It's an unfortunate fact of life that a worthwhile goal usually requires copious sacrifice.
You can't be a pro football player, for instance, without spending untold hours pumping iron. A surgeon doesn't get to the good part of his job before living through a boot camp-like residency. And a financial advisor cannot call himself a wealth manager without learning the ins and outs of insurance.
Wealth management, of course, has grown in the last year into the brokerage industry's version of “killer app” — a Grail of sorts, a state to which everyone aspires. The idea behind wealth management is simple: expand existing client relationships in a way that increases production without having to acquire new customers.
However, in order to realize all the benefits of such relationships, an advisor must first be able to provide a full range of financial services, including insurance.
Getting advisors to recognize the importance of insurance products is an uphill climb. They are, after all, decidedly un-sexy, especially when placed alongside more dynamic investments, such as equities. Further, insurance is unlikely to make any advisor rich on its own. Its strength lies in providing steady, long-term revenue streams.
But there is still one very good reason for advisors to be interested: the client.
Clients want and need insurance products, and the advisor who can make them complement an investment portfolio has a leg up in retaining that client and in securing new business from him in the future.
Experts recognize the important role insurance plays in the wealth management fields. According to Chip Roame of Tiburon Strategic Advisors in Tiburon, Calif., there are five important facets of wealth management (financial and tax planning, private banking, estate planning, charitable giving and liability insurance), and two of them involve insurance. Still, broker-sold insurance is still in a fledgling state. The research firm Market Metrics says only about 5 percent of all regional brokers sold insurance in 2002 (see page 76 for related story).
However, the increased emphasis on deep client relationships is expected to push that number sharply higher in the coming months.
First, Do No Harm
For those advisors who shy away from insurance because it lacks huge upside potential, it might pay to look at it from another perspective.
“Your goal should be to get and keep as much control of your clients' assets as possible,” says Mike Kalen, senior vice president and director of individual distribution at Hartford Life, in Simsbury, Conn.
Life insurance can be an effective tool for doing just that, especially for those managing “dead assets.” There's no revenue, for instance, in a bond portfolio that a retiree is holding to maturity. But a savvy advisor can turn that static wealth into revenue by selling a life insurance policy to protect it. An added plus is that the beneficiaries of such a policy are also potential clients.
Of course, you can't simply walk in to your office tomorrow morning and start selling life insurance. Most states have licensing requirements (though many advisors will already have the most basic of prerequisites). To sell insurance products like variable annuities, a broker needs to pass the NASD Series 6 or Series 7 and Series 63 exams. But to sell life insurance, reps need to be “appointed” by an insurance company and pass their home state department of insurance exam, says Anders Smith of Nuveen.
Once the certifications are out of the way, it's time to bone up on the specifics of the products you would sell, says Kendall Blunt, regional director of life insurance sales and marketing at MassMutual Financial Group.
It's complicated stuff, but the pitfalls of not understanding it — including looking stupid in front of a client — are incentive enough to hit the books.
Here are some basics to get you started.
There are two basic types of life insurance: term and permanent. Term insurance is a “pure” insurance policy in which benefits are paid only when a policy holder dies. Permanent policies have some term features, but then also serve as investment vehicles.
If a term life insurance policy expires before the policy holder dies, there is no benefit to the policy's beneficiaries. By contrast a permanent policy would almost always deliver a death benefit and then will deliver some investment-related income on top of that.
Still, the biggest bang for the buck is a level premium term insurance policy. For a client in his 30s or 40s, the premiums are relatively cheap. The client simply picks an amount he thinks his heirs will need to survive without him and then pays those annual premiums for a fixed number of years. Typically, the need for term insurance decreases as the client ages because: (a) the client's family-related expenses tend to decline as children leave the nest and the mortgage gets winnowed down, and (b) the client's retirement savings tends to reach a point where they could sustain a surviving spouse.
There are three types of permanent plans: whole life, universal life and variable universal.
Whole life is the least flexible but also the most predictable. The related premiums and death benefits of this policy stay the same until the client dies. His money is invested in the company's general investment account, which is kept predominately in bonds. For the client who doesn't like surprises, this is the policy: He will know the return on his account over the next 20 years the minute he signs the papers.
Universal life offers a bit more flexibility. The premium money is invested in the same general account, but premiums are adjustable. If, for example, a client happens to have extra cash on hand one year, he can add it to his premium and allow more money to grow tax-deferred. He also can raise and lower the policy's death benefit as well. If he decides halfway through the policy that he wants to leave more money to his heirs, he can just increase the death benefit and the premiums.
Variable universal life offers the same flexibility as a universal policy, but also allows a client to pick his own investments. If, for instance, the client believes his investing acumen can help improve the value of his policy, then this is the right option. Obviously this brand of insurance is also the most risky.
Pick a Partner
The broker who doesn't want to learn all the intricacies of the insurance market need not fear. Many broker/dealers are striking partnership deals with the big insurance companies that will let the b/d-based advisors simply refer their clients to full-time insurance salesmen to work out the details and close the sale on their behalf.
Hartford Life, for example, has selling agreements with 14,000 broker/dealers. If you worked for one of those contracted firms, you would have to deal with your client only until things start to move out of your area of expertise. Other firms, like Merrill Lynch, have their own insurance experts in-house.
But the fact that these experts are available doesn't free the advisor completely from having to learn about insurance. Without some solid knowledge of the products available and their benefits and drawbacks, a broker is unlikely to get a client to the referral stage in the first place.
And before calling in the dedicated insurance pros, the advisor needs to first get out there and meet them to ensure that the referral is being handled by someone whose professionalism is strengthening, rather than weakening, the client-advisor bond.
Finally, to the extent possible, deal with top-tier companies, like Hartford Life, MassMutual, AIG and New York Life. You want the insurance company to be around when its time for your client to cash in his policy, right?
One downside to selling insurance is that the payout process takes a bit longer then most advisors are used to. A life insurance application has to go through the 45-day underwriting process before you get paid, and this is a far cry from the 24-hour turnaround after dropping a trade ticket.
Still, the biggest insurance companies are trying to speed this process, in part because it's in their best interests to have more advisors hawking their products.
But then patience and long-looking business sense are big parts of making the transition to wealth management from straight brokering. Start thinking of life insurance as a relationship product and not a transaction product. The first goal of any financial advisory business should be retain client assets, and insurance products can go a long way to accomplishing that goal.