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February 13, 2014 at 08:48 PM
I must say I was somewhat surprised by the reaction from the advisory community in regard to my recent articles about index and guaranteed annuities. I received some expected feedback from those who strongly disagreed with my views, while also getting many positive comments from fiduciary advisors who see the same factual logic I illustrated in these past articles relative to annuities. The discussion has obviously touched a nerve.
(My previous articles on this topic were 3 Logical Insights Into the Notion of ‘Guaranteed’ Annuities and What I Wish Every Prospect Had Considered Before Asking ‘Can I Retire?’)
What concerns me is the anger behind the disapproving emails since, as advisors, I believe we should be open to criticism and differing opinions in what we do every day for our clients. Aren’t we supposed to focus on the end client’s needs first and foremost, regardless of our own financial benefit?
However, what was not surprising about the negative emails was that after further research on my part, it was evident that the individuals sending these messages make a living selling these canned products, rather than from fiduciary advisors. It does tell me that their personal compensation is likely tied to their sales-based advice, which I believe drastically blurs their objectivity.
I often wonder if these insurance brokers objectively and logically read the annuity prospectuses and assess them in the same way fiduciary advisors do, while actually mapping out a strategy with the client’s comprehensive financial situation in mind. Do they plan for issues such as cash flow, income and estate taxes, wealth transfer, wealth creation, investment flexibility/control and generational legacy family planning? Do they practice risk/return optimization planning, which includes the consideration of total cost?
I’m one of those advisors who actually read all the annuity prospectuses and contracts that a new client brings to me after losing a decade of investment life in a so-called “guaranteed” canned product, because it took 10 years for their surrender charge period to finally expire.
So what does logic teach us about insurance brokers who sell financial products?
The Broker Business Model
Who wouldn’t like a business model where a large company creates all the products and pays for an annual luxury conference to teach you how to sell their products as effectively as possible, then offers more free luxury vacation incentives if you become a top sales person?
Additionally, the insurance company even manages the daily, monthly and annual operational administration for its sales force: from investment selection and strategies, portfolio rebalancing and contract uptick lock-in riders to income floor calculation riders, actuarial risk management, death benefit rider updates and so on. All the brokers have to do is sell the products, based on understanding the marketing materials rather than the full explanation that accompanies them—often a 100-page prospectus which neither the salesperson nor the investor will likely ever read.
