There are several business models for the CPA financial planner, but the one that has been most widely embraced by the profession is the registered investment adviser (RIA) model. The adviser is typically compensated based on a percentage of assets under management (AUM), hourly fees, retainer or a mix of the three.. RIA models are referred to as “fee-only” when the practitioner receives no commissions from product related sales.
For many CPAs, this RIA model “feels right” for many reasons, including the fact that it is generally not product-driven or transactional. Unfortunately, until now, the same has not been said of the commission-based life insurance model, despite the fact that most life insurance can be purchased only in this way. Not only do many CPA financial planners frown on the life insurance business model; they may also go as far as avoiding the life insurance discussion altogether with their clients. The result? Clients will continue to have this valuable tool ignored.
Life insurance is my area of expertise based on the time I spent at Price Waterhouse when I was a senior tax manager, so I designed this model to offer an unconflicted life insurance business model. I strongly believe this life insurance business model for the CPA financial planner can also feel right and involves the following three components:
Comprehensive Financial Plan. A financial plan is prepared, for a fee, and life insurance is a proposed strategy when suitable. The engagement letter includes full disclosure of all potential revenue, including the fee and possibly an insurance commission. There is no pressure to purchase a policy and no return or reduction of the planning fee if a policy is purchased.
- Life Insurance Engagement. A client wishes to hire the planner to purchase a policy. The engagement letter offers two options: either pay an hourly fee for consultation or allow the planner to broker the transaction and be paid out of the commission. Note that this is appropriate only if life insurance is being considered for purchase and not just evaluated; otherwise only the fee model is offered. The client should be told that a commission will ultimately be paid to the broker or agent who sells the policy, in addition to the fee paid to the planner if the fee option is chosen.
- Life Insurance Servicing. All insurance professionals need to provide ongoing monitoring and servicing for each policy sold, even if no additional compensation will be paid after the initial year the policy is sold. The type of monitoring and servicing should be explained at the time the sale is proposed, and again when it is finalized.
To protect objectivity, the CPA planner can choose not to have an allegiance to a specific insurance company. This will eliminate the concern that a quota must be reached which may jeopardize the planner’s objectivity. It may also increase the odds that the client is getting the product that is in their best interest.
The CPA planner should also consider licensing requirements. Insurance policies are state specific, and the situs is generally based on the location by the owner, not the insured. This means that if the trustee is in a different state than the person being insured, the policy will be issued in the state of the trustee at the time of purchase and will follow the laws of that state. Note that you need a license in your resident state and then must be licensed in each and every state in which you sell a policy.
There is also a difference between being licensed to sell insurance and the need to get appointed by a specific carrier to sell their product. Each state has a different rule regarding when a broker has to be appointed with a carrier. Some require an appointment prior to taking an application, while others allow an appointment within a certain period of time after the application has been taken. All carriers require that you are licensed in advance of any appointment.
If you’re a planner who continues to avoid life insurance discussions with your clients, you may want to consider re-evaluating your personal objections in order to provide a more holistic approach to your client’s overall financial plan. Here are the most common objections shared with me over the years from fellow CPAs, along with my suggestions on how to deal with each one:
They don’t know how to start the conversation.
Discussing life insurance with your clients isn’t easy for many reasons, but it’s important, so here are a few strategies that you can try.
- Inventory your clients’ life insurance by creating an Excel matrix that includes the following information: the insured, risk class, owner, beneficiary, carrier, policy number, date of purchase, death benefit, duration, premium amount, premium date, current cash value and number of premiums expected to be paid when they first bought the policy. It also makes sense to list the broker and the insurance company contact information for each policy. This is simple to prepare and is very valuable for clients to have in their personal files—their attorney will love to have a copy, too! This matrix can then be provided to the servicing broker (or consultant) for a checkup, leading to all kinds of questions that should be addressed annually. Your clients will appreciate the review, especially if they get an A+ on their checkup. Why not do the review at tax time, and if you e-vault their other documents, include a copy of the policy as well?
- Ask about fiduciary responsibility. Simply ask if your clients are trustees for an irrevocable life insurance trust. In addition to their personal policies, they need to be aware that it is their fiduciary responsibility to review the trusts policies regularly. Don’t forget to mention Crummey notice compliance as well.
- Apply the Goldilocks Rule. Ask your clients if their current coverage is too much, too little or just right. Most don’t know and won’t sit down to do this until it may be too late. Do they, for example, have children nearing college age, but have inadequate savings? Maybe they should consider 10-year term insurance which often is inexpensive for the valuable protection. Did they buy a policy to pay estate taxes that may no longer be necessary since there’s a current federal estate exemption in excess of $5 million? STOP! Don’t let them drop the policy before you consider the value as a fixed income asset in the overall portfolio. After all, they have already paid the load, plus the interest-crediting rate and potential IRR may be quite attractive. Also, if the client is over age 75 or unhealthy, the policy may have greater intrinsic value than cash surrender value. The secondary market is alive and well-funded again, which may lead to a hidden asset for your client!
They are afraid of what they don’t know and don’t know who they can trust.
As CPAs, we have taken an oath to provide services only in areas we have an expertise in. Generally speaking, CPA financial planners know little about life insurance, so they hesitate to even go down this path with clients for fear of not being able to converse intelligently about even the basics and then looking bad in front of their clients. Solution? Expertise can come in two ways. The first is gaining the knowledge by taking classes, reading what they can and meeting with other professionals who provide life insurance services. The second is to learn the basics by bringing in an expert. After all, we provide estate-planning services, but don’t go as far as practicing law without an attorney. It’s not that different … so herein lies the next dilemma: Who to trust?
You have plenty of insurance professionals knocking on your door, so how do you know which one to choose? My suggestion is to ask your most trusted professional network who has already guided you in creating the rest of your professional network. Get a few names and start working on case reviews together. The suggestion to exchange every policy being reviewed is likely a red flag, as not all policies need to be replaced; many just need to be repaired. If the insurance professional really understands how the products work, then he or she will know how to fix a broken policy, too. You will earn respect and have happy clients, especially if it involves saving or making money for your client! However, keep an open mind, because replacement can be an appropriate course of action, too.
They, or their clients, have been burned in the past.
If this is the case, find out why. It’s like the stories about the asset manager who was badmouthed until you later find out the client had unrealistic rate-of-return expectations. The good news is that many of today’s life insurance products are actually quite transparent—if you know what to ask for. You need to know to request the “expense pages” and make sure you review them with the broker and your client thoroughly. Feel free to ask as many questions as you like.
Finally, know that insurance brokers also get burned. The classic case is working with a broker for months on both underwriting and plan design, possibly providing estate planning design advice, and then have the broker lose the case to the golf buddy who may have done little or nothing other than take the final illustration and put in the sale order. Don’t pit two brokers against each other. It’s bad for the client and confusing for the insurance companies when they get applications from different brokers on the same individual at the same time. Instead, get a second opinion from an insurance consultant, but expect to pay for that advice.
They try to avoid transaction-based fees, better known as commissions.
As mentioned above, the planner who charges a fee based on AUM is comfortable using the term “fee-only”. The fee is based on a percentage charged on a client’s AUM, with a lower percentage charged for a higher amount of assets. However, it’s not necessarily correlated with the amount of work being performed. Also, the AUM planner gets paid regardless of an increase or decrease in account value. Yes, fees generally increase if the clients’ accounts increase, so the planner can be said to be “aligned” with the clients’ best interest. But, again, the planner is still paid even if his or her work has led to a reduction in account value. OK—blame it on the market. Yes, fees sound better than commissions, but let’s not forget we are not talking about a fee that is directly correlated to the work performed, so let’s not be too quick to judge the insurance-based revenue model.
So where’s the real rub? What’s the big reason life insurance is avoided? Life insurance is sold on a commission basis and most brokers receive the majority, if not all, of their compensation as soon as the first year premium is paid. This amount can be equated with the present value of servicing the client for that policy for many years to come. Unfortunately, the public’s perception of the industry—and often, deservedly—is that the broker has no incentive to provide those years of service and therefore doesn’t.
Like any profession, this does not apply to the majority, but rather to a few bad apples. This bunch actually provides a great opportunity for the CPA planner, who has embraced the life insurance model described above, because he or she can separate from the pack! CPA planners are held to a higher standard as a result of their professional ethics, so they are much less likely to run their businesses in such a negative way. Yes, you can find many competent insurance brokers and agents who conduct themselves with their clients’ best interests as the priority, but the CPA planner is required to do just that.
There is a potential dilemma to lose the AUM.
Like it or not, asset managers do not want to see their AUM turn into insurance premium payments. Why? Because their income is based on the amount of assets they manage, and fewer assets means less income. Thankfully, again, CPA financial planners would not let this dilemma stand in the way of what is in the best interest of their clients.
Conclusion: A Call to Action!
In order to offer truly holistic personal financial planning services, as we all strive to do, life insurance must be addressed, even if it is dismissed as unnecessary for the client’s financial health. Only a small percentage of clients never need life insurance at some point in life, so your clients should be able to count on you to guide them appropriately. Try to lose the bias, if you have one, in favor of learning more about the current best practices in the industry.
About the Author
Susan J. Bruno, CPA/PFS, CFP, CIC, is managing director of Beacon Wealth Consulting, LLC in Stamford, Connecticut. She is a private wealth specialist creating distinct and customized solutions for high-net-worth individuals and families. Her extensive expertise in estate, insurance and tax planning is the basis for the comprehensive, multi-generational plans that she develops for her clients. Contact her at firstname.lastname@example.org.
Insurance Resources Available to PFP Section Members
The webcast, “Economics of Life Insurance” was presented by Amy Sonstein in September 2013. Among other topics, she discussed the true cost of life insurance and how the type of life insurance owned affects your clients’ retirement lifestyle. PFP members may access the audio recordings and presentation handouts in the PFP webcast library.
The 2014 Advanced PFP Conference included several sessions on insurance and retirement topics, including “Life and Disability Insurance Strategies in Live Situations” and “Retirement Income Strategies.” Audio recordings and presentation materials are available in the AICPA’s online library. Registered attendees for the 2014 conference have complimentary access when they log in through the website (see instructions to access). Those who did not attend can create an account to purchase audio recordings and presentation materials.
If you haven’t visited the Insurance and Risk Management resources page on the PFP Section website, you should! Here, you’ll find a number of resources on all types of insurance, including publications, archives from prior webcasts and member benefits. A self-study CPE course on the Fundamentals of Insurance Planning is also available, discounted for PFP/PFS members.
Make the most of planning meetings with clients to ensure that their insurance policies are in order by utilizing the checklists in Exhibit 7-2 and accessing the recorded webcast and presentation materials for Insurance Analysis & Implementation: What CPA Financial Planners Need to Know.