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Is Your (Client’s) Insurance Advisor a “Butcher” or “Dietitian”?

Thursday, May 10, 2012

A battle is being waged in Washington over the meaning of the words “client’s best interest”.  On one side are the financial advisors (i.e., advice-givers) who commit to putting their clients’ interests ahead of their own and can be held accountable for negative results when they don’t.  On the other side are the brokers (i.e., inventory-movers) who give clients reason to believe they put clients’ interest first, but are fighting vigorously against being held accountable for negative results when they don’t.

The problem is that financial advisors and brokers both carry business cards saying “Financial Advisor” or “Financial Consultant” and both use words like “independent”, “objective” and “clients’ best interest” in their marketing materials, but these words can and do have much different meaning to the client depending on who is saying it.  Financial advisors are advocating for a single meaning of these terms while brokers are fighting to maintain the current ambiguity.  No wonder clients are confused[i].

So what is a client to do when two ‘advisors’ present two different solutions that are both represented to be in the “client’s best interest?”  How does a client know which advisor is selling advice and which advisor is selling a product? Sometimes a picture is worth a thousand words and a short video below by HighTower Advisors seems to convert the battle over what a “client’s best interest” means and makes it into an easily understood illustration of whether a butcher could serve as a dietitian.

The problem depicted clearly at the end of this video is that “most people think their ‘Butcher’ (inventory-mover) is a ‘Dietitian’ (advice-giver)”. Another problem is that the investment industry has different rules and standards than the insurance industry. With the differences in the rules and standards between the two different segments of the financial services industry, an advice-giver on the investment side can also be an inventory-mover on the insurance side. All the more reason client’s are confused. i

What title an advisor uses on their business card or how they are compensated does not always make clear if they are an advisor or a broker. In fact, the old correlation between commission-based products with brokers and fee-only products with advisors does not apply to life insurance.  This is because the largest cost in most every life insurance policy are cost of insurance charges (COIs) which comprise up to  85% of total costs; whereas commissions generally comprise 15% of total costs or less. 

While costs are not the only measure of “client’s best interest”, research from both the Veralytic database as well as a Tillinghast Towers Perrin study[ii] reveals that COIs can vary by as much as 80%.  In other words, for every $1.00 in total cost, the cost-difference between poorly-priced products and best-available rates and terms can be as much as 68¢ whereas the cost-difference between commission-based products versus no/low-load products is only 15¢.   For example, a fully-commissioned product with low COIs can cost 53¢ (i.e., 68¢ - 15¢) less than a no/low-load product with high COIs.  Of course, a no/low-load product with low COIs can cost 15¢ less than a fully-commissioned product with equally low COIs.  Serving the client’s best interest is NOT about commissions vs fees, but instead is about fair and adequate disclosure and “truth in advertising”.[iii] 

Such “truth in advertising” also benefits BOTH clients and insurance advisors given Brad Bennett, FINRA’s Executive Vice President recent comment about “The cost of doing business incorrectly has to be greater than the cost of doing business correctly, or you give a competitive advantage to a non-compliant firm.” Such client confusion and cost of doing business “incorrectly” is not limited to insurance advisors as illustrated by a recent case involving one of the nation’s largest banks where the client thought/expected financial advice but where the bank actually engaged in undisclosed self-dealing and conflicts of interest (although they were not found liable because the trust agreement contained language SPECIFICALLY authorizing the trustee to invest assets “without regard to conflicts of interest”).[iv] The fact that certain states have also amended the Uniform State Law to exclude life insurance from their standard-of-care applicable to all other asset types can be another source of potential confusion where customers are thinking they are talking with their “financial dietitian” and instead can be talking with “Lou the butcher”. 

So how can you (help your clients) know whether you (or they) are talking with a “Financial Dietitian” or a “Butcher”? One thing that sets Dietitians apart from Butcher is that Dietitians take measurements. A Dietitian will have a tape measure, scale and instruments to create a baseline of where you are and then measure that information against benchmarks like BMI charts to see where you are in relation to your peer group.  Veralytic is the “tape measure” that “Dietitians” (i.e. advice-givers) use to provide you a baseline on insurance policies and then continue to use to provide you with “annual check-ups” through Veralytic’s patented process and benchmark database.  So, one way to tell if you are talking to a “Butcher” or “Dietitian” is to ask to see the Veralytic research or find insurance advisors that subscribe to Veralytic research. Veralytic research is simply the fastest, easiest, and most cost-effective way to measure the pricing and performance of any permanent life insurance product against peer-group alternatives as they relate to your (client’s) planning objectives. 

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[ii] Tillinghast Towers Perrin study referenced in the May 2003 issue of Trusts and Estates. 

[iv] French v. Wachovia Bank, N.A., 2011 U.S. Dist. LEXIS 72808 (E.D. Wisconsin 2011)

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