Do Insurance Agents Have a Fiduciary Responsibility

[somarco]

I heard a "consumer advocate" radio show host say insurance agents are not held to the same legal guidelines with their clients as an impartial, fee only, advisor. He claimed that there is some financial act (don't recall which one) that specifically names people like bank trust officers and fee only advisors as fiduciaries and holds them to a higher standard than commissioned agents.

This person already is prejudiced against commission sales people, claiming they are not objected, but I really believe he is stretching the truth here.

Years ago when I worked in the retirement planning market I was very much aware of my fiduciary responsibility under ERISA.

Is this guy totally off base, or is there a law that defines fiduciary responsibility that does not apply to insurance agents?

 

[VolAgent]

No, insurance agents and RRs are not fiduciaries. RIAs and IARs are. Also, when you work with a 401k, most B/Ds go to great pains to tell you to stay away from anything that would make you a fiduciary of the plan under ERISA. Unfortunately, I can't tell you the exact law, but that is part of the distinction between a 63 and 65/66 on the investment side.

Now, as to which is more ethical and unbiased, that depends on the person. While a fee only advisor doesn't have to worry about commissions, he does have to keep you coming back to pay the fee. The advisor's advice might be more complicated just to justify the continued fees. An agent might suggest a more simple solution that works just as well, because it pays a decent commission and lets him move on to the next case.

As I am sure you know, you cannot legislate ethics and morals.

 

[Larry Tew]

Whether you have a "legal" fiduciary position or not, for your career longevity and a good night's sleep, act as if you did have a fiduciary responsibility. Fee planners... don't even get me started.

 

[VolAgent]

Whether you have a "legal" fiduciary position or not, for your career longevity and a good night's sleep, act as if you did have a fiduciary responsibility. Fee planners... don't even get me started.

I would agree to a point. Correct me if I am wrong, but doesn't a fiduciary have a responsibility to research every single option before making a recommendation? I doubt most "legal" fiduciaries go to that length. I imagine that they are like most non-fiduciaries, they find a good solution and stop looking.

BNTRS has talked about this often. What you get with a fee-only advisor is disinterested, not unbiased. Personally, I'd rather have an interested party any day of the week.

Just as an example, say you need an estate plan along with some insurance to fund it. Who is going to be more motivated to get you to follow through, the fee-only planner who got paid on the front end, or the insurance based advisor who gets paid once the insurance is placed? No one is perfect, but I believe any compentent insurance professional is going to make sure the solution he or she recommends is appropriate to your situation.

 

[BNTRS]

No they don't have fiduciary responsibility and in truth many wouldn't be able to act as fiduciaries--captive agents who primarily sell for just one company would have an extremely difficult time being fiduciaries in the naive sense that fiduciaries are unbias and look at the best possible solution.

Legislation from over the spring/summer sought to make insurance agents and registered reps fiduciaries, and there was a lot of talk over the "limited basket" of options the captive guys brought to the table.

It's really a dumb debate and the person stressing the difference is just a salesman for fee based or fee only advising. Only in the insurance and investment industry can someone make money handing out information that one could relatively easily get for free. The fee only deal is kind of like someone who charges you to give you their opinion on what kind of car to buy, and what to watch out for when it comes to financing it. Ultimately if you are looking to buy insurance there is going to be an agent involved in the process somewhere, even if that person sits in a cubicle at a call center all day, and as the internet has proven no insurance company seems to be willing to cut you a deal by attempting to cut the agent out of the picture. In fact most people don't understand that insurance prices are part of the approval process for a product and cannot be changed on an individually issued case basis. Those of us with insurance licenses know that it's illegal to rebate premium for any reason.

I also don't understand the people who freak out about commissions. If I go down to the locally owned sew and vac and buy a vacuum off the guy who owns and runs the shop, what he receives in addition to his cost of buying the vacuum we commonly refer to as mark up. And the difference between that and commission is...

...exactly.

 

[Larry Tew]

Vol, what I mean is to do the right thing for the client within the guidelines of one of Covey's 7 Habits... "Win - Win, or no deal!"

What this means to me is that in every client interaction there is the desired outcome of the client being better off in some way after we worked together than he was before. At the same time, I fully intend to make this happen so that I also profit from my labor and experience. Csaba Siklai (pronounced "Chubba") in his Advocacy courses speaks of no agent or advisor should apologize for making a living any more than one of your clients apologizing for doing the same. To me, the "fiduciary" responsibility is simply having the spirit of "I'm going to give you the best of myself and the tools available to me for your benefit while at the same time I expect to profit from our work together as well. I will not knowingly hurt you for my gain. I will seek balance as we work together. You must be enriched in order for me to be enriched"

This extends to not just saying whatever you have to say to the prospect in order to get the deal, but putting him with a strong company and the right product even if it isn't the most lucrative for you. I don't think you have to be an independent in order to strike this balance. I've worked on both sides, and as a captive, I could honestly tell the prospect as a captive that I choose my company because they provide competitive products while also providing me with the support and tools to enable me to serve your needs. If I couldn't say that and mean it, I would go outside the captive system.

 

[Crabcake Johnny]

I'm not sure if I can translate this to selling health insurance, but I believe if an agent wishes to sell only Right Start, so long as they don't misrepresent the product, no legal action could be taken.

 

[VolAgent]

Vol, what I mean is to do the right thing for the client within the guidelines of one of Covey's 7 Habits... "Win - Win, or no deal!"

I'll cut out the rest and say I am in agreement with you. My goal is to leave the person in a better situation than I found them, and the best situation I know how to leave them in. I've run into a few people lately that were stuck between a rock and a hard place. I've just had to flat out tell them, I can try to help you, but I'm not really sure the solution is much better than problem. You'll just have to decide which way you want to go.

 

[somarco]

I agree that you cannot legislate ethics, any more than requiring insurance agents to have ethic's CE credits to renew their license makes them any more ethical than they would have been otherwise.

It always burns me up to hear people say commissioned agents have only their own interests at heart while a fee only planner is completely unbiased.

Having worked in this industry a long time, and worked closely with fee based advisors as well as commissioned agents, my opinion of fee based advisor is, they usually don't know what they are doing.

I have reviewed documents prepared by fee based (employee benefit) advisors that was pure garbage. I specially recall one that was drafted by a Nashville based consultant with a good reputation in the industry. He had several large corps as clients that were literally all over the country.

I read a report he did for Genesco that had at least 200 pages. As I recall, he charged them something like $10,000 (which was a lot of money 20 yrs ago) for the report. He had graphs and charts and an analysis of several different carrier proposals but then never made a specific recommendation.

I have nothing against fee only advisors per se, but my experience leads me to believe they are just as biased as commission agents may be and twice as lazy.

While agents may not be held to fiduciary standards by legislation, there are situations where advice offered can be construed as acting in a fiduciary capacity and get the agent in as much hot water as one who is bound by law.

 

[VolAgent]

I read a report he did for Genesco that had at least 200 pages. As I recall, he charged them something like $10,000 (which was a lot of money 20 yrs ago) for the report. He had graphs and charts and an analysis of several different carrier proposals but then never made a specific recommendation.

A lot like a psychic. Avoid giving any information that you can be held to. That way you can always say they didn't follow your advice, or claim credit for what they did that worked.

An agent has to give you a specific recommendation that they can be held to. I wonder who believes in their advice more?