Helping client with life insurance is an
important service of effective wealth managers.

Editor's Note: This article is the first in an occasional series that Financial Advisor magazine will run on life insurance.

Let's start with some basic truths:
    Wealthy individuals are the most desirable clients for financial advisors.
    Wealthy clients have complex financial needs, and the greater a client's wealth the more intricate their requirements will be.
    Wealthy clients want to work with someone they trust and someone who will act in their best interests.
    Wealthy individuals want a financial provider who will help them manage their finances and provide solutions to pressing financial issues.
    Wealthy individuals expect state-of-the-art products and services from their advisors.
    Wealthy individuals are open to having a single provider coordinate all the aspects of their finances.
    These facts point directly to wealth management as the best method of meeting a wealthy client's requirements and the preferred business model for financial advisors to the affluent. So, what exactly is wealth management? The answer depends on your perspective. For clients, a wealth management experience means working with a reliable financial counselor to solve their financial issues and improve their economic situations. For advisors, delivering a wealth management experience means having sufficient client knowledge to use a wide range of products and services on their behalf in a consultative way.

Personal And Professional Profitability

Wealth management is not just about breadth of product, but also about depth of information and resources. If your expertise is in investment management, to be a successful wealth manager you must be willing to step outside the footprint of your current business and expand your capabilities. It is a complicated and sometimes frustrating process, but the results can be impressive. Satisfaction is much higher among the clients of wealth managers, and practitioners of wealth management report a much higher average income than their counterparts who offer a more restricted range of services.

Most advisors have built a business around managing money for their clients. As a result, the average advisor has a superior level of investment expertise and offers a menu of products that is dominated by investments. A comparison between investment advisors and wealth managers shows some distinct and unflattering differences.
    In a study of 1,177 advisors, the average wealth manager generates twice as much in gross production than the average investment advisor and has almost three times as much assets under management. Yet the wealth manager has only a fraction of the clients to deal with. For the majority of financial advisors, wealth management is a more profitable and efficient practice model than investment management by itself (Exhibit 1).
Another way to demonstrate the fiscal advantages of the wealth management model to advisors is to review the results of the professionals who have transitioned their practices. About only one in ten advisors is able to make a successful transition, but in doing so they increased their first year income by a minimum of 35%. That means an investment advisor earning $200,000 a year would take home at least $270,000 in their first year as a wealth manager.
    The case for wealth management is indisputable, but the realities of adopting the model can be troublesome and problematic. Because wealth management entails so much more than basic investments or brokerage, one of the hurdles to a smooth transition may be climbing the learning curve on new and different products-and it's worth noting that one of the most important, and frequently used, products among wealthy individuals and families is life insurance.

Uncertain About Life Insurance

Effective wealth managers regularly provide life insurance to their clients and ensure that it happens seamlessly. This requires practice, patience and, more often than not, a partnership with a life insurance expert. But why enter a partnership when it's more profitable to eliminate a third party? In a study of 522 financial advisors, roughly 34% of respondents were opposed to offering life insurance. While the remaining 66% were willing to provide it, they were critical of their ability to do so successfully.

The Six Degrees Of Separation
    Using a factor-analytic approach, six items were identified as the principal reasons that 34% of advisors choose not to sell life insurance (Exhibit 2). The reasons make sense for a professional who operates strictly as an investment advisor. But when life insurance is viewed more broadly, as a component of an integrated wealth management process, it can be an effective solution for a variety of needs.
The majority of surveyed advisors, 69%, report that clients do not want to buy life insurance and, very often, that is the case. However, affluent clients do want what life insurance can accomplish, such as protection for their families and their businesses and tax-advantaged growth. Wealth managers present life insurance as a tool to achieve the expressed goals of the client.
    Another large group of advisors, 60%, feel that selling life insurance would hurt their practices. If a practice is intentionally positioned as an investment-only business, offering life insurance can be confusing to clients. In addition, a poor experience with life insurance can cast a pall on an advisor's reputation. But wealth managers know that managing money cannot solve every financial problem and they keep an open mind when seeking solutions for their clients, and forge the professional alliances that will allow them to deliver those solutions.

Half of financial advisors cited insurance as a bad investment, and there are usually other vehicles that make more sense. While there are a few instances, such as private placement variable life insurance, in which insurance is a unique and excellent investment, its principal purpose is not to provide investment results, but rather death benefits that can be deployed at the decedent's direction to pay estates taxes or fund business buy-outs, among other things.

Life insurance companies charge premiums for their policies and advisors receive a portion of those premiums in remuneration for selling the product. In fact, wealth managers find that meeting the objectives of their affluent clients usually requires a combination of products that may include commission- and fee-based products and services for which a flat fee is charged. Consequently, a fee-based advisor (42% of survey respondents) has made a business decision to focus on a different, and smaller, range of products and services, and will likely not transition their business to a wealth management model.

Two-fifths of advisors, or 41%, reported that life insurance is too complicated to add to their menu of offerings. Without question, insurance is complex and becomes more so when used as part of sophisticated wealth management strategies. Successful wealth managers know that insurance is a key element of their practice and have struck a compromise-they've taken the time to learn the basics, while relying on specialists to provide the necessary expertise.
    Almost a third, or 30%, of advisors believe that good planning eliminates the need for insurance. Some estate taxes can, in fact, be eliminated with proper advance planning. However, taxes on exceptionally large estates may never be completely eliminated. Actuaries will remind us that they make a living analyzing the patterns associated with unexpected events, which means that untimely accidents may compromise a plan that is in progress and not yet complete. Wealth managers do not leave protection to chance, and use life insurance to their client's advantage.

There's Still Room For Improvement
    The 346 financial advisors in the survey that do provide life insurance are, by their own admission, not very adept at it (Exhibit 3). Tellingly, not a single respondent considered themselves "very successful" and only 17% reported being "successful." The remaining 83% categorized themselves as less than successful, which means there is considerable room for improvement for these practitioners.
    The two issues impacting the effectiveness of these advisors were identified using factor-analytic methodology-client receptiveness and complexity of the product. Like the group of advisors that do not offer insurance, the largest survey sample, 86%, believe that their affluent clients do not want to buy life insurance. And a similarly large number, 73%, find insurance too difficult to fully understand and represent to their clients.

Again, wealth managers know that specific strategies require life insurance and, if so, can be structured in a way that makes it cost-effective for their clients. In this type of scenario, affluent clients are amenable to an insurance product. The key for advisors is to quickly recognize client situations that will benefit from life insurance. One tool to help advisors learn more about their clients is the Whole Client Model, discussed in more detail in the March 2005 Financial Advisor column entitled Know Thy Clients.

Wealth Management And Life Insurance-Necessary Evils?

Advisors with the dual goals of increasing their income and having more satisfied clients must consider the wealth management business model and, in doing so, must include life insurance in their capabilities. An advisor need not be an expert on insurance-although being one is certainly a plus-to make the product available to clients. Life insurance is a unique and flexible product that fills specific needs, and can be a solution to the critical and advanced financial needs of affluent individuals. Wealth managers readily identify their weaknesses and find professionals who can fill the gaps in their technical and regulatory knowledge. Partnering with a life insurance specialist and creating a broad network of experts is the best way for an advisor to enter a complete relationship with their clients, and wealth managers are well on the way to transforming their businesses accordingly.