Any time an adviser steps outside of his or her own disciplines on behalf of his or her clients, even a seemingly unimportant detail that is missed or mistaken creates a vector that may lead clients off course. Conversely, advisers might hesitate to address problems for their client just because they lie outside their own discipline. In either scenario, clients could make uninformed decisions and the result could be financial loss or lost opportunity for the clients and certainly loss of the relationship or worse.
Clients expect their advisers to protect their interests. They expect a high level of expertise. And they expect responsiveness — proactively. But they may be hazy about lines drawn between professions or suspicious when their advisers extend their practices beyond traditional boundaries.
How many accountants, attorneys and trustees believe they can offer due diligence or due care in the life insurance decisions their clients have to make?
Clients may simply want opinions, but the weight of an adviser’s opinion in such circumstances may tip the balance to endorsement in spite of oral and written disclaimers, limitations on the scope of services and constraints on the applicability of advice. When an adviser has a fiduciary responsibility as a trustee, responsibilities may be governed by the Uniform Prudent Investor Act, which sets standards and procedures for all trust investments. Much of the life insurance purchased as a funding device for estate tax liabilities is held in trusts. This raises the liability bar for advisers who serve as trustees or advise clients who are trustees, even higher than that of the insurance agent.
The act specifies a trustee duty to the beneficiaries to make and implement decisions concerning the retention and disposition of original investments. If a trustee undertakes an investment outside his or her skill and experience, the failure to delegate its execution to a qualified expert may constitute a breach of trust. With life insurance, trustee responsibility cannot be limited to policy performance. Unlike other trust investments, numerous noninvestment issues and tax consequences need to be dealt with.
Can the trustee claim a committee of beneficiaries is so qualified?
Probably not. What about a life insurance agent? An agent may be qualified to make recommendations, but how should the agent’s financial gain be factored in? Compounding that difficulty, a wide variation exists among agents about what long-term service commitment remains after the initial decision. From the agent’s perspective, such review work may be considered non-compensated. Worse, the agent may have left the business and the policy now has orphan status, a limbo realm within the life insurance company.
Adviser liability in the life insurance arena is an issue without easy parallels and precedents. No adviser wants to be the lawsuit to set that precedent, but being overcautious carries as many liabilities.
Resolving this adviser dilemma requires moving up a level and realizing that the role of life insurance has changed as much as the roles of advisers.
Life insurance has traditionally been considered and treated as a buy-and-hold investment. But many took the word hold to mean ignore.
That proved potentially disastrous because many of the cash accumulation policies purchased in the 1980s failed to perform to projections within ten years.
In the past two decades, the need to more frequently and consistently reevaluate life insurance for suitability and performance in relation to clients’ overall financial goals altered the buy-and-hold perspective.
Today, life insurance has to be viewed as family or corporate capital (in the form of a life insurance contract) and has to be managed as a capital asset over years, decades and even generations. And that concept is the common ground among professional disciplines that come together over life insurance decisions. Every member of the advisory team has a role, defined in terms of managing the capital represented by the life insurance contract, from designing the policy variables to the client’s plan, to the accounting processes and legal structures and trustee oversight.
Since effective life insurance decision-making among affluent clients and corporations inevitably requires participation by multiple advisers, one safeguard can be found in creating working standards for the advisory team. The first responsibility of advisers is to make sure the team truly pulls together to help clients manage family and corporate capital in the form of life insurance.
This article has been excerpted from Life Insurance: How to Use It to Your Client’s Advantage. The book can be purchased at CPA2Biz.
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