Today’s insurance and financial advisors are vetting “alternatives” as the hot new thing, the exciting opportunity, or the way to go for people on the cutting edge.
This strategy is not something to be undertaken without thinking or planning.
Here are some examples of how it’s playing out:
Insurance professionals are promoting not just life, annuity, disability, long term care and related insurance products and services. Depending on their licenses, some are also offering “alternative solutions”: reverse mortgages, life settlements, separately managed accounts, and more.
Banks reps are talking up not just checking, savings and certificate of deposit accounts, but also alternatives like private banking arrangements, insurance, wealth management, investment strategies. Again, this depends on the licenses they hold.
Securities reps are offering not only the traditional stocks, bonds, and mutual funds but also–depending on licensure–insurance, private investments and a host of so-called “alternative investments” like hedge funds, commodities, real estate, currencies, private equity funds, etc. In fact, alternative investing has become so entrenched that there are websites and publications devoted to the concept, and serious minds routinely weigh in on whether this is a fad or a trend.
Many offer “advice” as an alternative/adjunct to products.
There are reasons for this blossoming of financial alternatives. One is the Gramm-Leach-Bliley Act of 1999, which allows insurance, banking and securities firms to sell one another’s products. Financial professionals, taking this to heart, now often offer products and services previously out of their ken–as alternatives to their primary business focus.
Other reasons: The American preference for having choice, which has created an almost insatiable demand for options; a highly diverse society, which has fostered need for tailored solutions, not one-size-fits-all; the recession of the early 2000s, which all but forced advisors and reps to offer services and products previously ignored; advancing technology, which has made ever more complex designs and innovations possible and popular; and growth in fee-based financial planning, which has made exploring alternatives a matter of routine.
Where “alternative investing” is concerned, a key stimulus has been the search for investments that produce greater returns than more traditional options (ideally with less downside risk). This has given rise to products that blend risk exposures in unique ways.
The alternatives trend involves more than offering one type of product beside another. It’s also integrative, as is very apparent in the insurance sector.
For instance, index insurance products blend a fixed downside guarantee with upside potential linked to an equity or bond index. Such products are often described as alternatives to more traditional fixed products like bank CDs or traditional fixed annuities, or as an alternative to variable annuities, which are securities.
Likewise, the annuity/LTC and life/LTC hybrid policies are promoted as alternatives for customers who don’t want/can’t afford stand-alone LTC insurance or who think they’ll never need LTC but want to hedge their bets.
The high deductible-health-plans-with-health-savings-accounts are often presented as alternatives for those who don’t have or can’t afford traditional major medical.
Even same-class insurance products come under the alternative moniker. For example, a variable annuity with a living benefit rider (such as the guaranteed minimum withdrawal benefit) is often described as an alternative to an income annuity, an annuitization, or a traditional systematic withdrawal from a VA.
So, it won’t go away, though it may wax and wane depending on market conditions.
For advisors, a word to the wise:
o Be clear on what the alternative word means in your venue. If it’s an insurance alternative, that’s one thing; if it’s an alternative investment, it’s quite another.
o Know the implications of offering alternatives. Is there licensing and/or training required to handle the alternative? What support is needed to make for successful expansion into alternatives? How do customers view the use of alternatives?
o Consider the consequences of offering alternatives or not. Doing so may entail costs in infrastructure, education, ramp-up time, etc. But not doing so could mean lost opportunities or perhaps legal liability (for not offering something that is available). Get legal advice on going either way.
In a multi-cultural, multi-choice society, offering alternatives is natural. But to deliver effectively, advisors need awareness, education and expertise, too.