Near the end of 2011, I had an epiphany. I realized that I wasn't putting your interests first as well as I could.
Product DesignWhen I designed health and life insurance products for a decade, I knew there were compromises that boosted profits.
Example (skip if you don’t like statistics): universal life might have a contingent bonus that rewards you if your investment returns are high. For instance, you might get a 2% bonus if you earn 5% in a year. That looks appealing but research showed the bonus would only pay 60% of the time. That reduced the projected payout to 1.2% (= 2% rate x 60% probability). To cover costs, the investment loads were increased by 1.2% (say from 1.8% to 3.0%).I was okay with this because other insurers had similar designs and sales were made through independent advisors. Buyer beware looks fair when you have an impartial advisor with the will and skill to help you make sound choices. I didn’t realize that advisors also suffered from the plague of innumeracy (low financial literacy).
One For AllWhen I spent 5 years helping top advisors sell insurance, I saw a more troublesome issue. Since I was working for an insurance company, I could only promote their offerings. No company in any business can have the best product for every situation. That's because companies make different compromises. For instance, clients at younger ages or buying smaller policies may be charged more to subsidize older clients buying larger policies. Why? There's more competition for the wealthy, which means better prices for them.
Representing a single company creates a conflict between what you’ve got and what's best for the client. I rationalized. I was supporting independent advisors who could deal with different companies. They decided what to offer their clients and I was there to help them. Never mind that compensation or other incentives might influence the recommendations. Since the advisors were really salespeople, they were not required to put your interests ahead of their own (see the insurance loophole).
All For OneSince 2009, I've been saying that I've been serving you directly, bypassing the salespeople. At least that’s what I said. That wasn't 100% correct. In some cases, I was still collaborating with advisors to serve their clients. This is often called “splitting cases” since the revenue gets shared. That looked like a win/win:
- advisors had clients but needed more credibility or expertise
- I had both but, as a startup, needed more clients
There was a bigger problem.
Oh NoSince the advisors "owned" the clients, I had to meet their interests first. This lead to conflicts since I would not concede. Too often, these advisors wanted to sell products with
- more coverage than necessary
- higher compensation than conscionable, or
- strategies with more sizzle than substance
Example: You know mutual funds have high investment expenses. You may not know — but probably guessed — that investments inside life insurance have high investment expenses too. This is normally hidden, but I told you in 2008 (see two drawbacks of investing in life insurance). A salesperson might not feel compelled to inform you but an advocate for you must ...What if an advisor doesn't provide full disclosure? There's the sin of omission. It's not the same as telling a lie but now the onus is on you to pose questions you might not think to ask. Even if you do, what answer can you expect?
What's worse than fooling a client? Fooling their tax advisor into recommending a strategy. When clients find out what happened — which may take years — the tax advisors get blamed since they were more trusted.
ConundrumDo you see my conundrum? Serving you with life and health insurance is my calling. It's the only thing I've done in my entire career. This is not my Plan B or Plan C.
How could I serve two masters, the salespeople and you?
I couldn't find a way to overcome the troubling conflict of interest. There's a time to take sides. That's why I've stopped sharing cases with advisors who make their living by selling health or life insurance.
I've terminated every single arrangement by the end of 2011. I can't serve them and you.
I choose you.
- Who can you trust?
- The foolproof measure of trust
- The word advisors imply but dare not say
- The ABCs of 1-2-3: The key to financial literacy
- The Globe and Mail on Canada’s insurance loophole: what else is wrong?
- What are you doing about your high investment expenses?
- How to fight cynicism
- image courtesy of nacu (Spain)
Podcast 152 (6:51)
direct download | Internet Archive page | iTunes
PS I still collaborate with hand-picked specialists like accountants, lawyers, fee-only financial planners, investment-only advisors and employee benefit specialists.