Budget Babe recently released an open letter to insurance agents.
It was about as well-received as you can expect; she’s a much better business and marketing person than people think. Whether you liked it, disliked it, agreed, disagreed – it certainly got attention. You can read about it here.
Of course, me being me - I would respond.
But people hoping for an evisceration will be kind of disappointed, because I largely agreed. Largely. As such, I’m not going to spend time focusing on what I think she got wrong or kind of contradictory, nor was it nearly as badly written as the article I eviscerated on a Saturday.
I’ll be writing some of my thoughts on three of the pointers for the following reasons:
a) For clients and potential clients to see my thought process, to understand my perspective and journey with me
b) For the benefit of colleagues, friends and others in this line
c) For the understanding of those not in the industry or have a degree of hostility towards the industry due to poor experience
Here we go.
1) "Please stop calling yourself an "expert"."
My take: Keep working at it till you are.
Currently I do consider myself a specialist in some specific areas, particularly Early Critical Illness and investing. So maybe there's a degree of high expertise.
In contrast, I am NOT an expert in many other things.
Hospital plans irritate me, and quite frankly speaking, I offer neither of the best-value-for-money Shield plans of 2018.
The fine print for Disability continues to evolve at the same rate as Early Critical Illness (moving into lower ADLs, increasing/changing the definitions for them, loss of independence, etc) and I don’t have nearly the same expertise in them as I do my specialties.
Even though I can certainly give more than enough appropriate advice in the areas outside my specialty – I don’t consider myself an expert.
To be fair... Financial Consultants have a tough time. You have to master the basic 5 components of Life Insurance planning, Retirement planning, Investing, Bank interest rates and refinancing, claiming, biological/medical knowledge on your major CIs, a degree of arbitrage, trading and property, understanding of competition from other FAs to Robos to FSM… It’s a lot, before you can even go about calling yourself an expert at financial consultancy.
Expertise is Mastery – and it’s an ongoing process no matter how good you are at it. Your Financial Adviser, expert or not, must always strive to improve regardless of what they call themselves. I'd be much more comfortable with a big talker who backs it up than a humble person who doesn't bring results.
2) “Please stop trying to sell us high-commission plans.”
My take: Identify the conflict of interest.
This point seems pretty silly to me, because anyone who’s ever gotten their hands on a commission sheet can see that the majority of long-term plans are high commission. Generally, if someone can even sell you a plan where you dump money with almost no hope of liquidity for over a dozen years (and it can be awfully difficult in this day and age) to get a bigger payoff, its going to reward them with some form of living wage. And based on the median income of Financial Consultants (which is hella low)...
Incidentally, term plans actually give higher bonuses and commission (in terms of %) than what people usually blame (e.g. Endowments, ILPs). But well, I’ve only seen 5 different sheets, so you never know. It’s always going to be an ethical issue though, I can tell you that.
But her general idea is right. Not many people know this, but it is perfectly within your rights as a consumer to ask your agent what kind of commission they are making from you. It’s literally in the annual 4-hour ethics and guidelines test that all agents have to take.
I know this because I took mine last week. Knowledge of your rights is much more important than trying to deliberately avoid being sold or selling high commission plans.
Some people would simply refer to the distribution charges, but they can be skewed from the expense ratios of other unrelated things (TLDR: Your agent really doesn’t get paid that much).
At the same time, it doesn’t make sense to avoid a plan that meets your needs just because the person selling it to you will make money. People are working for you and will likely work for you for a minimum number of years. They need to eat as well.
My specific advice, to sound as neutral as possible, is to ask about this in order to understand the potential conflict of interest, which agents are legally obliged to disclose upon request.
Simply put, if you have two options, ask the commission structure for both because your agent is very likely to lean towards one.
Give him or her the benefit of the doubt upon response – the response will tell you everything. The agent may be able to justify why one suits your needs better even though it happens to be the one with a higher commission.
Failure to do so is still failure on the agent’s part to invoke trust in you, so don’t take it personally if you end up taking the lower commission plan and the agent looks disappointed.
It’s really one of the simplest ways to determine your agent's ethics, and as we all know, an ethical agent is a good agent.
3) “Please don't ask me to switch my policies just because you've just changed companies.”
My take: Justify it and it’s fine. Don’t and you’re a douche
I’ve never left my company, so I’ll be sidetracking a bit here. What I have done, however, is told clients to get rid of their old policies from other companies, or even my own partners.
I think this action could be a lot worse than the example Budget Babe used – in the wrong context, it’s called churning. Switching or surrendering for the sake of it. I’ve never done this, but I wouldn’t be surprised if it’s been knowingly or unknowingly done.
Of all the nonsense, the one I get most irritated with is when people suggest surrender simply since it’s an Endowment or ILP. In contrast to an online remark, a Financial Adviser could be stripped of their license or fined for saying such comments offhandedly.
Here’s how the process works on my end (simplified):
a) Justification (logic): Switching or cancelling advice only comes in under very specific, trying conditions. Is the plan they are currently on unsuitable for them? Can I provide something better?
b) Further justification ($): Typically, replacement comes with a form of monetary loss. Can this be overcome as well due to compounding interest over time, lower fees, discounts or other bonuses? Will they pay less over time with my policy? Or would the person be better off seeing their existing policy reach fruition?
c) Other considerations: Is the person comfortable with this? Is the person still insurable? Are there any other losses in terms of benefits, or definitions (notably, CI policies in the 1990s were more favorable towards women than they are today)?
Failure to meet any of the three means no switch, no surrender. And quite frankly, MAS would have my head if I didn’t do this, let alone my client.
Never switch policies just to support somebody. If an adviser recommends a switch, do ensure that it’s been suggested in your best interest.
This article would be too long if I addressed every point that came to mind. I would have liked to talk about the other points: how agents make wild claims or claim their policy is the best or lack their T and Cs… This article is as long enough as it is.
I tried to balance my thoughts on her points, where I neither completely slammed nor completely kowtowed to whatever was being said.
I hope I also brought some insight and perspective into a Financial Consultant’s thought process and what we face, being the ones on the other end of an open letter. I don’t think anyone in my line likes to be openly addressed like that repeatedly, but it does say something I think we can all agree on…
…it’s that I survive, even thrive, on the incompetence and failures of the industry of old. Most people do – whether they’re a financial blogger, an IFA, a Robo advisor, and this is the industry I decided to enter.
It is my hope that we can all do better to the point that such letters are no longer needed.
Luke Ho, Money Maverick.