OH, the JOYS of Reg 187 & Reg BI!

It does NOT adress the fact that any student loans that the resident doctor was “loaded up with” may have to be repaid at death depending on whether it was a federal versus a private student loan.  Maybe some term life insurance with a strong conversion option should have been part of the conversation. Furthermore, there is no discussion about disability income insurance. A young doctor’s biggest asset would be his/her ability to earn an income for life assuming he/she is able to work at all, or in his/her chosen profession. Maybe disability should have been part of the discussion. I am not suggesting that a $1.5MM whole life policy with a $32,000 premium was or wasn’t appropriate, but it is easy to see how someone would say that it was “all about the high commission” and that the so called advisor did not do their job. I would argue that possibly the “hero” in the story did not do her entire job either – so shame on both of them.

 

As the insurance industry now grapples with Reg 187 compliance in NY for both life insurance and annuities and since the passage of the SEC Regulation Best Interest (Reg BI), it is stories like the one above that fuel the continued debate over best interest practices of the insurance industry and commission driven sales people. Furthermore, according to the law firm of Drinker Biddle as reported by WealthManagement.com on January 31, the DOL rule is not dead either, stating that “the new rule is expected to align with the SEC regulation, and some were expecting it as early as the end of last year”. Finally, as if that was not onerous enough for the financial industry, Massachusetts has proposed a new Fiduciary Conduct Standard that would make Reg 187 look like a walk in the park.

 

Let’s face it, acting in the client’s best interest is a GOOD THING and financial advisors of any kind – insurance agents, broker dealers or investment advisor representatives – should do it every time they interact with a client – without fail. If that were the case, we would not need all this regulation, but regrettably it is not always the case, so here we are. 

“Is it about commission or is it about making the right recommendation”? For years, much of the fee-only and fee-based investment advisor community has made the argument that commissions are bad. 

 

I recently heard a story about a fee-based advisor who had completed a financial plan for a client. The client, a young and healthy man, trains and competes in triathlons. One of the recommendations was that the client purchase term life insurance. Since the advisor did not sell commission-based insurance, he recommended that the client purchase it online through one of the typical vendors – which, by the way, will make a commission on the sale. During a triathlon, the man died. His widow, upon return to her home, found the life insurance application on the man’s desk. He had never submitted the application.

 

The point of this story is that it was not the commission that was bad, it was the lack of action or maybe, the lack of urgency. People buy car insurance because they don’t know if or when they will have an accident. The same can be said of any insurance – homeowners, health, disability insurance… but we all have it in some form or fashion. Someone is getting paid a commission on these products, so why is it so bad that a life insurance agent gets paid a commission? Maybe it’s because the product being sold or recommended is not the “right” product for the needs of the client, such as in the example presented earlier.

Clearly, there is no right answer, but Reg 187 and other regulatory requirements that come along are going to force anyone making financial recommendations, including life insurance, to ask a lot more questions and “get it right”. AND, it has nothing to do with the fact that the sale of the product pays some sort of commission.

 

During a recent insurance company sponsored webinar on New York’s Reg 187, I was exposed to a software platform that helps advisors create the documentation needed to recommend life insurance through a client profiler, a product profiler, a life insurance wizard and product validation. The software is called RightBRIDGE. Created by Capital Rock, the system integrates with several financial planning software systems such as MoneyGuidePro and eMoney and provides recommendations tied to needs analysis and suitability for life, long term care and disability insurance. It creates a documentable justification for the recommendations made, or to be made, to a prospective client for insurance and other risk mitigation purposes, by collecting the requisite Reg 187 data elements.

 

This analysis takes the conversation away from HOW insurance professionals get paid to WHY they get paid, allowing for a more transparent and best interest relationship with the client and potentially other financial advisors that may be part of the collaborative team. I applaud the approach because, lets face it, regulation around Best Interest is not going to go away any time soon. We need to embrace it and do the right thing for our clients relative to their risk management needs.

 

A sample Client Profile report can be seen below and is based on documented needs analysis. For more sample reports around product selection and validation, please see the CapitalROCK RightBRIDGE website.