On the surface, Registered Investment Advisors (RIAs) in the United States are a natural home for life insurance advice. They advise their clients on pretty much everything else – tax planning, estate planning and investing, to name but a few – so, life insurance makes a lot of sense here. Right?
Sadly, not so much. RIAs often steer clear of life insurance advice; part of the reason is because they might not be licensed to sell life insurance in the first place. And part of the reason why they might not be licensed to sell life insurance is because their fiduciary duty to their clients can’t be satisfied under the current structure.
“Current regulations in most states for most product types permit agents, brokers and insurers to ‘quote’ low premiums and project high account growth, while charging high costs without disclosing either those costs nor the correspondingly high(er) risks of under-performance, additional future ‘premium calls’, or even policy lapse,” said Barry Flagg, CEO, President and Founder at Tampa, FL-based insurance research and analysis firm Veralytic. “This lack of transparency, uniformity, and consistency makes it impossible for an RIA to discern between agents, brokers and insurers engaged in such misleading sales practices versus those agents, brokers and insurers offering products in their best interest.”
There are many databases that enable easy analysis of mutual funds and ETFs for their retail clients, and those that enable screening of sophisticated investments like hedge funds and private equity funds for their accredited investor clients are an ally to the RIA that needs to be able to quickly and easily find the products that satisfy their client’s risk appetite and return expectations. Evaluating if or when a life insurance policy is in the client’s best interest has been comparatively more difficult, providing another reason for an RIA to stay away.
“Because RIAs haven’t had a reliable means of measuring costs, performance and risks as is required by their operating model, they haven’t been able to even think about their clients’ life insurance the way they already think about every other asset on their clients’ balance sheets. They all have clients who already own life insurance, so they certainly would talk with clients about life insurance if they just had the same access to research that they already have for every other asset on their clients’ balance sheet,” said Flagg.
RIAs are itching for change in this market. Keith Loveland, President at Loveland Consulting in Minneapolis, Minnesota, said that the current situation is holding them back from providing a holistic look at a client’s retirement and estate planning needs.
“It’s frustrating for a few reasons, but mainly because life insurance is a critical component of an overall solution for our clients,” he said. “If the current situation was easier to navigate then we would be able to provide a better service for our clients.”
Despite the challenges, there are some green shoots. In New York, for example, the state’s financial services regulation 187, which was drafted to ensure that a “best interest” standard will be imposed on all life insurance sales in the Empire state, came into force on February 1, 2020, for life insurance sales (and August 1, 2019 for annuity sales). The Supreme Court Appellate Division struck the ruling down in April 2021, but the DFS has appealed to New York Court of Appeals. Flagg says that some version of the ruling is likely to go through.
“If the NY Court of Appeals upholds the ‘unconstitutionally vague’ verdict by the Appellate Division, then NY DFS can/will almost certainly re write NY Regulation 187 to eliminate “unconstitutionally vagueness”. Either way, given NY DFS has taken this matter all the way to NY’s highest court, NY Regulation 187 will almost certainly go into full force and effect in some form or fashion sooner or later. That’s good news for the consumer,” he said.
Life settlement investors cite a lack of awareness amongst the insured that selling their life insurance policy is even a possibility as being one of the main drivers of the lack of deal flow coming to market. If RIAs were more involved in the life insurance space, that would be a significant boon.
“Studies suggest that wealthy clients need and want advice about life insurance more than financial advice about almost anything else. Life insurance is among the last, largest, most-neglected and worst performing assets according to client expectations,” said Flagg. “So, if or when RIAs get the ‘inputs’ needed to start thinking more about their clients’ life insurance, they will naturally start including life insurance advice in their ‘output’, talking more and more about life settlements as one of the policy management options (PMOs) in their clients’ best interest, thereby increasing the supply of policies for life settlement.”
Change is slow in the insurance world. It’s also slow in the legal world, so any excitement around the possibility of regulatory change to enable more RIAs to get more involved in the life insurance advice game in the United States should be tempered. But for Loveland, it can’t come quick enough.
“It makes all the sense in the world for the industry to change to a best interest model,” he said. “It would remove barriers to RIAs including insurance as part of their advice model, and the nature of the RIA model means that clients would be getting independent advice and analysis around what’s best for their clients. This would be a significant win for the consumer.”