One area of controversy in the financial advisory business centers around advisors at registered investment advisory firms who offer insurance and annuity services in addition to planning and asset management.
While many advisors split the insurance business into a separate entity, some professional groups still refuse to admit them. They hold the position that any type of commission business disqualifies those advisors from calling themselves “fee only.”
However, advisors at registered investment advisor firms who offer insurance services — and there are many — hold a different view. They emphasize that they can best serve clients by offering a comprehensive menu of financial services.
Stephanie McCullough, founder and CEO of Sofia Financial in Berwyn, Pennsylvania, maintains her insurance license mainly to help clients whose plans indicate they need life insurance.
She also helps clients with insurance in the areas of disability and long-term care.
“The last is an especially big concern for my clients, who are mostly women over 50,” she says.
“Everything is driven by comprehensive financial planning,” she adds. “The first questions we dig into are: What kind of life are you trying to create? What is most important to you? Then we look at: What does this money need to do for you? When do you need to start spending it, and how much?”
Acting in the Client’s Best Interest
Lawrence Sprung, founder and wealth advisor at Mitlin Financial in Hauppauge, New York, says including insurance as part of his firm’s offering was necessary to offer comprehensive help to clients.
“It also ensured that the clients who used us for their insurance needs were purchasing the product that we discussed during the planning process, and they were not swayed to purchase something different than what was discussed,” he says.
“Being that we must act as fiduciaries, we always act in the best interest of the client. The balance of this type of decision rests solely on what is in the best interest of the client,” Sprung says.
In cases where planning reveals a need for insurance, advisors who don’t offer that service must refer the business elsewhere. That creates a risk that a client won’t purchase insurance at all, or perhaps be sold the wrong product by an outside agent.
Zaneilia Harris, president of Harris & Harris Wealth Management Group in Upper Marlboro, Maryland, is also guided by the client’s plan when choosing the approach to take.
“Comprehensive planning is about understanding all the moving aspects of a client’s life and matching the money sources to it,” Harris says. “That’s why, foundationally, I focus on understanding what’s important to them in living the life they want. The financial vehicles I use are based on what the client wants to achieve.”
Harris adds that some of her clients want a guaranteed income stream beyond Social Security. That’s where an annuity can play a role.
“I balance that with allocating longer-term money in a portfolio with stocks, bonds and cash,” she says.
The Need for Holistic Planning
Faye Sykes, CEO of Scarlet Oak Financial Services, an RIA in Atlanta, made career moves specifically to learn about insurance.
“I worked on the investment side for almost five years, then worked for two insurance companies to learn more in-depth about both sides,” she says.
Like other advisors who offer insurance and investment services, Sykes uses comprehensive planning to understand a client’s overall situation.
“I personally do not consider people that only do investments or only insurance as full holistic planners,” she says. “We, as planners, really need to understand and look at the entire picture to do what is needed best for the client. As a fiduciary, I do not see how people cannot do this.”
“One of the biggest concerns for retirees besides health care is potentially running out of money,” Sykes says. “All tools, like Social Security, annuities and investments, need to work in tandem to fully help clients get the peace of mind that is needed.”
Echo Huang, president and founder of Echo Wealth Management in Plymouth, Minnesota, says insurance is an important component of wealth management. If the plan reveals that clients need a specific type of insurance, such as life, disability or long-term care, Huang gives them the option of purchasing it through her.
“I still maintain my insurance license and disclose to clients that I receive some commissions from the insurance companies, and they are not required to use my insurance service to become my client,” she says.
Huang keeps her insurance license to simplify client finances and provide ongoing reviews. “I believe I can do a better job for them than an insurance agent who doesn’t know their entire financial picture and specific goals,” she says. “Clients know that the commissions are paid to other insurance agents if they buy the same products from other agents.”
Huang uses the fiduciary standard as the benchmark for a client’s best interests.
“If a client needs an annuity for its tax-deferred or lifetime income benefits, then the right annuity can serve that purpose, and it’s OK to reduce the assets in their investment accounts,” she says. “In addition, using a cash-flow-based planning tool to show them the exact impact can help them make the best decisions. I generally recommend commission-free annuities, if possible, to lower the costs for clients.”
Disclosing Conflicts of Interest
Huang does not share the viewpoint that an advisor who sells insurance is working against her clients’ best interests.
“Firms must make their own decisions on the business models,” Huang says. “Reducing and disclosing a conflict of interest are both critical.”
If the advisor doesn’t use a planning tool to help clients understand their insurance needs and how it can help them achieve their goals, then selling insurance for the commissions alone presents an ethical issue, she says.
However, she adds, “Suppose the advisor does proper planning for clients and helps them implement strategies such as investment management and asset protection. In that case, this advisor delivers the services.”
The controversy surrounding RIAs who sell insurance shows no sign of easing.
“I was berated on the floor of a trade show when someone heard I was insurance-licensed and therefore not fee-only,” McCullough says. “The trouble is, no one is free of conflicts of interest. If the guy who mocked me had a client who was considering buying an apartment building as an investment, as opposed to investing in a portfolio with that advisor, there’s a conflict of interest.”
Sprung expresses dismay that certain professional groups don’t allow RIA firms or their advisors to become members.
“I am not sure I understand why certain organizations frown on it,” he says. “It seems that these types of organizations are a bit polarizing and feel that advisors should either be fee-only or not. I do not think the way an advisor gets compensated says anything about the advisor. We believe that if you want to work with a client fully, insurance is a part of that. Unfortunately, I believe the insurance industry needs to work on coming up with a better way of compensating fee-only advisors, so they can assist in this area too.”
Consumer Protection, Not Morality
One prominent industry organization that does not admit advisors who receive commissions is XY Planning Network. The group provides technology, training and support services for fee-only financial advisors.
“You’re not a fiduciary when you transact insurance as the insurance agent,” says co-founder Alan Moore. “You are working on behalf of the insurance company. You have no fiduciary duty to your client, and that’s a big issue that creates consumer confusion.”
Moore emphasizes that XYPN’s perspective is not based on morality.
“I hear from advisors who say, ‘I’m a good person. I do things the right way.’ I don’t doubt that,” he says. “But our industry has enabled people who are not doing the right thing, and who are in it just to make a buck and who don’t care about taking care of clients.”
He adds, “That has brought down trust of our entire industry. It only takes a few bad apples, and we are not weeding them out.”
New developments within the insurance industry mean fee-only financial advisors may hold certain annuities at their brokerage custodian, and in some cases, earn a fee that is not a commission.
Moore says certain no-load annuity products fall under that category. Some annuities can also be sold without a commission. An advisor may get paid a flat fee or an assets-under-management fee of, for example, 1% per year. XYPN members are permitted to use these products, as the advisor never receives a sales commission.
XYPN member J. Stanton Burns, a financial advisor at Oakview Wealth Solutions in St. Charles, Missouri, says his firm offers commission-free insurance products and annuities.
“I work with both TD Ameritrade’s annuity desk and a company called LLIS to offer these products to my clients,” he says. “It ends up being a win for everyone — doing it this way. I have no conflict of interest when recommending products to my clients, and the clients’ fees are significantly lower, as they are not paying commission.”
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Selling Insurance: A Hot-Button Issue for Financial Advisors originally appeared on usnews.com