An ongoing philosophical debate in the financial services community is how financial professionals should be compensated, either by commissions or advisory fees. Both sides of the discussion raise some interesting issues. Those advocating a fee-based approach argue that the incentive of commissions for brokers and sales agents has the potential to cloud the assessment of any transaction. In contrast, those defending the commission-driven model assert there is greater incentive to actually implement and monitor financial transactions, while fee-based planners have little or no motivation to ensure that the customer actually follows through on the advice given.
Since both sides are fairly well-entrenched on philosophical grounds, it is perhaps surprising to read a practical, real-world perspective on how to obtain reliable financial advice, particularly in regard to life insurance.
Errold F. Moody, Jr., operates and maintains what he claims is “the largest and most comprehensive planning site on the Internet” (www.efmoody.com). For more than two decades, Moody’s major interest has been “individual fee financial planning.” It is Moody’s contention that the best way to retain the services of financial professionals is by paying for their advice as opposed to buying their products – except when it comes to life insurance.
Moody’s exception is because he observes that many fee-based planners don’t seem to know much about life insurance. Besides personal experience, he quotes a 1999 Journal of Financial Planning article which stated:
“…many planners were not looking at, or least not emphasizing enough, the entire area of risk management – not just life insurance, but also disability, health, long-term care and liability coverage.”
Moody follows with some commentary of his own. (As you read this, keep in mind that for the past 24 years, Moody has been a professor at the University of California, Berkeley and Irvine, taught classes for Professional Designations in Financial Planning, and from 1995-2004, he was an Insurance instructor for various licenses and continuing education programs.)
“Insurance is, in my mind, one of the most difficult of all planning areas. While it is easy to get information about mutual funds and other investments from the likes of Morningstar or Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners have the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid an hourly or flat fee for an incompetent, unknowledgeable adviser who has effectively breached its [his/her] fiduciary obligation to a client.”
Thus, Moody concludes the only effective way to buy life insurance is from a knowledgeable agent. Setting aside questions of compensation, the real issue is the financial professional’s knowledge of insurance, and ability to accurately transmit that information to the consumer, then deliver the appropriate products. Because of the variety and complexity of life insurance contracts, you need to work with someone who is immersed in the business. And the most likely “expert” is a life insurance agent, whether compensated by commissions or fees.
Need insurance advice, or a review of your current policies? Give Partners for Prosperity, Inc. a call at (877) 889-3981, ext 120; we’d love to help.