I visit and speak with a vast number of advisors across the U.S. every month about using insurance as a part of their planning for clients. In speaking with a broad range of advisors countrywide, we get some interesting insights and hear many misperceptions regarding the role of insurance in financial planning.
Independent advisors have valid concerns when it comes to optimally growing their practice. In addition to solid investment management, advisors are pushed to provide holistic income tax, estate tax and legacy advice as part of their holistic offering. Insurance planning is a key part of this process. How RIAs deal with it varies widely. Some RIAs with insurance experience have established connections; however, these can be simple bi-lateral arrangements with insurance carriers, resulting in limited choice and less competitive outcomes.
That said, I believe it’s time to address the top misunderstandings:
- Advisors can completely avoid dealing with insurance. The vast majority of RIA practices have simply neglected to bring up the topic with their clients, particularly those advisors who have recently rolled out of the wirehouse environment. As the independent RIA community has grown, RIAs have struggled to find a gateway that marries specialized planning advice, choice of providers and ongoing support. But helping clients solve their insurance challenges is providing significant value.
- “We are going to wait until things settle down.” Inaction is inexcusable. There has been too much change to assume life will return to status quo before COVID-19. Even if clients have plans in place already, insurance is dynamic and requires review. In some cases, we review plans annually to check for issues with regulatory changes, performance, carrier issues and change in client life situation. Like it or not, what your clients had in place before COVID-19 may not deliver the same outcomes. Your options may have narrowed. Bringing a wider scope to your offering is not a zero-sum game with one option replacing another … it’s adding to the options you already have, a net positive to your clients.
- “We don’t believe in insurance” or “We only believe in term insurance.” Permanent insurance is an asset class in its own right, implemented and managed over time properly, it can make material improvements to the client balance sheet. Insurance can also be designed to deliver uncorrelated returns, serving as a natural hedge to the client’s portfolio. Term insurance has no place in a multigenerational plan.
- Low interest rates are bad for insurance. Wrong. Low interest rates have polarized the market and forced carriers to either scale back or defend their competitive positions. Arbitrage exists and there are opportunities out there, they just need to be found.
- “My client is wealthy enough and doesn’t require insurance.” Actually, we have found that the wealthier the client, the more important insurance becomes to control legacy, taxation and intergenerational wealth transfer.
- The fees are too high. As an advisor, how are you considering the context of fees? Is this because there is no transparency and just making an assumption? Equally – when fees are fully explained and the expected outcome understood, the fees can be more than justifiable.
- Performance is bad compared to other options. How are you considering performance? Side by side on a pre-tax basis or after tax? Tax drag is huge. Look at how many families willingly invest in muni bonds just for the federal tax benefits, despite the low returns. Compare the tax free after fees IRR to the taxable IRR.
- “Insurance should be handled by brokers only, I don’t want my practice to handle this. Advisors are missing out on a huge opportunity to connect with the client, their heirs and other advisors such as attorneys, tax advisors and other bankers. Those advocating holistic client advice must be part of the process. The specialized brokerage general agency is the cornerstone of this process.
Typically, advisors find navigating the insurance arena challenging. We have found the key to delivering best in class insurance outcomes is through outsourcing and partnership with the right experts. In the same way selected investment capabilities are delegated to mutual, hedge, and private equity fund managers, advisors should draw on the expertise of specialists for estate, legacy and insurance planning. Specialized brokerage general agencies, or BGAs, have begun to appear to handle this, specifically designed to help RIAs and their unique business models.
The RIA community has a vast range of business models, specialization and requirements for partnership expertise. BGAs aligned for RIA workflow recognize this and have the ability to pivot between empowering advisors with an assisted sales model, supporting the advisor in the background with expertise, case management and administrational support, and/or seconding a specialist to offer full support, co-handling the client relationship.
The cornerstone of the RIA philosophy is putting clients first, championing transparency and delivering holistic advice. Make sure you are upholding these ideals when integrating insurance into your client’s financial futures. Perhaps the greatest outcome of the emergence of BGAs built for RIAs is the ability to solve, not sell. How can one truly be holistic without proactively interpreting liquidity, income tax & benefits of insurance, let alone ignoring it?
Matthew Celenza is the founder and managing partner of Boulevard Insurance Strategies & Boulevard Family Wealth