A Financial Planner’s Insurance Advice: Case Study

The financial planning industry changed quite substantially since I arrived on scene a little over 10 years ago.  In that time, much of the regulatory shifts seek to establish new standards (e.g. the fiduciary standard) across all transactions in an effort to 1.) force advisors to better educate themselves about financial products and 2.) give consumers greater peace-of-mind when it comes to engaging an advisor for his/her services.

One of the chief stakeholders in establishing ever stringent standards among financial advisors, the Certified Financial Planners Board (CFP®) purports membership that upholds the highest ethical standard within the industry.  Long time followers of The Insurance Pro Blog know that we're not always keen on the initiatives championed by the CFP Board or other regulators who constantly seek to “improve” the industry by making more rules and attempting to shove all aspects of financial planning into a neat little box that serves best interest primarily through a model that extols superficial “low cost” while decrying most other attributes whenever additional expense follows.

For a long time, I held the believe that too much regulatory effort focuses on buzzwords and a lazy ideal that one who achieves a certain certification attainment is automatically all knowing, all wise, and all ethically balanced.  My cynicism comes from a decade's worth of various experiences that appear to conflict with the agreed upon standards that low cost is best and certain types of advisors who do not primarily “earn commissions” have the best interest at heart for their prospective clients.

I recently found myself in a situation where this whole paradox amusingly (to me at least) played out.  I'm going to share the tale because it's a wonderful example that explains why I hold the reservations I do.  It also highlights the possibility that believing you have the best intentions can still be dangerous for the general public.

A Request for Life Insurance Consultation

We received a request for help.  A financial advisor, a Certified Financial Advisor, needed assistance in order to help a new prospective client.  The client owned an indexed universal life insurance policy.  This particular policy had a rather sizable premium ($100,000 per year).  The financial advisor convinced the client that he didn't really need the life insurance and could better employee the money elsewhere.  There was just one small problem, the client didn't want to surrender the policy and pay the surrender fee still applicable to the policy that was purchased about five years ago.

The story gets even better…

The client only made one premium payment to the policy.  After the first premium payment, he left simply let normal expenses deduct from the cash value created by his one time premium.

The financial advisor reached out to us to help him understand the policy and–more importantly–figure out a way to get the client out of the life insurance policy, so he could focus his energy on funding the brokerage account(s) the advisor planned to set up for him.

Reviewing the life insurance policy showed that it had the correct implementation so far as cash accumulation was the goal.  Death benefit was as low as legally permissible for the premium and all the other manipulations we must do to universal life insurance to make it conducive to cash accumulation were present.  The only reason to dump the life insurance idea were a fundamental strategy change that no longer thought life insurance could deliver on the goals for the client–presumably wealth creation through cash value build up.

The financial advisor explained this to me as circumstanced in the client's life had changed from five years ago when he bought the life insurance policy, and he decided he needed to go in a different direction to achieve his goals.

I was Suspicious

I'll admit I held some suspicions about the claim that circumstances changed and the client decided he needed to head in a different direction.  But in the interest of giving the advisor the benefit of the doubt, I decided I'd take his word at face value on that.

So the big dilemma concerning the policy was the surrender charge and the advisor was trying to figure out how to get the policy cash value over to a brokerage account preserving as much money as possible.  I later discovered that doing this as soon as possible also appeared to be a high priority, but it wasn't clear who exactly was more itching to get the money over there–the client or the advisor.

The Meeting

Coming into the meeting with the advisor, I knew he was a CFP, and I also knew that he began his career in the investment industry in 2000.  He did not hold an insurance license.  I had a few facts about the client.  Moderately high income earner, seemingly a tad behind on asset accumulation for his age, married, kids, and that's pretty much it.

The meeting started with the advisor giving me a very brief overview of the facts about the client and the life insurance policy.  The one thing that stuck with me was a comment the advisor made.  It was something to the effect of what I mentioned already.  Basically the client bought the policy some years ago, never did much with it.  Circumstances changed, and now he decided that he needed to go in a different direction to accomplish his goals.

That sounds like a reasonable explanation for wanting to stop the policy and do something else, but here's were I found myself confused.

I was meeting (by phone) with an advisor who did not, nor did he ever, hold a life insurance license.  This implies that he's never sold a life insurance policy, nor worked through the process of designing and recommended life insurance for any financial need.  What he knew about life insurance appeared to come from casual encounters throughout his career, but there was no hands on experience with it.  How then, had he already arrived at the recommendation the client needed to do something else?  It seems like the guidance from someone, like me, was necessary before we arrived at this point.  But that's not how this unfolded.  The advisor, who appeared to know about as much about life insurance as I know about sewing quilts, somehow temporarily gained the proficiency on the subject to recommend against the life insurance policy and move forward with something else…something the advisor could sell him.

The meeting became more amusing by the minute.  My first comment to the advisor concerning the surrender fee, and the client's apparent desire not to pay it, was to simply leave the cash in the policy and wait out the surrender period.  The advisor appeared very unenthusiastic about that idea.

I also recommended reducing the death benefit by the surrender free amount each year.

“Surrender free?”  The advisor asked with some enthusiasm.  “What's that?”

I wanted to say it's one of the most fundamental features of all universal life and annuity contracts, but I kept the meeting cordial and simply explained that almost all universal life insurance policies allow for a percentage of surrender free withdrawal or death benefit reduction to which the surrender fee does not apply.  This amount is usually around 10%.  So, I explained to the CFP advisor, he could instruct the client to reduce the death benefit amount by 10% each year to further reduce the insurance costs of the universal life policy.

Then he asked a question that, to this very day, I continue to marvel at.  He asked me, “if we reduce the death benefit by 10%…roughly how much will that reduce the insurance cost.”  I kid you not.

I was a bit stunned by the question.  I know being a financial advisor, even a CFP, doesn't require a high level of advanced mathematics, but surely elementary school level math logic is a safely assumed skill they posses.  It took me a few seconds to arrange my thoughts as a raging WTF moment ensued inside my head, but I simply said, “It should be 10%.”  Looking back on it, I really wished that I had messed with him and made up some precise figure like 8.336% or maybe 3.14% and waited to see if he picked up on the joke.

At this point, I had to ask a question about the policy that was nagging at me.  What was the current cash value?  After all the client made one six-figure payment to this indexed universal life insurance policy roughly five years ago and then left it to fend for itself.  The answer…$70-ish thousand.  Now after the surrender charge, the remaining balance was in the low sixties, but when I heard just how much money was in this policy I immediately thought, why on earth would the recommendation be to dump the policy?

The client paid one $100,000 premium five years ago for a seven-figure death benefit, let expenses draw down cash value and the results are still seventy-some-thousand dollars in cash.  If the client expectations weren't met with those results, I'm afraid the CFP is in for a rough time trying to come up with anything that impresses, but I guess good luck to him in his pursuit.

Most Financial Planners aren't Financial Planners

The moral of this story is that most “financial planners” are not financial planners.  If your financial planner's compensation structure is anything outside of hourly charges or pre established fees specifically for designing a plan for you, he/she is not a financial planner.  He/she is a commissioned salesperson who gets paid to sell you things.  Sometimes those commissions are obscured behind the word “fee,” which they assess on the value of your assets they “manage” or “invest” for you.  It's still the same thing–in spirit–as a commission.

This doesn't make them bad.  I'm a commissioned sales person who collects commissions to sell life insurance.  The problem arises when they lie and hold themselves out as something that appears to be objective and unbiased.  We don't refer to ourselves as financial advisors, planner, et. al. at The Insurance Pro Blog.  While we do possess much knowledge on the subject of financial planning, we do not have the desire to perform planning for a fee.  We also do not wish to obscure what we do by telling people that we can provide them with financial advice (for free!) if they engage us.

We sell life insurance.  We think life insurance can accomplish an array of financial goals quite well.  For those who agree with our world view on this subject, we'll select and/or design the best life insurance policy for their purposes weighing a myriad of factors we understand from years (decades actually) of assisting a wide variety of people with this exact pursuit.

We do not recommend against any other financial product.  While we have compared life insurance to several other financial vehicles over the years, we do that only to show how the two compare to provide people with a quantitative measure for expectations.

This here is the core of the problem that spurs a lot of regulatory ire within our industry.  Far too many people choose to veil their profession through various allusions about objectivity or advisor-like services because they think it will relax the angst of a new prospective client.  It doesn't.  It confuses people and it often puts the investment/insurance/whatever else salesperson in an awkward position of feeling the expectation to provide expert advice on subject matter he/she holds nearly no knowledge.  Some choose to do this as a means to sell against various product options in favor of what they have to sell.

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