Insurance may be the least understood and most
underappreciated asset a client owns, even by financial advisors.
It certainly is the subject of a long and ongoing debate in
the financial industry. However, as the COVID-19 pandemic has continued
globally, many more advisors are being asked questions about the value of life
insurance as well as long-term care, health and other health-based coverages.
Company owners are learning what protection their business
interruption policies really provide, as well as how well they are protected
from the liability and legal ramifications of having employees. In short,
financial advisors are having to ramp up their insurance knowledge rapidly.
The Need for Insurance
Insurance is defined as a means of protection from financial
loss. But in simpler terms, it protects people and their families who would not
be able to afford to pay their bills if an unplanned event, such as a heart
attack, car accident or fire, were to occur.
A person can transfer the financial ramifications from an
unplanned event, such as bankruptcy, to an insurance company through a payment
called a premium. This premium will entitle the person to specific actions if
the event occurs.
The Challenges and Pitfalls of Insurance for an Advisor
Unplanned events can adversely impact a client's flow of
money. While it would seem logical that a financial advisor would be concerned
about these risks, many still shy away from discussing insurance as an option
in a client's financial plan for three main reasons:
A fee-only fiduciary advisor cannot be compensated on
commission-based products.
Assets under management decrease when investable funds are
diverted to premium payments.
Advisors do not or cannot make the time to learn the
technical aspects of insurance.
Unfortunately, when financial advisors sidestep the
discussion of insurance, they are potentially failing to meet their clients'
complete needs. In addition, they may not realize that they are also exposing
themselves to substantial adverse ramifications:
They could have an errors and omissions, or E&O,
insurance claim filed against them for not bringing up the client's exposure or
need for insurance. An adverse event can cause even a well-constructed
portfolio to fail when it is needed the most.
They could face an E&O claim for making a mistake in
establishing a sound insurance plan for the client because they do not have the
appropriate expertise.
If an advisor receives any direct compensation by working
with a secondary party who presumably has technical expertise, the advisor
could be held liable even if it is the secondary party who makes an omission or
error.
Insurance Can Be an Opportunity
A more established advisory firm may seek a hybrid approach
to investments and insurance by establishing a separate insurance practice
above and beyond its wealth advisory activities.
Advisors, through this additional entity, may choose to
review existing insurance policies, make updated recommendations and implement
new policies themselves, or hire a specialized internal team for these tasks.
Newer advisors may not be able to afford the additional
business expense and compliance requirements of two distinct business lines.
Irrespective of size, if the firm's primary focus is investment management, an
insurance practice may prove to be a burdensome distraction.
A more optimal approach for any advisor is to work with a
dedicated insurance professional. In doing so, the advisor can reap significant
benefits:
Meeting clients' needs. Clients' needs are more fully
satisfied and risk exposure is significantly reduced.
Increasing trust. Clients find it comforting to have
their financial advisor quarterback these discussions, increasing their trust
in their overall plan. A high level of trust increases client retention and
generates more referrals. Consistent growth in both activities can
significantly increase the firm's overall valuation.
Growing relationships. The investment relationship
grows when the client sees the advisor bringing all needed resources to the
table. Clients will often consolidate all their investment assets with one
advisor when they see that there is an entire team available to meet their
needs. These new assets are valuable to financial advisors for revenue growth.
Generating fees for recommendations. Insurance is
properly recommended when the need emanates from established planning goals.
The advisor can focus on the planning necessary to support these
recommendations on a fee basis, rather than directly sharing revenue on the
insurance sale.
Life insurance may require income-replacement solutions. The
surviving family will need a contingency plan for income generation and college
planning. Long-term-care insurance will necessitate discussion on the
appropriate investment asset mix for longevity. Business owners will be
interested in optimizing their succession plan and, in consultation with their
accountant, reducing taxes on any sale.
All of these planning opportunities are the primary focus of
an advisor, and fees can be appropriately charged for that expertise. The
actual life insurance recommendation, implementation and ongoing service by the
insurance professional are transactions that can be appropriately compensated
with commissions.
Reducing liability. An advisor's liability can be
significantly reduced by working with an insurance professional. Many insurance
transactions are highly complicated, and properly structuring the policy can be
paramount to it achieving its desired goals.
Many insurance practitioners have earned professional
designations, and that expertise will go a long way in determining which
insurance plans fit in with the overall picture of the client's financial
goals. These accredited professionals can also work closely with an advisor's
network of attorneys and accountants to completely encompass a client's unique
needs.
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