Insurance may be the least understood and most underappreciated asset a client owns, even by financial advisors.
It certainly is the subject of a long and ongoing debate in the financial industry. However, as the COVID-19 pandemic has continued globally, many more advisors are being asked questions about the value of life insurance as well as long-term care, health and other health-based coverages.
Company owners are learning what protection their business interruption policies really provide, as well as how well they are protected from the liability and legal ramifications of having employees. In short, financial advisors are having to ramp up their insurance knowledge rapidly.
The Need for Insurance
Insurance is defined as a means of protection from financial loss. But in simpler terms, it protects people and their families who would not be able to afford to pay their bills if an unplanned event, such as a heart attack, car accident or fire, were to occur.
A person can transfer the financial ramifications from an unplanned event, such as bankruptcy, to an insurance company through a payment called a premium. This premium will entitle the person to specific actions if the event occurs.
The Challenges and Pitfalls of Insurance for an Advisor
Unplanned events can adversely impact a client’s flow of money. While it would seem logical that a financial advisor would be concerned about these risks, many still shy away from discussing insurance as an option in a client’s financial plan for three main reasons:
— A fee-only fiduciary advisor cannot be compensated on commission-based products.
— Assets under management decrease when investable funds are diverted to premium payments.
— Advisors do not or cannot make the time to learn the technical aspects of insurance.
Unfortunately, when financial advisors sidestep the discussion of insurance, they are potentially failing to meet their clients’ complete needs. In addition, they may not realize that they are also exposing themselves to substantial adverse ramifications:
— They could have an errors and omissions, or E&O, insurance claim filed against them for not bringing up the client’s exposure or need for insurance. An adverse event can cause even a well-constructed portfolio to fail when it is needed the most.
— They could face an E&O claim for making a mistake in establishing a sound insurance plan for the client because they do not have the appropriate expertise.
— If an advisor receives any direct compensation by working with a secondary party who presumably has technical expertise, the advisor could be held liable even if it is the secondary party who makes an omission or error.
Insurance Can Be an Opportunity
A more established advisory firm may seek a hybrid approach to investments and insurance by establishing a separate insurance practice above and beyond its wealth advisory activities.
Advisors, through this additional entity, may choose to review existing insurance policies, make updated recommendations and implement new policies themselves, or hire a specialized internal team for these tasks.
Newer advisors may not be able to afford the additional business expense and compliance requirements of two distinct business lines. Irrespective of size, if the firm’s primary focus is investment management, an insurance practice may prove to be a burdensome distraction.
A more optimal approach for any advisor is to work with a dedicated insurance professional. In doing so, the advisor can reap significant benefits:
Meeting clients’ needs. Clients’ needs are more fully satisfied and risk exposure is significantly reduced.
Increasing trust. Clients find it comforting to have their financial advisor quarterback these discussions, increasing their trust in their overall plan. A high level of trust increases client retention and generates more referrals. Consistent growth in both activities can significantly increase the firm’s overall valuation.
Growing relationships. The investment relationship grows when the client sees the advisor bringing all needed resources to the table. Clients will often consolidate all their investment assets with one advisor when they see that there is an entire team available to meet their needs. These new assets are valuable to financial advisors for revenue growth.
Generating fees for recommendations. Insurance is properly recommended when the need emanates from established planning goals. The advisor can focus on the planning necessary to support these recommendations on a fee basis, rather than directly sharing revenue on the insurance sale.
Life insurance may require income-replacement solutions. The surviving family will need a contingency plan for income generation and college planning. Long-term-care insurance will necessitate discussion on the appropriate investment asset mix for longevity. Business owners will be interested in optimizing their succession plan and, in consultation with their accountant, reducing taxes on any sale.
All of these planning opportunities are the primary focus of an advisor, and fees can be appropriately charged for that expertise. The actual life insurance recommendation, implementation and ongoing service by the insurance professional are transactions that can be appropriately compensated with commissions.
Reducing liability. An advisor’s liability can be significantly reduced by working with an insurance professional. Many insurance transactions are highly complicated, and properly structuring the policy can be paramount to it achieving its desired goals.
Many insurance practitioners have earned professional designations, and that expertise will go a long way in determining which insurance plans fit in with the overall picture of the client’s financial goals. These accredited professionals can also work closely with an advisor’s network of attorneys and accountants to completely encompass a client’s unique needs.
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Why Advisors Need Insurance Strategies for Clients originally appeared on usnews.com