If you’re a financial advisor, you’re likely to agree that in providing prudent advice to your clients, you will want to review their insurance coverage. This is perfectly fine, but some advisors think it’s alright to go further than a review and try to ‘sell’ insurance products to their clients, mainly in the form of life insurance and annuities. Yet RIAs are obligated to put their clients’ interests above their own, and selling insurance products automatically creates a conflict of interest.
So how do RIAs claim they are ‘fee-only’ when they receive commissions for selling insurance products? It’s easy – they just bury their conflicts of interests deep inside of regulatory disclosure documents that many clients don’t read.
I took a look at a few randomly selected $1bn+ RIAs that often receive a lot of media coverage to see if they sell insurance products to their clients, and, sure enough, they do sell life insurance and annuities.
Although this was not surprising, it was eye-opening to see disclosures indicate that the firm itself does not sell insurance products or receive commissions for the sale of insurance-related products, but those ‘investment advisors’ at the firm in their ‘separate capacity’ as insurance agents may receive commissions for the sale of insurance products.
Another RIA I looked at indicates that the firm itself does not sell insurance or receive commissions but that it has a ‘related’ insurance agency that receives commissions for the sale of insurance policies and annuities to the RIA clients.
From a regulatory and legal perspective, there is nothing wrong with those types of arrangements (as they are properly spelled out in the RIA disclosure documents), but it does not pass the smell test. When an RIA says its financial advisors are acting as fiduciaries, it’s just not right for them to promote the sale of life insurance and annuity products as part of a client-advisor relationship.
This is just smoke and mirrors. Clients should not have to dig through 30-40 pages of RIA disclosure documents to find out that their financial advisor may not be acting in their best interest.
There are some good outsourced solutions for life insurance and annuity products that do not pay the RIA if a client needs them as part of their financial plan.
With these relatively conflict-free options available, you simply have to scratch your head and ask why an RIA would go through all of the disclosure and conflicts of interest issues to sell insurance products.
In my opinion, the short answer is that those RIAs and others are more motivated by the revenues (commissions) they receive from the products than by the benefits actually produced by the products.
This article originally appeared on CityWire USA.
