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Don’t Give Insurance Planning Short Shrift

By Joan Warner May 20, 2014

Most RIAs treat insurance planning like wealth management’s unloved stepchild, and with good reason. It takes time and effort without yielding much in the way of compensation. Talking about it usually makes clients uncomfortable. And advisors don’t want to give the impression they’re pushing a product.

Yet to neglect insurance is to neglect one’s fiduciary duty. “Any good financial advisor — especially a CFP — by definition needs to do a good job of addressing the insurance side,” says Scott Tiras of Tiras Wealth Management, an Ameriprise practice in Houston that manages $750 million. “If you don’t have protection, all your plans are for naught.”

Advisors typically bring up insurance early in their relationship with a new client, making sure the basics are in place — for most people, health, disability, home and life — and coverage is adequate. The problem, experts say, is that’s often where it ends. Clients don’t see the need to reexamine a policy once they’ve bought it, and too many advisors make the same mistake, according to Kellan Finley, managing director of New York-based Insurance Decisions, a consultancy to independent advisors.

Because insurance represents no more than a sliver of most RIAs’ business, Finley says, advisors tend not to be up on the latest products and regulations. And they don’t get a lot of support from insurance companies, which don’t see them as big producers. “Advisors have CRM solutions and investment solutions, but not a lot of insurance solutions,” she says. “So they farm it out or they just don’t do it.”

Then there’s the issue of client resistance. Insurance can be a tough sell, requiring advisors to explain that disaster doesn’t happen just to other people. Furthermore, “it’s hard for people to quantify how much they need,” says Harris Konter of Raymond James in Atlanta. Clients may feel guilty or insecure about the amount of life-insurance coverage they should buy, he adds. “We try to take the emotion out of it and make it sterile,” says Konter, whose team manages $220 million.

But the biggest insurance issue he encounters is old policies that no one has eyeballed in years. One client in her seventies, who was paying $20,000 a year for $1 million in whole-life coverage that her brother-in-law had sold her long ago, didn’t notice her premiums had doubled. Neither did her estate attorney, says Konter, who switched the client into a $13,000-a-year policy. “Clients think insurance is ‘I buy it and I’m done,’” he says. “They don’t review it like equities or bonds.”

The LTC Challenge

Tiras of Ameriprise says that with clients approaching retirement, his toughest insurance conversation is about long-term care. Premiums have skyrocketed over the last 10 years as insurers struggle to break even on low interest rates, and few companies now offer lifetime benefits. Still, Tiras urges his clients to consider long-term-care coverage. Alzheimer’s disease or a stroke can stretch a long-term-care stay to 15 years, he says, and “at $5,000, $7,000 or even $10,000 a month, with a spouse still living at home, that’s a huge expense [clients] haven’t planned for.” Tiras adds that clients seem more receptive to the relatively new hybrid life-LTC policies, which include a death benefit. “More and more of these policies are coming on the market,” he says. “It makes sense for clients to shop around.”

Many RIAs facilitate such comparison shopping by working with an independent consultant, in cases where a client doesn’t already have a trusted insurance agent or broker. Jim Holtzman of Legend Financial Advisors in Pittsburgh says he’ll get quotes from multiple sources — and since he’s a fee-only advisor, clients are “comfortable with where I’m coming from.” When they have their own agent or broker, “I’ll ask for terms that make sense.”

Holtzman says that for his firm, which manages $350 million and bills clients a percentage of assets, insurance is something of a loss leader. It’s so labor-intensive that even when advisors charge a flat fee to cover a year’s worth of financial planning, “in the first year we end up losing quite a bit,” he says. “It’s a relationship driver, but it’s not a big revenue driver.”

But then if the relationship turns profitable, the hours spent poring over policies and gathering quotes will turn out to have been a great investment. That’s how Kathy Nalywajko, a principal at Legg Mason Investment Counsel in New York, sees insurance planning. Her firm, which manages $8.6 billion, is a customer of Insurance Decisions, which Nalywajko says will often conduct a thorough review of her clients’ policies without recommending a single transaction. “There’s no better way to show somebody who you are,” she says.