RIAs and insurance have often been like oil and water – the two really don’t mix. For lots of reasons. Starting with the products, which are generally commission-based – obviously not a fit for fee-only advisors. Then the costs, which are generally quite high (largely to offset the commissions). Then the complexity – hundreds of pages of prospectus language that only actuaries can understand.
So, what’s changed? Why do RIAs need to start offering insurance solutions in their practices instead of referring it away? Let’s look at some of the data, research and RIA commentary regarding the issue:
1) Your Clients Want, Need and Already Own Insurance Products
According to Cerulli’s Advisor Metrics 2015, of the 20 products clients request, unsolicited, from their advisor, 2 of the top 5 are insurance. Long-term care (#1 – 78% of clients request) and annuities (#5 – 51% of clients request). Eye-catching numbers to be sure.
I know part of your job as a financial advisor can be to protect people from themselves. Every RIA has those clients who panic at every market downturn and want to sell and those who want to invest in the latest hot stock or fund. However, the request for insurance is a far different request than that of a hot stock. That type of request is showing a true need – there is something about insurance the client wants – the peace of mind. And there’s plenty of research to back that, but my favorite insight comes from Dr. Wade Pfau and Michael Finke’s report "Social Security Won’t Be Enough" where they found:
"Older households who receive a higher guaranteed regular income from sources such as pensions and income annuities are happier than retirees who create income from pulling money out of an investment account."
Clients with guaranteed income are happier in retirement! Who doesn’t want that? Studies show there are many reasons for this:
So, if clients want and need insurance, it shouldn’t surprise you that many already own annuities, life and other insurance products. (If you aren’t providing them with low-cost fee-based solutions, someone is selling them high-priced commissioned ones). The annuity industry is nearly a $4 trillion market (more than double the size of the entire RIA market). And, LIMRA reports that 70% of US households own life insurance and that the market opportunity for life insurance is $12 trillion when looking at underinsured households. (More on this in my next article about getting clients out of high priced products and into low-cost, fee-based ones).
Which leads me to my second reason to add insurance to your practice:
2) Retain the Client Relationship and the Assets
There are many reasons why you want to retain the client relationship and the assets – beyond revenue (which is, of course, important). When you don’t offer insurance solutions in your practice, you either have to refer your clients to an insurance professional or leave it to them to find one (as the market data above suggests, clients will find a solution to this need).
This can be problematic in several ways:
We’ve all seen the data that shows 80% of clients have multiple advisors (on average 3). When you offer more fulsome services you lessen the need for your clients to seek other advice.
Which leads to the third reason to add insurance to your practice now:
3) Everyone’s Doing It (well, almost everyone)
As independent businesses, RIAs generally don’t tend toward the "herd" mentality, but when it comes to providing "Insurance Services" there is a strong trend. Data from Wealth Management’s 2016 Advisor Benchmarking RIA Trend Report shows that in 2014, 54% of RIAs reported offering "Insurance Services". By 2016, that number grew to 79%! That’s a 46% increase in just 2 years, making it nearly 4 in 5 RIA firms that offer "Insurance Services". Hard to believe with a group as diverse and independent as RIAs that you would see such a massive trend toward a service.
For RIAs "Insurance Services" generally mean analysis, consultation and planning. The actual product implementation is usually referred out to a local insurance professional or through an insurance IMO (inviting the fox into the hen house). But there’s another significant market threat emerging very quickly that RIAs need to pay attention to: the growth of dually registered RIAs.
According to Cerulli, the number of dually registered RIAs has grown from 4,378 in 2004 to 26,165 in 2014! Again, an astounding trend. But, why is this a threat to pure RIAs? Dually registered advisors are competing with RIAs by moving to fee-based compensation and can fulfill insurance needs through their broker-dealer and licensing. In the advisory channel over the past decade, dually registered advisors are the only segment whose numbers and assets are growing at a faster rate than pure RIAs.
Like Bill Bancroft, executive director at True Fiduciary in Reston, VA stated, "Mathematically it can be difficult to justify insurance, but there is a need it fulfills for clients."
As the data shows and Bill points out, clients want and need insurance for their investments – it can make them happier in retirement (shouldn’t planning software have "happiness" as a retirement goal?)
Fortunately for RIAs and their clients, more low-cost, fee-based insurance products are coming to market, making it possible to meet clients’ needs for the security of insurance at a fair price — greatly improving the traditional math.
So maybe RIAs and insurance don’t need to be oil and water. Maybe it’s possible to be a fiduciary and offer insurance.
Maybe now is the time to take a fresh look at adding insurance solutions to your practice.
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.