WHY INSURANCE ADVISORS ALSO SELL INVESTMENTS

Would you go to a doctor who also does dentistry, or an accountant who also prepares Wills? Their professional bodies may protect you by banning the overlap.

Investments and insurance are very different but cross-selling occurs. Many insurance advisors also sell investments like segregated funds and perhaps mutual funds. This puzzled me. How can one person master such different product category?

These generalists don’t want to "leave money on the table". If markets are bad, they focus on selling insurance. When markets are good, they earn nice trailers from the investment portfolios they administer. They are also "building walls around their clients" by becoming a one-stop shop. Some go further and offer even more services.

What about investment experience? Financial literacy is a problem for advisors too, but recommending balanced funds doesn’t take much skill.

Cross-selling makes business sense for an advisor but you as a client lose. You're paying a premium for advice that a generalist doesn’t have.

WHOLESALERS

Insurers hire wholesalers to entice advisors to sell their products. Insurers tried to save money by having insurance wholesalers promote investment products too. This flopped. The products were too different and difficult to learn well. Also, compensation structures tended to favour one product line (typically insurance).

Insurers then hired investment-specific wholesalers. This worked better. The challenge was to get these investment people (who may have worked at mutual fund companies) to understand and cross-promote insurance.

Are you with me? Insurers decided that investments and insurance are so complex that different wholesalers promote them … to advisors who usually sell both.

FINER

Even within insurance, there are vast product differences. Advisors are often more comfortable with life insurance (term, whole life and universal life) than living benefits (income replacement, critical illness, long term care). The wholesalers had similar issues.

When I was designing critical illness plans in the 1990s, I felt out of my depths (having focused primarily on life insurance). Luckily, I was able to assign the work to an actuarial associate who had experience from a previous employer. My wholesalers were clamoring for critical illness plans ... but had difficulty understanding the products when launched. In turn, they had trouble explaining to advisors who then had trouble explaining to you. Other insurers had the same problems.

Sales of critical illness insurance languished and you didn't get valuable protection. The pattern repeated with Long Term Care insurance.

Why not have wholesalers who specialized in living benefits? Sun Life tried this. These specialists --- often nurses --- could do much of the work for the advisor. This seemed ideal but last year, Sun Life disbanded this initiative.

Consequences

Your advisor might sell investments, life insurance and living benefits. And extras like group insurance. And more. I met one last week who also does free insurance reviews. He didn’t have a single designation, though. Maybe that’s because he’s busy sending spam. The next day, I got an email with poor grammar and weird formatting.

Who helps advisors understand and select suitable options for you?

Any advisor can get support from insurers but that's limited to the products that company sells. Some advisors get specialized support from their connections or the intermediaries through whom they sell insurance. This support is much better than what an insurer can provide. As independents, these specialists are not confined to using products from a specific company.

Blend

You could choose to have separate advisors for

• investments (maybe you self-manage)
• life and health insurance (backed by separate specialists in life insurance and health insurance)
• employee benefits (also called group insurance)
• other products

Using specialists doesn't cost more but you get more expertise working for you. Isn't that good value?

Links

• Sun Life axes LTCi model (advisor.ca, Nov 30, 2011)
• Where does your insurance advisor get advice?
• Two types of insurance you may have but can’t own
• Why critical illness insurance remains unsuccessful
• The word advisors imply but dare not say
• image courtesy of PhotoXpress.com

Podcast 168

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PS Insurance advisors may work with investment advisors to give you a one-stop option but dealing with complete independents may be better.