WHERE DOES YOUR INSURANCE ADVISOR GET ADVICE?

"The Canadian life and health insurance industry is witnessing some dramatic developments. Barely a day after Standard Life’s announcement that it would discontinue its individual life insurance and critical illness products, there is word that Sun Life Financial has dismantled its long term care insurance (LTCI) specialist model."
— advisor.ca (Nov 30, 2011)

Following that article, this exchange took place on LinkedIn.

Promod Sharma: For years, I've seen insurance advisors struggle to understand the different types of products: life insurance vs living benefits (disability, critical illness, long term care) vs investments. Clients lose when they aren't offered products which are suitable and well-configured. Having experts certainly helps but has a cost ... 

Byren Innes (LinkedIn profile): Agreed. Unfortunately we live in a very complex product world today even though the 'product' shelves are much narrower than the past. As many advisors broaden their own offerings it becomes increasingly difficult to understand - not just the basics but the specific and sometimes complex and subtle details. I'm waiting for a smart entrepreneurial firm to step up and fill this gap. Who will it be?

To date, Byren’s challenge has gone unanswered. This post proposes solution.

The Past

When your condition exceeds your doctor's expertise, you get referred to a specialist. You get better care and doctor avoids malpractice issues. Insurance works differently. Advisors need no real training. Once they pass a simple multiple-choice exam they are free to work on cases beyond their capabilities.

Since insurance advisors are commissioned salespeople, their primary goal is finding prospects. That tough role gets well-rewarded. When advisors elect to get technical help they have three choices:

1. insurers
2. intermediaries, or
3. independents

Each source has pros and cons. As Bob Dylan said, you gotta serve somebody. That's true even when you think they are serving you.

Insurers

Insurers provide free support. The price is right but the advisor then has an obligation to sell that company's product. Say bye to independent advice.

Since insurers are cost-conscious, they hire average specialists. Despite the impressive credentials, you get average advice. These experts often have "field experience". That means they failed at selling and are happy to get a salary and employee benefits instead.

Intermediaries

Managing General Agents (MGAs) are the intermediaries between the insurers and the advisors. The larger organizations provide internal support. This can be better than what's available from the insurers. Recommendations can now be independent but there's an indirect cost: the advisor usually gets lower compensation.

This model looks good. There's no upfront cost to the advisor, which is ideal since not every case closes. However, advisors often begrudge the cost. For reasons I've never understood, they'd rather get 100% of nothing or compromise with the free support from insurers.

Independents

Some technicians realize they can't sell and some salespeople realize they can't do the technical work. They form formal alliances or work together on selected cases.

These technicians can be very good but they aren't cheap. They typically get a split of the revenue (e.g., 25%-50%). No sale means no money, which may tint their advice.

To show their value, technicians tend to make matters look more complicated than they really are. If they simplify, the advisor might soon realize they can use free or cheaper resources.

The Ideal

Can an advisor who tries to do everything be great at anything?

The ideal is to have a team of independent specialists. Each masters their niche and gives referrals outside their expertise.

In practice, few advisors specialize because that means leaving "money on the table". For some reason, that's a problem. The other challenge is trust. Advisors want you to trust them but they have immense difficulty trusting other advisors.

An Extra Step

Commission-based sales create conflicts of interest. The solution is for you to pay for each service even if you decide against proceeding.

Is this radical?

You already pay your lawyer and accountant for their services. You pay a home inspector even if you don't buy the house. What do you think?

Links

• Is the best advice free or for fee?
• "Canada's insurance loophole": what else is wrong?
• The foolproof measure of trust
• Are you paying for efforts or results?
• The risk of financial innovation
• image courtesy of Jason Bain (Canada)

Podcast 146 (6:15)

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PS Just because advisors can get help to sell you a policy doesn't mean they have help to provide ongoing service.