The NAPFA Fall 2018 conference held recently in Philadelphia delivered on its promise to provide a blend of “tradition and financial planning innovation.” The work we do at DPL Financial Partners falls decidedly on the “innovation” side of the business, so it was great to see so much forward-thinking content in the sessions, from the future of AI and fintech to the rise of women in the profession.
The energy of attendees to explore new ideas was palpable. My session on The Power of Commission- Free Guaranteed Income, and a session I moderated on the use of commission-free annuities in retirement planning, were well attended and spurred lots of questions. After 3 days of presentations and conversations with numerous advisors and attending press, I was struck by two things:
1) Commission-free insurance has become an undeniably hot topic as the move to no-load products accelerates, and, 2) Change is hard, in part because it challenges conventional norms.
The move toward commission-free insurance is accelerating
At DPL, we talk with advisors about commission-free insurance solutions every day, but even I was surprised by the noticeable increase in awareness and interest in no-load insurance among NAPFA members since the spring conference in Phoenix a mere five months ago. At least four sessions in Philadelphia shared strategies to use commission-free insurance to better meet client needs and empower advisors as fiduciaries—including a standing room only session on the power of utilizing annuities for retirement income by Wade Pfau.
Advisors are becoming aware of the new, fee-only products entering the market from leading carriers. And they are embracing the plethora of academic research that illuminates the benefits of annuities to solve for important client needs before and in retirement in ways traditional investing simply cannot. This move toward commission-free is both relevant and timely as advisors face profound challenges from trends that are reshaping their industry. Nowhere is this move more apparent than at DPL, where over 140 RIA firms have joined as members to access commission-free insurance products, product education and expertise to leverage these solutions for their clients and their practices.
Change may be easier than you think…consistent, transparent billing is key to the Fee-Only model
NAPFA members are Fee-Only advisors; they don’t accept compensation from product sales…period. It’s a clean, conflict-free commitment that takes ambiguity out of the value proposition and pricing strategy for fiduciaries. But it was clear at the conference that, for some, the elimination of commissions is an uncomfortable and confusing concept. In my session on guaranteed income, several questions focused on how to justify charging a fee on a specific annuity product, and if the no-load product I used in an example would be “better” than a commissioned version of the product in every client situation. This line of questioning is perplexing, especially coming from a Fee-Only advisor.
In my 15 years working in the RIA industry, I have spoken to thousands of RIAs and have never heard of advisors performing that calculus on any other investment. Mutual funds, ETFs and bonds are not evaluated as to whether or not the load versions would be less expensive for clients over time. Why? Because Fee-Only RIAs do not work for product companies collecting commissions for sales. They are paid by their clients for financial advice. In order to keep that advice free of conflict and in the best interest of their clients, Fee-Only advisors do three things: 1) take consideration of commissioned products off the table, 2) evaluate all products, including insurance and annuities, and, 3) bill on all products.
The advisor compensation model has been evolving in many ways and AUM models are now primarily a device for billing for overall financial advice and planning rather than just asset management or, as it used to be, manager selection. Just as it took time for the industry to embrace fee billing on ETFs because no “manager” was being selected, the industry needs to get comfortable with fee billing on annuities because they are, similar to ETFs, a prudent allocation in many retirement income portfolios. Not doing so creates another conflict of interest. And not evaluating them as a solution for clients is contrary to the fiduciary code of ethics.
While most advisors embrace the commission-free insurance movement that DPL is helping to drive and the positive benefits it is bringing to clients and firms alike through better pricing and fiduciary implementation, some advisors are challenged by the change it represents. For RIAs we work with, it becomes a lot simpler when they see that insurance, through risk pooling and mortality credits, is able to deliver benefits to their clients that cannot be replicated through traditional investing.
My message to NAPFA members: Commission-free insurance for fiduciaries is here. Explore it. Embrace it. Learn to use its benefits. And bill on it!