The client pays for that, of course, and there are question marks. "The big one is, 'Did the broker get the real value for that policy?'" says Kleinhandler, the Manhattan insurance advisor. You put your trust in the broker to earnestly make the rounds on your behalf and not just shop his buddies.
How does one choose a
broker? Kirby suggests looking at the number of providers the
brokerage typically solicits, whether all offers received will be fully
disclosed to you, the firm's experience, regulatory record and its
privacy safeguards. You don't want a broker indiscreetly papering the
marketplace with your client's data.
Be wary of brokers who try to
hustle the transaction. Giving document gathering short shrift at the
start of the process sets up the deal for failure. Finally, look for
errors-and-omissions coverage, which some brokerages provide through
their E&O carrier on the transactions they close.
If you opt for a broker, consider dipping one toe in first. Other advisory shops do that, reports Jon Mendelsohn, president and CEO of Ashar Group LLC, a broker in Orlando. "We have had many instances where a high-end planning firm asks us to handle a $300,000 policy, we take care of it, and the next thing you know they're sending us a $10 million policy on the same insured," Mendelsohn says.
Potential Paradigm Shift
Electronic exchanges could be The Next Big Thing in the marketplace. Here sellers and buyers meet certain standards, policies are put up for auction and the bidding begins. The exchange charges a fee, naturally. But the case gets in front of multiple buyers and no one horns in on the client-advisor relationship.
Another payoff is . . . the payoff. Policies have been going for higher prices on LexNet, the 2007-launched exchange operated by Cantor Fitzgerald LLP, than in the secondary market generally-31 cents on the dollar, versus something in the 20s, according to Stuart Hersch, president and CEO of Cantor LifeMarkets.
Cantor is a good example of one of those well-intentioned recent entrants. "We looked at the marketplace and saw a lack of transparency," Hersch says. "We thought that by operating as a neutral intermediary with good processes, we could make for a more efficient marketplace." Those processes include carefully redacting all personally identifying characteristics on documents that potential buyers see, along with disclosing all items of compensation, which Hersch says has led to commission compression.
Kleinhandler, among others, believes there will come a sunny day when full disclosure of fees at all points in the life-settlement chain is standard procedure. The market will be more efficient then, and clients will benefit, he says. "When everyone knows what everybody else is making, there is room for the insured to profit."