Fee-only insurance advisors sound like a good idea. Since we can never know if an insurance agent/broker is truly working in a client’s best interest or secretly anticipating a commission check, the thought of an independent second opinion that is not motivated by a potential payday appears straightforwardly good.
However, the use of fee-only insurance advisors is very few and very far between. Further the number of fee-only insurance consultants pales in comparison to the number of insurance agents/brokers. So why does this seemingly good idea fail so miserably to be a widespread and successful industry?
What is a Fee-Only Insurance Advisor?
Let’s start with a definition, not just in practical terms but also keeping legal consideration in mind, and one quickly starts to discover why this might be an idea doomed to failure. A fee-only insurance advisor is someone who charges a fee for insurance advice. This advice can take the form of offering an opinion on the relative fairness of a given premium paid for an insurance policy, to the adequacy of a given type of insurance used for a specific goal, the need for insurance of any sort, and to the foundational construct of a life insurance design (that thing we do with whole life insurance and universal life insurance for free).
That seems reasonable and understandable, but there is legal nuance to charging a fee for insurance advice that quickly makes the prospect of being engaged in this business headache inducing.
Not the same as Financial or Investment Advice
A huge misunderstanding within the financial services industry is the incorrect assumption that someone who holds a license to charge a fee for financial or investment advice is thereby licensed and qualified to render insurance advice for a fee. There are many states that disagree and many of these states will impose harsh penalties on those who ignore this fact. This also helps explain why many dyed-in-the-wool fee only advisors are pretty silent on the insurance subject.
There are currently 19 states that have specific licenses for individuals wishing to charge a fee for insurance advice, but even among those 19 there is a lot of variance in what holding that special license means.
For example in my home state of Vermont, having an insurance consultant license bars one from also having an agent/broker license and also bars one from employing, being employed by, or being in a partnership with anyone who holds an agent/broker license. Vermont law further explicitly prohibits any compensation to an insurance consultant for contingent sales of insurance made through that individual’s recommendations.
On the other hand in the state of NY, having an insurance consultant license does not necessarily restrict one from holding an agent or broker license (New York state still recognizes a difference between agent and broker licenses), and New York state has ruled that agents and brokers can charge fees to their clients if they want to provided the fee structure is disclose and agreed to prior to the executing the work for which the fee will be charged.
Further adding to the confusion is California’s recent addition of the Insurance Analyst license that sort of makes them the 20th state to have a separate license for individuals wishing to charge a fee (only applicable to people who want to charge a fee and live in the state of California, however).
For the remaining 30 states that have no specific license for charging a fee for advice, most will allow someone who holds an agent/broker license to charge a fee for various work they do if they so desire.
The Numbers, they don’t Scream Success
The fee-only insurance industry essentially started in the early 1980’s and it’s been a relatively obscure industry ever since. At least this is the opinion of one of the fee only insurance consulting world's biggest advocates, Glen Daily.
To draw a comparison on the number of people engaged in consulting for a fee vs. selling insurance for a commission, the New York Department of Labor (taken from NY because they have the most readily available and accurate data) tells me that there are presently 370 licensed insurance consultants (that's what New York calls the license for individual seeking to focus on charging a fee rather than selling insurance products for a commission) in New York State compared to 143,083 life/accident/health insurance agents and 55,808 property/casualty agents.
Our Thoughts on Fee-Only Insurance Advisors
Our official position on fee-only insurance advisors is that we don’t have a position on them. We’ve had clients use them before, and I’ve witnessed them in action. I can’t say that I was ever wildly impressed with most of what they brought to the table, but I do note that since we already seek to optimize benefits to our clients these encounters did act as validation when the advisor blessed our design/plan–we've never encountered a fee-only advisor who didn't.
There have been a handful of incidences where fee-only advisors have made some awkward recommendations for situations in which we were not originally involved. There was one incident in particular where a fee-only advisor steadfastly recommended a certain life insurer for a whole life purchase despite that carrier's performing rather poorly both in terms of projected and guaranteed values against a few other carriers .
I do see a value, however, knowing that a lot of insurance agents don’t always operate in the most honest of ways. But there is a potential pitfall for fee-only advisors in terms of industry and product knowledge. Since they are not generally appointed with an insurance company and don’t readily have access to the latest information about insurance products, their approach to insurance design and evaluation can be a tad dated. Most states also don’t require continuing education for insurance consultants (those specifically licensed to charge a fee) so keeping up to date is largely driven by personal desire.
Ultimately I don’t personally discourage the use of fee-only insurance advisors. What you as the individual need to determine is if the on average $1,500 to $2,000 you’ll pay for their advice is worth the time saved researching the topic yourself.