Bill Boersma: On Life Insurance

I’ve had this on my desk for a long time and I thought I would finally weigh in on it, though this tug-of-war will never be over. On March 13, 2011, there was a WSJ piece titled “A Smarter Way to Buy Insurance?” which was countered shortly thereafter by a posting on the NAIFA (National Association of Insurance and Financial Advisors) Blog titled “Myth Busting: Fee-Only Life Insurance Consultants Can’t Beat Agents on a Policy’s Price”.

They clearly disagree with each other so… who is right?

As is almost always the case, they are both right and they are both wrong. It lies as much in what’s not said as what is said and the ensuing misrepresentations, posturing, half truths and misleading statements are unfortunately par for the course. My goal is to get to the end of this post having upset everyone. If I accomplish that, I have accomplished my mission and have provided a balanced perspective.

Let’s start with the WSJ piece. The point of this piece is that you need an independent, fee-based consultant to make sure you are not getting hosed. I agree… to an extent.

I believe the piece is being fair when it states that most consumers do not realize that agents are not under a legal obligation to put clients first and that agents have an incentive to sell a more expensive policy. That incentive part is obvious as the same is true with realtors selling homes, dealers selling cars and jewelers selling diamonds. But it is not a reason to discount the value of working with an agent.

However, I have never entirely bought onto the idea that fee-only consultants are unbiased. Remembering that I am a big fan of consultants and argue for them regularly, please take a look at my previous blog posts for more on this.

It is true that first year commissions are significant, sometimes even more than 100% of the first year premium. But to go on to say that “Commissions are significantly lower for term insurance…” is silly. They are lower only because the premiums are smaller. As a percentage of premiums, term commissions are often actually bigger. This is like saying the commission on selling a modest ranch style home in the Midwest is lower than selling an ocean front home in Malibu.

Terry Headley, then president of NAIFA and counter point in the article and author of the subsequent blog taking issue with the WSJ piece is quoted as saying “… its members… all follow its code of conduct and ethics and design policies with clients’ best interest in mind”.

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I’m sorry. I was eating leftover Christmas candy when I read that and I choked it up and some of it got jammed in the keyboard.

Really? I guess I understand that as the president of the organization he might have to say that but I hope Mr. Headley was misquoted because it is embarrassingly ridiculous to say something like that.

On the other hand the article goes on to state that fee-only consultants are independent experts. Says who? Just because they charge a fee they are experts? That’s as equally silly and embarrassing. In my experience, if a professional doesn’t have significant experience in the sales side of an industry, it is very difficult to be appropriately effective for a client. I see many of these consultants reactively cast a vote against commission based products and focus solely on “no-load” products or policies where commissions can be manipulated downward. After all, how are you going to prove your value if you end up recommending a product the commissioned salesperson already recommended. I honestly believe that few fee-only advisors are as objective and unbiased and they believe themselves to be.

Here’s a big question, and I’m not being facetious. Why should the ultimate goal be to reduce or eliminate commissions? Sure, I’ll spreadsheet and shop commodities. But life insurance is not a commodity. When something is really important, I want someone to get paid well for their work and advice. Yes, I would like another party to keep them honest but don’t think I am going to get what I am looking for when I try to scalp a provider for numerous products and services.

Let’s turn to the blog response. Mr. Headley starts out by stating the WSJ article is misleading. That is an interestingly appropriate use of a word to preface his own piece.

“The consumer is getting the same product at the same cost, whether they purchase the life insurance from a fee-only consultant or from an agent… No(one)… has the ability to negotiate the pricing of the life insurance product.”

Sure they do. A big part of my job is to negotiate with underwriters for better pricing. I do this almost every day in both my fee-based and commission based practices. I’ve actually worked with agents who were disappointed that I negotiated a better underwriting class because it reduced premiums and lowered their commission. I realize that is not specifically what he is talking about but the point is that he’s too narrowly focusing on commissions.

Mr. Headley states that “… all consumers are offered the same product at the same price. The idea that the consultant can remove agents’ compensation from the sales process is a myth.” Sorry. That is not true. First of all, products do exist where you can carve out some of the commissions and reduce the premium. Furthermore, while it is true that the same products exist, the fact of the matter is that they are not equally offered. In fact, low commission products are often kept off the spreadsheets for just that reason.

He does have a valid point when he states that redesigning the insurance program involves certain tradeoffs. That is often the case but it is also often precisely what a client wants and needs. I also strongly agree that “best” can not always be defined as cheapest. However, these tradeoffs and the search for the cheapest may be exactly what a prospective policy owner is looking for on the menu and the commission based agent may not include them.

Of course, as Mr. Headley states, consumers need agents who can recommend a suitable product based on a thorough needs analysis of the clients’ financial goals and objectives. I hope he isn’t insinuating that an agent can do that any better than a consultant. He goes on to state “The agent, as a part of the ongoing relationship with the consumer, would be accessible to assist in the servicing of the life insurance policy on a long term basis whereas the fee-based consultant would only disappear after the policy is initially acquired.” Now, that is nothing short of reckless and I’m offended by the statement and the connotation.

He closes with “My recommendations are based on a fact-based approach tailored to my client’s needs, wants, goals and objectives. One thing that is not necessary for consumers is paying an additional fee for a second opinion that they don’t need.”

I thinketh thou protest too much.

Based on that comment alone, I wouldn’t trust you Terry. A significant piece of my practice is Second Opinions. It is difficult to express just how much value the professional advisors who call me in bring to their clients. Sometimes the deal is great from my perspective and I give it a nod. Often, there is something from modest to substantive I see which can be improved. Sometimes I am saving them from unadulterated disaster.

So where does that leave this argument? A good and conscientious agent can be invaluable. Some agents are crooks. A good and conscientious consultant can be invaluable. Some consultants are crooks. While undeniably true, that doesn’t get us anywhere.

The biggest value an objective consultant can bring doesn’t even have anything to do with commissions so the entire premise of the WSJ piece and the retort are not worth as much as either camp thinks. The real value is in being a true expert and putting the clients needs above all else. Either camp can fill that role. It is about thoroughly understanding the marketplace and all options available and having a tremendous amount of experience under your belt. It’s about not being subject to institutional indoctrination like so many agents are. It’s about not being biased against commissioned products like so many consultants are. It’s about custom building a product or portfolio to perform the best given the objectives, the resources available and the prevailing markets. It’s about close and ongoing management to account for all client needs and changes and all product and economic market shifts.

The irony in Mr. Headley’s comment about a fee-based consultant disappearing after the sale as opposed to the agent being there for the long term is that the very cynicism the market has towards life insurance agents is fostered by the fact that so many agents disappear after the sale (even when they are being paid renewals to service the policies) and are never heard from again until they are looking for another sale. It’s also amazing how they all of a sudden start paying attention when I am brought in as a third party consultant. A primary reason I am brought in is because the agent is AWOL for whatever reason or the client and advisor doesn’t trust him or her. The fact that consultants can get paid in a variety of ways and generally get paid as they provide value, rather than in bulk up front, is what often makes them so useful.

In my experience some of the greatest benefit of a fee-based consultant is when a policy owner is well into a transaction. Many insurance contracts are victims to some extent of a lack of management. What I have been able to do to turn around the performance of an existing policy or portfolio, sometimes through simple changes and sometimes through complex re-structuring, is worth many times any conceivable fee I would charge.

I am a huge fan of fully commissioned insurance salespeople who are smart, ethical and there for the long run. The biggest problem is that it is damn near impossible to know if that is who you are dealing with. After all, the best sales person isn’t selling you on just a product.

I have long believed that an appropriate balance between commissioned sales and fee-based consulting is almost always best. Each methodology has significant upsides and downsides and each camp can make their own premise glow in comparison to the evil of the other. It is very important to realize that both camps are predominately in sales, whether for commissions or fees. That being understood, this old axiom rings true.

“The reason I brought in two salesmen is so they can pick each others pockets rather than pick mine.”

Everyone needs to be held accountable. My assistant just had twins and they are in daycare while she is in the office. Her little boys are on camera showing up on her computer screen whenever she wants to see them. No one can legitimately think that the caretakers aren’t constantly aware of that and it affects their every action, even if they are honorable and have the best intentions. I’ll bet they even wait until they are out of camera range before they pick their nose. Those who argue that they don’t need to be held accountable deserve the greatest cynicism and closest scrutiny.