June 15, 2014


The magic of levitation
Insurance advisors love referrals but why would you bother giving them? They sell the same products from the same insurance companies at the same prices. What really sets an advisor apart?

The potential advisor must show they are significantly better or different to overcome the client's inertia. As with other consumer goods, packaging helps.

A common approach among insurance advisors is claiming to offer “exclusive” financial strategies. There’s a risk with financial innovation but there’s an allure too. The advisor might sell something different, but at least they got to meet the prospect. The “10-8” insured leveraging strategies were often used as door-openers, though the 2013 federal budget reduced their appeal.

Before giving a referral, consider these questions.

Do you understand the strategy?

If you can't explain it simply, you don't understand it well enough.
— Albert Einstein
Just because you don’t understand a magic trick like levitation doesn’t mean you can believe your eyes. Insurance strategies are designed to look appealing and plausible. Advisors are trained to look knowledgeable and sincere.

Results which look too-good-to-be-true, might be. Assumptions and interpretations affect the results in ways that may not be obvious.

What if the advisor is wrong?

You likely aren't an expert in what the advisor is selling. You might not be especially interested in the details. If the advisor is wrong, what's the worst that could happen?

You're a steward with an obligation to protect your connections. What happens to your relationships and credibility if you make a bad referral because you didn’t do enough checking?

What makes the new advisor a better choice?

Unless the new advisor seems better, why go through the hassle of switching? The new advisor might appear more innovative, more knowledgeable and better at providing ongoing service. That doesn't mean you get what you see. Advisors are trained at prospecting. The successful ones get very good at building rapport and getting business.

What makes the advisor a true expert?

The only source of knowledge is experience.
— Albert Einstein
Advisors get rewarded for selling. Success requires being good at that. Once they've found a prospect, they can bring in other people to help them. I was a resource for them when I worked for insurance companies.

It's unrealistic to expect an advisor to be an expert in the technical details, the substance. They are rewarded for creating the sizzle that marks the start of the sales process and the closing at the end. They get help in the middle.

Think of buying a car. You start with the salesperson, talk to a service advisor for maintenance, have the work done by a technician and pay the service reception desk. This division of roles is more efficient and provides you with better service.

To get more than sizzle. Who taught the advisor? Who supports the advisor?

Does the advisor claim to have unique strategies?

The secret to creativity is knowing how to hide your sources.
— Albert Einstein
If an advisor claims to have have something unique, you may not be getting the whole story. The only difference may be in the packaging. Ultimately, you get the same product from the same insurance company at their normal price.

When I was the product actuary at National Life, we created white label products like MD Life Plan (sold to doctors) and TD Universal Life (sold to bank clients). These products performed better than our normal products because the compensation was lower. Other advisors who sold our products were not pleased that we were helping their competition. Sales suffered. Lesson learned. Future white label products had our normal street pricing and differed only in packaging (e.g., exclusive investment choices in UL).

What are the potential side effects?

A fiduciary like a doctor, lawyer or accountant has a legal responsibility to tell you about side effects from a recommendation. Salespeople need not unless you ask.

For instance, when I got my first SUV, I wasn't told the tires only lasted 40,000 km and that replacements cost $500-$700 each! I wasn’t told how pricey the scheduled maintenance was either. Caveat emptor in action.

Who is the supporting the advisor working?

Advisors need help with complex strategies. Asking for help creates obligations to
  • sell higher compensation options to "feed" the extra mouths
  • sell products from a specific insurer if getting help from them
  • close sales to get the revenue
If an advisor claims to be working alone, be wary. That’s unlikely. Life insurance combines the specialized worlds of risk, accounting, investment and law. How well could one person know all of them?

How forthright is the advisor?

"It's the words that we don't say that scare me so."
— Elvis Costello, Accidents Will Happen
A forthright advisor tells you what you ought to know before you ask.

Have you been given adequate information about the advisor's hidden incentives (e.g., commissions, bonuses, conventions), the downsides, the reasonability of the assumptions used or the alternatives? You may have difficulty figuring out what's left out, which makes it tougher to ask the right questions and gauge the responses.

What does Google say?

Experts publish and get interviewed. Is the advisor an expert?

Do a web search for the advisor’s original content. In particular, look at their LinkedIn profiles. What have they published there? How recently? How many readers do they have?

Nothing stops advisors from creating and publishing quality content continually — except themselves. Their digital tapestry shows the past and may predict future performance.

Why does the advisor need your help?

If you bought what the advisor wants to sell to your connections, you have a reason to tell the ones who might benefit.

If you didn't buy, you don't have direct experience with the advisor’s full process. That’s a reason to be more cautious. The post-sale service might not meet your pre-sale expectations.

Who backs the promises?

Things can go wrong. What then? What is the advisor guaranteeing? The fineprint often tells you to get independent advice, which is a way to transfer responsibility from your advisor.

If you're using standard strategies backed by mega-insurance companies with solid corporate governance, they have incentives to fight on your behalf. For 10-8 insured leveraging, insurers fought all the way to the Supreme Court. If you're buying an “exclusive” for-your-eyes-only strategy, who can you count on?

What’s your reward?

Advisors might pay you a referral fee if a sale occurs. This is illegal in Ontario but still happens. If you're getting rewarded for giving referrals, your objectivity may suffer --- even if you think you're unbiased. It's tempting to believe what makes us money. It's not as if people are forced to work for tobacco companies or today's equivalents like processed foods.

Would you make a referral for free? If not, should you for money?


PS Buyer beware. Referrer beware too.

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