Let’s continue our discussion on how investment advisors work. First, we spoke about Certified Financial Planners. Now lets turn our attention to life insurance agents and stock brokers.
Insurance agents have a bum rap…and I hate to say it…but in my opinion, much of it for a good reason. The State issues licenses to sell insurance. If someone only has an insurance license, they can only sell – you guessed it – insurance. Such a person is likely to see life insurance as the solution to whatever your financial problem is. If you ask how much money you need in order to retire they’ll answer the question…and then sell you more life insurance.
Life insurance agents are either captive or independent. A captive life insurance agent is only allowed to sell the insurance products that her insurance company makes available to them. That means if you are talking to a captive Met Life agent for example, he can only sell those products that Met Life approves of.
Why Are They Called Agents?
These people are agents for the companies they work for – they are not your agents. If you are dealing with an independent agent, she can sell insurance products from a variety of insurance companies. But depending on who you ask, they they may not be able to objectively explain the difference between term life insurance and whole life or why you may need more investments and less insurance.
The main point – if your financial advisor only has an insurance license, he can only and will only sell you insurance products.
Am I saying that life insurance is bad? No. Am I saying that nobody needs life insurance? No. Am I saying that all life insurance agents are stinkers? Not at all.
What I am saying however is that life insurance is one piece of the puzzle that you may or may not need. I am also saying that most people I know have financial needs that life insurance can’t meet. So yes, you might need some life insurance and no, life insurance can’t solve all your financial problems.
Life insurance agents sometimes tell you that whole or universal life is a tool that will help you save for retirement. Don’t fall for it. The only people I’ve ever seen benefit from the sale of these products are the people who sell them. I’m not going into the pros and cons of life insurance in this post. And I’m not going into the pros and cons of term versus whole life. We can save that for another day.
I’m simply trying to point out that if your financial advisor is only licensed as a life insurance agent, you should find a new advisor – even if your current advisor is your brother.
What about stockbrokers?
Like insurance agents, stockbrokers also work for their employer – not you. Their first responsibility is to their brokerage firm.
Does this mean that every stockbroker is a dirty rotten scoundrel? Nope. Some of my closest friends are stockbrokers. Most of the stockbrokers I’ve met really want to do the best they can for their clients. The only problem I have with these folks is that they are held accountable first and foremost to their firms and not to their clients.
Their firms decide what they can and can’t sell. Their firms decide how much commission the broker will get if that broker sells Product A as opposed to Product B. This is a huge conflict of interest and it’s the reason I left the brokerage business many years ago.
I was a stockbroker for a very large bank in California. My manager wanted me to sell more annuities (a life insurance product) to clients because the commissions were higher. I didn’t want to do it because I thought they were a bad deal for my clients, and this led to a problem.
My manager’s constituents were his bosses and he wanted to make them happy. My constituents were my clients. If I didn’t make them happy, I would be out of business. I could not maximize my clients’ interests without jeopardizing the interests of my manager, so I split.
And lots of brokers are leaving the brokerage world for that exact reason. My point is, if you are still working with a broker, you are at a disadvantage. Your broker makes recommendations to you only after his employer has given the green light. That’s like a doctor having to get permission from the pharmaceutical companies before he can subscribe any medication. That just plain stinks.
Your Homework
Spend a few minutes. Read this over again. Are you comfortable having a stockbroker or insurance agent as your main financial advisor? Talk this over with somebody you trust. If you are comfortable, why? If not, why not? What are you really looking for in an advisor?
I don’t think that everyone needs a financial advisor. I really don’t.
Are stockbrokers and insurance agents useless? Not at all. They all have a place and can potentially be a very important part of your financial team. It’s just that neither can really be your financial advisor.
Last, I imagine that some readers might think I’m writing this series to drum up business for my own firm. As you’ll see shortly, nothing could be further from the truth.
RECAP:
Day 1 – We spoke about how to choose a financial planner – CFP.
Day 3 – Next we’ll discuss registered investment advisors.
Day 4 We’ll round up and see how this all fits.
Neal says
EVO,
If you know exactly what you want, you should not use an agent. But sometimes, people think they know what they need and don’t.
That is very expensive.
Evolution of Wealth says
Okay I understand that. Then the value the stockbroker brings is the system he uses. Fair? What value would an insurance guy bring? Couldn’t anyone that shops insurance put those policies in place? Would you need someone who specializes in insurance or just someone that passed the test?
Neal says
Evo,
A really good life guy is great for:
a. solving the term needs for clients or….
b. solving the estate planning needs of those in need. Usually, someone with a very large estate. Whole life or universal is fantastic for that purpose (skip variable life if you ask me).
c. business transition planning is a great place to use whole life or universal too.
I think the very successful life insurance people either do one of the 3 things above or they are very convincing sales people who take advantage of clients who don’t know better.
In the interests of time/space…that’s my best answer.
Stock brokers can be really great if they are old school….i.e. they actually pick stocks and have a system to do so that has been successful. Usually, such a person has a very high minimum account requirement.
This is my opinion based on my experience.
My Journey says
Evolution of Wealth,
I feel that while there are those Life Guys or Stockbrokers that aren’t worth the suit they try to fill (is that a saying or did I just make that one up lol) there are plenty of both of those types that take a comprehensive look at a client’s finances. And those are the ones that are the most successful.
Evolution of Wealth says
So what, if any, value is there with a life insurance guy? or a stockbroker? I understand that if you don’t have a financial planner or maybe don’t need one and you want to get some life insurance or trade some stocks they might fit. Is there an ideal way that a really good life guy or stockbroker fit into the equation? As a completely separate questions, how do the most successful (just) insurange guys make so much money? Same for stockbrokers?
Neal says
Thanks…..thought so.
It’s often behind the scenes. I’m going to write about RIA registration tomorrow….I hope you tune in.
My Journey says
Yup, RIA
Neal says
MY Journey,
If people in your office are also doing fee based work, they either:
a. have an RIA or an affiliate RIA (more on that tomorrow) or
b. they are breaking the law.
There is no problem having more than one license – I have 2. I used to have 3. But if a person ONLY has the insurance license and no other affiliation, they can’t give fee based advice legally. The only exception I know of is if they have very few clients and qualify under the deminimus rules.
If I’m wrong…..by all means….let me know. But my guess is, the folks have some kind of association with the firm’s RIA….can you confirm?
My Journey says
“But the main point is that if your financial adviser only has an insurance license, he can only and will only sell you insurance products.”
This simply isn’t true. I work in an office where most of the people just have their life insurance license, but they do Fee Based Financial Planning and there are clients who buy nothing but that relationship.