Insurance may be a client’s least understood and most undervalued asset, even by financial advisors.
This is certainly the subject of a long and ongoing debate in the financial industry. However, as the COVID-19 pandemic continues globally, many more advisors are being asked questions about the value of life insurance as well as long-term care, health, and insurance. other health-based coverages.
Business owners learn what protection their business interruption policies actually provide, as well as how protected they are from liability and the legal ramifications of having employees. In short, financial advisors must quickly deepen their knowledge of insurance.
The need for insurance
Insurance is defined as a means of protection against financial loss. But in simpler terms, it protects people and their families who could not afford to pay their bills if an unforeseen event, such as a heart attack, car accident or fire, were to occur.
A person can transfer the financial ramifications of an unforeseen event, such as bankruptcy, to an insurance company through a payment called a premium. This bonus will entitle the person to specific actions if the event occurs.
The challenges and pitfalls of insurance for an advisor
Unforeseen events can negatively impact a client’s cash flow. While it would seem logical for a financial advisor to be concerned about these risks, many are still hesitant to discuss 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 paying premiums.
- Advisors do not or cannot take the time to learn the technical aspects of insurance.
Unfortunately, when financial advisors dodge the discussion of insurance, they may not meet all of their clients’ needs. Additionally, they may not realize that they are also exposing themselves to significant negative ramifications:
- They could have an errors and omissions, or errors and omissions, insurance claim filed against them for not discussing the client’s exposure or need for insurance. One adverse event can even cause a well-constructed portfolio to fail when it is needed most.
- They could face an E&O claim for making a mistake in establishing a solid insurance plan for the client because they lack the appropriate expertise.
- If an advisor receives direct compensation for 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 beyond its wealth management advisory business.
Advisors, through this additional entity, can choose to review existing insurance policies, make updated recommendations and implement new policies themselves, or hire an in-house team specialized for these tasks.
New advisors may not be able to afford the additional professional fees and compliance requirements of two separate lines of business. Regardless of size, if the primary focus of the business is investment management, an insurance practice can prove to be a tedious 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:
Respond to client’s needs. Customer needs are better met and risk exposure is significantly reduced.
Increase confidence. Clients find it comforting to have their financial advisor accompany these discussions, increasing their confidence in their overall plan. A high level of trust increases customer retention and generates more referrals. Consistent growth in both businesses can significantly increase the overall valuation of the business.
Growing relationships. The investment relationship develops when the client sees the advisor bringing all the necessary resources to the table. Clients often consolidate all of their investment assets with one advisor when they see that there is a whole 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 arises from established planning objectives. The advisor can focus on the planning needed to support these recommendations on a fee basis, rather than directly sharing revenue from insurance sales.
Life insurance may require income replacement solutions. The surviving family will need an emergency plan for income generation and college planning. Long-term care insurance will require discussion of the appropriate mix of investment assets for longevity. Business owners will be interested in optimizing their succession plan and, in consultation with their accountant, reducing taxes on any sales.
All of these planning opportunities are a consultant’s primary focus, and fees may be appropriately charged for this expertise. The actual life insurance recommendation, implementation and ongoing service by the insurance professional are transactions that can be appropriately remunerated by commissions.
Reduction of Liability. An advisor’s liability can be greatly reduced by working with an insurance professional. Many insurance transactions are very complicated, and the proper structuring of the policy can be paramount to achieving the desired objectives.
Many insurance practitioners have earned professional designations, and this expertise will go a long way in determining which insurance plans fit the overall picture of a client’s financial goals. These credentialed professionals can also work closely with an advisor’s network of attorneys and accountants to fully encompass a client’s unique needs.