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The full-service fiduciary

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Regulation is sweeping the industry worldwide and will change the way insurance agents and financial advisors conduct business in the future.

In 2010, the passage of the Dodd-Frank Act in the United States required a uniform fiduciary standard covering both stockbrokers and financial advisors when providing personalized financial advice. Recently, the Australian legislature imposed a fiduciary duty to act in customers’ best interest applying to all retail products, including superannuation and investment products. In the Netherlands and U.K., they are banning commissions and moving to a fee-for-advice model.

Registered Investment Advisors have both a suitability requirement and a fiduciary duty. They are regulated by the SEC and are normally paid through a percentage of assets under management or on an hourly basis.

Let’s take a look at the definition of a financial advisor, according to Annuity Digest:

“A financial advisor is a professional who works to help their clients meet and manage their most important financial goals in life. A fundamental goal of a financial advisor is to increase the net worth of their clients over time, while protecting them from risks such as loss of income due to disability, premature death and long-term care expenses. Financial advisors will also work with clients in the areas of tax planning, estate planning, and retirement income planning and asset DE accumulation.”

Why is all of this so important? I spend most of my day working with insurance agents and financial advisors around the country. It amazes me that a high percentage of advisors don’t sell life insurance anymore!

Most got their start in some type of captive agency system where they were taught about life insurance. Over the years, many advisors have drifted away from it because it is not a transactional sale; rather, it’s a sales process. Many advisors have instead gravitated to annuities and other investments.

According to a survey by M&O Marketing, financial advisors are so uncomfortable speaking about life insurance that more than half (59 percent) don’t do it. Many of the advisors surveyed said they don’t sell life insurance because:

-          The sales process is too long,

-          There’s too much paperwork,

-          There’s a low placement ratio, and

-          Clients have to undergo a physical and reveal medical information.

If the work were easy, the insurance carriers would do it themselves.

With increasing fiduciary responsibility in the insurance industry likely now and in the future, it is important our industry stop being so transactional. We have recently just begun to recover from what is seen by many as one of the worst recessions the United States has ever seen. Planning for the future is more important than ever, and I believe the public sees this.

With the move to a fee-for-advice model in Europe, no longer will the product offer the value; rather, the value will be in the advisor’s advice. This is a real shift. Advisors in only one line of business will have to offer a superior level of value to justify fees, or they will have to gravitate toward working more comprehensively with clients.

What is more valuable to a client? Working with an advisor holistically? Or having a relationship with a life insurance guy, an annuity guy and an investment guy?

I am not suggesting that what is happening in Europe will necessarily happen here in the United States, but I promise one thing: it will be watched closely.

My challenge for you

Before I get into my challenge, I would like to tell a story.

A financial advisor worked with a retired couple for more than 20 years. He worked with them on their investments and annuities. This particular advisor had done a great job creating sufficient income for the couple and protected much of their investments from loss. Then the first spouse died of a heart attack, and two years later, the surviving spouse went into a long-term care situation, only to pass away a year later. During all of this, a life insurance premium was missed, and the policy lapsed. In addition, the couple had no long-term care insurance. Half of the estate was eaten up by taxes and long-term care expenses.

As the executor of their estate, their son worked through the details of closing out the estate, and he became very upset when he realized the life insurance policy had lapsed and his parents had never bought LTC. The executor and his siblings were anticipating a significant inheritance. The son, therefore, picked up the phone and called the parent’s advisor. He questioned the advisor about the lapsed life insurance policy and the fact that his parents didn’t have LTC. The advisor’s response was, “I don’t work with insurance. I specialize in investments. I didn’t set up the life insurance policy and never had a conversation about LTC. Sorry.”

How do you think that response settled with the family? The next step the family took was filing a lawsuit against the advisor for breach of his fiduciary duty to the parents. How this story ends doesn’t really matter. Win or lose, the advisor will go to court. He will face distraction from his business, the cost of a lawyer, public disclosure on his registered documents, bad Internet exposure, and so on.

Whether you have a true fiduciary responsibility at this point or not, being a financial advisor carries many expectations. The public looks to you for advice and pays you for it. What you do, day in and day out, carries a ton of responsibility. The public trusts you to help make good financial decisions. Please never take this lightly.

Here is my challenge to all financial advisors, financial planners, and CFPs. The industry is changing. What is happening in Europe can happen here. Start rounding out your practice now. Get a head start. If the United States were to go to a fee-based model, you would need to obtain securities licensing — either series 66 or 65 will allow you to serve as an investment advisor agent. Many people will not go through this process, which will cut out a lot of the competition. The life insurance marketplace is way under-serviced, and there are great opportunities to step up and help people here.

I am not, however, suggesting that everybody be a generalist. I believe everyone should have his or her specialty.

Still, if you are a financial advisor and are looking to grow your business, there are two ways of doing it: get more clients or offer more services to existing clients. I have found working with existing clients to be much easier and more cost-effective. If you don’t want to do life insurance or LTC, team up with an expert. I work with hundreds of trusted agents who would work with your clients on a split basis. Otherwise, team up with a good FMO that can do all of the research and analysis for you. You simply have to collect the information and ask the right questions. After that, they will handle all of the underwriting. It will take minimal effort and reap big rewards for you and your clients.

I see full-service firms as a big trend. These firms handle every aspect of a client’s financial situation. There are many firms where financial advisors, insurance reps, lawyers, and CPAs work together under one roof, providing one-stop shopping for their clients. Clients love it because they only have to have one relationship and every professional is working together.

In conclusion, fiduciary responsibility is going to be an increasing focus as regulation gets tougher. Take steps now in your practice to be well-rounded. Whether you do it yourself or bring in a partner, it is very important as a financial advisor to look at every aspect of your client’s financial well-being. This will help you stay out of trouble — and maybe even help your business grow!

For more on the fiduciary standard, see:

How important is a Series 65?

How to prepare for a possible fiduciary standard

Why a uniform fiduciary standard isn’t the answer


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