The Power and Importance of Commission-Free Insurance

I love the culture we’ve created at DPL. It’s energetic, passionate, team-oriented and highly focused on our mission. We’re incredibly fortunate to have a team of talented and driven people working together for a common goal and it helps when everyone believes the mission is important. Our mission is simple yet extremely ambitious: Create widespread industry change to bring low-cost, Commission-Free insurance to market for RIAs.

Throughout my career I have tried to drive meaningful change in the financial services industry for the benefit of the client or consumer. After nearly 25 years, I still get angry when I see people taken advantage of. It fuels me. It’s also why I have been drawn to the RIA industry. I love its fiduciary ethos. And when you see what I’ve seen, there’s no room for doubt: Fiduciaries need to be involved in their clients’ insurance!

I believe—to my core—that DPL’s mission is important and powerful. For clients. For RIAs. For the RIA industry as a whole. Let me tell you why:

Powerful and Important Things Happen When You Remove Commissions from Insurance

For Clients:

The obvious answer to this is the dramatic re-pricing that is enabled by removing commissions (more on that in a minute). But to me, the most important and powerful change that comes from removing commissions is that it enables fiduciaries to implement insurance for their clients. I’ll say it again because it cannot be overstated: Fiduciaries need to be involved in their clients’ insurance!

I’m not saying that sellers of insurance aren’t trying to do what’s in the best interest of their clients, I’m just saying that I believe heavy commissions and proprietary (i.e. — rigged — don’t get me started on these!) illustration systems cause reasonable doubt. (This is also why we’re fans of kindred spirit Barry Flagg at Veralytic, whose company brings Morningstar-like reporting to life insurance contracts.) Removing the conflicts caused by commissions and performing objective analysis of insurance will create better client outcomes through better product selection.

Better client outcomes also occur when products are re-priced by taking out commissions. Commissions cause obvious ethical problems for fiduciaries, but the pricing problems they cause are an issue as well. Reducing the M&E expense of a variable annuity from the industry average of 1.35% for commissioned products to 0.20% – 0.35% in Commission-Free products is highly impactful for the client. From an asset management point of view, this can turn a VA from a problem into a valuable source of tax deferral. Similar powerful examples can be found in permanent life insurance products where commissions are often 80% (!) of initial premiums. Do your clients a favor and explore the wide range of Commission-Free products that are coming to market – whether through DPL or from carriers directly.

For RIAs:

For decades RIAs have been handicapped in their ability to serve their clients by not being able to offer insurance. Insurance is an important part of a financial plan and, when priced appropriately, can provide powerful protections and longevity benefits to client and firm assets. Not to mention income protection, wealth transfer and legacy planning.

The opportunity for firm-level growth by incorporating insurance solutions is enormous. The RIA industry is huge – nearly $4T and growing. The annuity market alone is larger than the RIA industry. The life insurance market is even bigger. How else can RIAs potentially double the size of their firms without adding a single client?

Your clients want, need and already own many insurance products. The psychological and financial benefits of insurance in retirement are well-documented in academic research. And that’s before you add the pricing power of Commission-Free products. When insurance was exclusively commission-based you could not be a fiduciary and offer insurance products. Now, with low-cost, Commission-Free products rapidly coming to market, it’s hard to be a fiduciary without offering insurance.

Serve your clients more holistically, grow your practice, expand your fiduciary purview. The market is changing – take advantage of the opportunity being presented to grow your practice and better serve your clients.

For the RIA industry:

As I already stated, I love the RIA industry. I am passionate about its fiduciary ethos and share its entrepreneurial spirit. But, for all the growth the industry is experiencing, I can foresee pending problems. The industry’s foundational points of differentiation are disappearing:

Fee-based asset management – Once the tangible differentiating factor for RIAs when competing for clients, now nearly every wirehouse or broker/dealer representative also manages assets on a fee basis. It’s become the industry norm.

Fiduciary standard of care – Like fee-based asset management, the fiduciary standard is coming to the advisory industry. Whether mandated by regulation or not, wirehouses and broker/dealers are moving to a fiduciary standard – eliminating another of the RIA industry’s points of differentiation. Whether they say they are acting in the client’s “Best Interest” or acting as a fiduciary, it will sound very much the same to clients.

With these foundational points of differentiation disappearing or becoming muddied, the RIA industry needs to add services to compete in the long run. Due to the size of the market and importance of insurance to a financial plan, I believe adding insurance is a critical piece to that expansion of services.

DPL is working tirelessly to help create this opportunity for RIAs, the RIA industry and its clients. Contact us to see how we can be of assistance to you.

Meet the Author

David Lau is an executive with more than 25 years of professional experience directing strategy for innovative financial services companies. Mr. Lau has expertise in financial services sales, marketing, technology and operations.