How To Evaluate A Proposal From An Advisor

A verbal promise isn't worth the paper it's written on. --- Samuel Goldwyn

The wealthy receive unsolicited proposals for insured tax strategies along their Financial TRAIL. If intrigued, they may meet the advisor with the idea but leave confused and skeptical. For answers they often turn to their "regular" advisor. Relationships matter.

Basic Misunderstandings
Only Audi has Quattro but other companies offer 4-wheel drive. Advisors and insurers tweak generic strategies (we looked at the top five earlier) and brand them under different names. What looks unique probably isn't --- which is good. Why be a guinea pig for an unproven idea?

Insured strategies combine actuarial, tax, accounting, investment and legal concepts. No wonder they can be tough to follow. To help you understand, advisors simplify which means leaving details out. You may get the "big picture" but miss key details unless you ask questions. Here's what often happens

• you misunderstand the proposal (e.g., E=mc^2 is elegant but try explaining to someone else)
  
• you expect better results than are likely (e.g., benefits get emphasized over risks)
  
• you aren't given enough detail for a proper evaluation (e.g., by your accountant)
  

What You Can Do
To help evaluate a proposal

• get a copy by email
  
• think of questions before you meet
  
• make notes during the meeting and think of what's been left out
  

Before Meeting
Ask for a copy of the proposal by email before you meet. Explain that you want to prepare in advance. The advisor may refuse to send the entire proposal in advance for various plausible reasons, but sure to get agreement that you'll get an electronic copy afterwards.

Since you agreed to meet, you're intrigued or at least a bit curious. Why? Jot down the questions you want answered.

While Meeting
Listen and ask questions. The advisor will likely show you a simplified prepared presentation that looks like a PowerPoint followed by numbers in Excel. This aids understanding but is not a full picture.

To explore further, you need an official illustration compliant with the guidelines from The Canadian Life and Health Insurance Association (CLHIA).

"... the CLHIA's Sales Illustration Guideline underscores the importance of communicating to clients the risks involved and the potential variability of the product for those products not fully guaranteed. For Universal Life policies with an equity component, it requires that any illustrations of non-guaranteed elements prominently specify that actual results will vary from those illustration - upward or downward- depending on future experience. A minimum of two scenarios must be provided - the first within the "primary" scenario range established, on an annual basis, by the insurer; and the second that is less favourable than the primary scenario. The general basis for each scenario and its key assumptions must also be outlined." --- Ontario Securities Commission

After Meeting
If you did not get a copy of the proposal electronically, be sure to request one now. This must include a CLHIA-compliant illustration showing

• the assumptions used
  
• projections for all years
  

If you don't get enough detail, ask for more. You can then review the proposal or --- more likely --- ask someone like your accountant. The advisor who made the proposal will answer questions, but printed documentation helps. You can then make a decision.

Links

• The Top Five Insured Strategies
• Three Reasons The Rich Get Richer
• The Ideal Investments For Tax-Free Growth
• The Financial TRAIL To Taming Your Financial Risks
  
• Principles and Practices for the Sale of Products and Services in the Financial Sector (Ontario Securities Council)