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Bringing the Orphan Client in from the Cold

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Those of us who have long been in the financial advising business are well aware that too few financial professionals stay in the field past the four-year mark. A 2010 study by LIMRA International shows that only 1 in 10 (11%) advisors stay in the business after four years.

But sometimes we forget about who stands to lose the most when a financial advisor leaves the industry. It isn’t his colleagues, and it isn’t his firm. Rather, it’s the client — in this case, the orphan client.

It’s all too easy to worry about how we are impacted by a colleague’s exit from the field. It can be inconvenient and even awkward to tell a client his advisor has left the business. And the list of names and numbers can seem long for a life insurance agency keen to take care of its clients. But it’s important to remember that with each entry, there is a real person with a real life and real financial needs. Individual lives are at stake. Every person on the list had a financial goal in mind when they purchased their instrument of choice. The person who can suffer the most is the one whose insurance policy hangs in the balance, who could further benefit from other financial instruments and who needs the guidance of a seasoned professional.

Not all advisors relish the idea of following up on a client with whom they don’t have a relationship. It can feel too much like cold calling. But doing the right thing is always best, and in this case, what you do can impact not only the client’s life, but her family members’ lives. Are you doing all you can to help the orphan clients to whom you have been assigned? Are you conducting annual reviews? Do you know the status of the client’s retirement funds? The orphan client can be at risk without the guidance of her financial professional. You may be the only one who stands between her and financial mishap.

Here are some circumstances that can cause significant problems for a client if a financial advisor isn’t there to pay attention:

  • Investments: Risk tolerance or product performance can change.
  • Retirement: Companies can fold, and qualified plan trusteesthe only people with the authority to access the client’s fundscan disappear, leaving the money stuck in the plan until a lengthy legal process can free it.
  • Life insurance: Policies can lapse if the bank account changes, or if people die and beneficiaries can’t be reached.
  • Life events: Clients’ situations can change, and their financial plans may not reflect those changesfor example, marriage, divorce, birth or health.
  • Insurability: Some life insurance policies have a guaranteed insurability option that allows the insured to increase his insurance every three years (usually between ages 23–46) without proving insurability. If the client’s health changes and he is no longer insurable, it’s vital that this is pointed out to him, so he can take advantage of the increased insurance before it’s too late.

In doing right by the orphan client, you not only build up the reputation of you and your firm, but you may also develop a long-term relationship with a client who stays with the firm and purchases financial instruments to serve her needs. Here are three examples when orphan clients and their dependents benefited from an agency that had systems in place to ensure their care.

Case #1: A 35-year-old divorced father of a 10-year-old boy wisely purchases a $100,000 term policy while he is healthy, on the advice of a financial professional who later leaves the agency. As the sales manager, I take over the account and notice that payment to the policy has stopped. I contact the client. It turns out the bank account has been changed, and the billing information hasn’t been updated. Then, two years later, the client’s brother contacts me and shares that the client is dangerously ill. Soon after, the client dies. Because the policy is current, the brother is able to use the money to provide for the client’s son. I help the brother place the money in a 529 plan for the boy, helping to ensure the funds grow tax free for his college education. The brother even purchases life insurance for himself.

Lessons learned: In this case, if the agency had not had processes in place to care for orphan clients, the boy may have been left both fatherless and financially insecure. As an added feature, I was able to grow my practice, all while doing the right thing.

Case #2: A client buys a policy in 2007 from a new agent who leaves the field within a year. I take over the account and meet with the client annually over several years. In March 2011, the client shares that he has terminal cancer. I explain the claims process to the client, and the issue of beneficiary comes up. The client’s life partner feels that the client’s two adult sons should not serve as sole beneficiaries because they were not visiting their father or caring for him. I encourage the client to do what he feels is best and to communicate his decision to all involved. As a result, the life partner knows to contact me when the client dies, and the claim is straightforward. Also, the sons receive a six-figure inheritance that has an improved chance of being properly managed.

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Lessons learned: I encouraged communication about the decision of beneficiary with all involved, which decreased the likelihood of tension or a lawsuit. Everyone knew the client’s wishes, and the documents weren’t challenged as being out of date. Also, the life partner knew to contact me when the death occurred, helping make the process more straightforward. Finally, I earned two new clients by way of the sons, and they benefited from professional advice rather than a wasted inheritance.

Case #3: A new agent takes out several policies on herself, her sister and her father, who is a prominent businessman with a high net worth. After two years, the agent leaves the firm. Later, I take over the accounts. When I try to contact the family in November 2010, I am unsuccessful. Two months later, I read in the local newspaper that the father has died. I am able to reach the former agent, and I help her with the claims process. Then we go about reviewing and restructuring the other policies — a complicated process because the father could no longer be an owner or a beneficiary on the policies for his daughters. Through the process, I build trust with the former agent, and today, I am helping the sisters with their own estate planning.

Lessons learned: Because of my involvement, the former agent had a less onerous experience, even though she was overseas. She did not have to deal directly with the insurance company, and I was able to take the load from her shoulders. Also, otherwise, everything may not have been resolved in time to pay the estate taxes. In the end, I did the right thing, which benefited both the family and me.

Showing empathy and caring toward someone who needs your guidance feels good. But that ethical behavior can also reap you financial rewards that you know have been well earned.

People’s circumstances change, products change — and it’s the obligation of firms to reach out and offer financial guidance that keeps people on track to meet the goals they had in mind. So, when your agency asks you to reach out to orphan clients, do the right thing. And, chances are, they won’t be the only ones to benefit.

MoyerJay Moyer is a financial professional with Sapient Financial Group, a general agency of Massachusetts Mutual Life Insurance Company (MassMutual). He can be reached at [email protected]

Jay Moyer is a registered representative of and offers securities and investment advisory services through MML Investors Services LLC., Member SIPC. One Union Square, Suite 300, 10101 Reunion Place, San Antonio, Texas ,78216. (210) 342-4141.

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Sapient Financial Group, its employees, or representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal tax or legal counsel.