certain clients understand the types of potential problems than can occur, what to expect and how to handle them.

–Show samples of quarterly and annual company communications and reports the client will be receiving and explain their purpose and value.

–Never ask for a signature without explaining what it means to the company and to the client.

–Document in your client file that you carried out your education process and note the reasons for the purchase and specific issues discussed that caused potential confusion.

–Call clients shortly after their purchase to see if they have additional questions.

–Conduct a six-month review with new clients to ensure they have a good understanding of what they bought and why.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 15, 2002. Copyright 2002 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.