For as long as there has been an RIA industry, RIAs have been allergic to insurance. And for good reason. Insurance historically has been a commission-driven business that doesn’t fit the compensation model or fiduciary ethos of the fee-only RIA. Further, commissions drive up pricing, which can significantly eat into the value of the products. So generally, RIAs haven’t addressed their clients’ insurance needs beyond making the occasional recommendation to purchase term life, exchange an existing high-cost variable annuity for a lower-cost product or look into an income annuity.
Commission-free insurance products, particularly annuities, have come to market rapidly over the past five years. Where there used to be only a few carriers with very limited commission-free product offerings, more than 20 carriers with dozens of products are now available to fee-only advisers. And RIA firms across the country are beginning to provide insurance solutions to their clients for very compelling reasons, both for the benefit of their clients and their firm:
1. Better retirement outcomes for clients. While annuities may be controversial in some circles, they are not among academics. Prominent retirement experts like Wade Pfau, David Blanchett and Michael Finke extol both the financial and psychological benefits of annuities in retirement portfolios. With the advent of commission-free annuities built for RIAs, fee-only advisers now are able to leverage the benefits of annuities to improve outcomes in clients’ financial plans.
2. Fixed-income alternative. With interest rates at historic lows, advisers are challenged to find fixed-income investments that can keep up with inflation and cover advisory fees. Commission-free fixed and fixed index annuities provide yields that can help enhance the fixed-income portion of a client’s portfolio.
3. Firm growth. In Business 101, you learn that it far easier to gain greater wallet share from existing clients than to acquire new ones. According to LIMRA, 1 in 6 long-term savings dollars are held in life and annuity products, providing the opportunity to attract as much as 15% to 20% AUM growth from existing clients. The annuity market alone is a multi-trillion-dollar market. RIA firms that are expanding into insurance are also growing their revenue.
4. Competitive differentiation. As the majority of wirehouse advisers and broker-dealer representatives have moved to fee-based pricing models, and with the Regulation Best Interest in effect, RIAs have lost much of their competitive advantage and differentiation. Providing commission-free insurance gives RIAs a tangible and meaningful way to position their holistic services and value-add to attract new clients.
5. More holistic services: In today’s world, clients are demanding more services from their advisers, so providing asset management is no longer enough. In the past decade, RIA firms have begun providing financial planning and wealth management as part of their service offering, and insurance is an important component of that.
After developing a financial plan and identifying the need for life insurance, long-term care or disability coverage, or an annuity, it makes no sense to then send the client to another adviser to get that insurance prescription filled — particularly when insurance providers are increasingly becoming CFPs and are looking to take over the entire financial relationship. Allowing clients to talk to another adviser puts that client relationship, and some of the client’s assets, at risk.
6. Risk management. Life insurance and disability insurance can protect or replace income during a client’s accumulation phase. Utilizing annuities to guarantee income during retirement protects against sequence-of-return and longevity risks. Long-term care insurance and life insurance can help provide a legacy for heirs. These are important components in providing holistic wealth management and cannot be achieved through investing alone.
7. Being a more complete fiduciary. Insurance is an important component in a client’s overall financial plan. Failing to address a client’s insurance needs leaves an important gap in that plan. Fiduciary firms that are adding insurance to their practices not only define appropriate insurance needs for their clients but ensure that clients get the coverage.
As clients demand more from their fiduciary advisers and advisory practices expand to meet these needs, adding low-cost insurance brings a myriad of benefits both to the firm and its clients. It’s good to see insurance carriers bringing commission-free products to market to serve the needs of RIAs.
David Lau is CEO of DPL Financial Partners, which distributes financial products geared toward the RIA and fee-based advisory channels.
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