In response to pressure from Congress and public reaction to the current turmoil in the markets, the Securities and Exchange Commission’s struggle to find ways to better inform investors is much in the news today. Proposals by the SEC, so far, seem to present more problems than solutions. In the final analysis the objective boils down to providing a way for investors to find the most suitable product when all facts are known and considered. There is enough inherent risk in most investments without having to deal with the unknown.
Today’s discussion is reminiscent of the struggle insurance regulators went through in years past to de-jargonize insurance policies. The industry and regulators were torn between the use of clear language and the legal requirements for policy language. Owners’ manuals and support documents have helped, but they have not quelled the notion that policies are hard to understand. A big part of the problem is that life insurance and annuities, in particular, serve over a long period of time and they are frequently subject to the selective memory of policyholders.
When I was new in the business I often encountered people with policies written years earlier by other agents and where there was a misunderstanding of the terms of the contract. It made me question the thoroughness of the previous generation of agents. But then, as time went by, I noticed that some of my own policyholders had forgotten the details of the policies I had sold them, despite what I believe was a thorough explanation at the time of sale. Time does play tricks on one’s memory.
Because of the nature of the products and the changing needs of policyholders, the industry has always supported full disclosure, but opposed the imposition of suitability standards. But, as the business has developed variable products, which effectively shift much of the risk to the policyholder, the actions of the SEC are spilling over into insurance products, thereby complicating the picture. The foregoing notwithstanding, I still believe we should continue to defend against suitability standards for traditional products.
I have reached the age where I have witnessed how products I sold have played out over time and seen the effect of outside influences on decisions made at the time of sale. Some of my policyholders are even starting to confess their sins.
A case in point. I live on a street that parallels a bridle path formerly used by horses, now the favored path for joggers and people walking to keep fit. Recently I encountered one of my policyholders out for his daily walk. About 40 years ago he purchased a large term insurance policy from me. I say he “purchased” it because that was not what I was recommending he buy. He was a young lawyer with a very good income and I felt that he should have some permanent insurance. He was very much influenced by a college professor when he was in law school and by financial writers like Jane Bryant Quinn, touting their “products du jour,” and had concluded term was the only product to buy. As much as I tried I could not convince him to convert any of the term insurance in the succeeding years. On the bridle path we chatted and he confessed he had been mistaken. Now in his 70s, he said the term insurance is now gone and he didn’t save as much as he had planned. He also chided me for not pushing him hard enough.