If you’re recommending clients purchase insurance products like annuities in their rollover IRA, you might need to be prepared to prove that you are acting in your client’s best interest as an investment advice fiduciary. For Registered Investment Advisors (RIAs), adhering to a fiduciary standard is nothing new. But for financial professionals like insurance agents who have never had to adhere to a fiduciary standard for the insurance products they sell, this change is huge.
While there are strict rules of conduct for fiduciary advice, let’s focus on one of the hardest standards to meet: ensuring the advice given – including insurance products recommended – are in the investor’s best interest.
Too often financial professionals and investors associate best interest with lowest fees. Given the popular up-front nature of commissions for financial professionals on many insurance products, the simple knee-jerk reaction is to think that commissions and fees for financial professionals need to be lower and that would accomplish the best-interest intent. Let’s look at how that logic is flawed and at some best practices to ensure the use of insurance products are aligned with investor’s best interests.
Best Practice #1: Diagnose and Identify Problems
Just like taking in your car for service, your mechanic must do this first. Yes you may have noticed a ‘service soon’ or a check-engine light, but without a proper analysis and diagnosis, you may not know what problems your car is experiencing and why you received those notifications.
For financial professionals, it’s impossible to diagnose and identify problems without creating a comprehensive financial plan that includes tax planning. Only by projecting incomes, expenses, asset growth, and taxes can you answer the core question every client has “will I have enough to support my lifestyle?”
While just completing a baseline plan may help a financial professional diagnose and identify problems like not running out of money, a high-quality one will identify opportunities to improve tax efficiency in both the current generation and for future heirs.
Best Practice #2: Provide recommendations that address problems identified
Now that you’ve identified some problems, you can provide some recommendations to address those problems.
Whether the problem is an income shortfall later in life or a client preference for a guaranteed income stream, using insurance products to solve those specific problems while in the context of a comprehensive financial tax-aware plan makes it easy to see the facts. Using an insurance product illustration alone is not sufficient, it needs to be viewed in the context of a comprehensive financial plan.
Best Practice #3: Give clients choices and alternatives
Synthetic oil or conventional? One costs twice more than the other but the more expensive synthetic will provide better lubrication to your engine in harsh environments like dust, off-road driving, and extreme heat/cold. If driving in those conditions are your goals, then you might want to consider synthetic.
Roth or IUL? They both provide tax-free conversion opportunities for clients. They are both ways to address reducing taxes and increasing inheritances, but each has their own nuances that may fit better into client preferences.
Even if you are vetting between different insurance products, it’s always a good idea to see how two or three different options fit into a client’s comprehensive financial plan. This is why we often vet a handful of products for plans we create to provide some choices on how to solve those problems.
Best Practice #4: Focus on education
The “ah-ha!” moment when clients see and understand their comprehensive financial plan is your goal. When you’ve reached that point, you’ve taught them to be aware of the problems they will face (whether they did or didn’t realize them before) and how actions they can take will impact their future.
Using a comprehensive financial plan that includes tax planning will help give you the canvas and tools to confirm your recommendations are aligned with your client’s best interest. Relationships started in this way also provide a fantastic blueprint for future updates because clients just care about their plan and if they are still on track or have more issues and problems to address.
Conclusion
If you’re not using a comprehensive financial plan with tax planning, you may find yourself unprepared for the new DOL fiduciary rules. By following these proven best-practices and delivering plans for all of your clients, you can stay ahead of one of the hardest parts of investment fiduciary advice to ensure your recommendations are in the best interest of your clients.
Warm regards,
CEO & Founder of PlanScout
Ps. Want to connect? Feel free to book a meeting with me now and follow PlanScout on LinkedIn.
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