The Real Costs of Fractional (Modal) Premiums

If you truly know what it means to be a fiduciary (and I don't doubt that you do, based on what you've said), then you already know the answer to that question: only a pure *** would just declare himself to be a fiduciary and make no changes to his practice.

The fact that being a "fiduciary life insurance agent" is not a real thing. That is what stops me from putting it in writing.

I do realize that some states allow agents to work on a fee only basis to make recommendations. And they are prohibited from taking commissions on those recommendations in most of those states.

But a fee only life insurance advisor is not a legal Fiduciary in those states as far as I know. If I am incorrect please direct me to the state regs stating so.

Also, as an agent who works in multiple states. I have no clue if I am even allowed to say that in many states. Especially the ones that do not have regulations regarding fee based agents.

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Most people in our industry, including most people who are CFPs, consider the terms fiduciary and brokerage to be mutually exclusive.

We will have to agree to disagree on the many vs. most term. I would say that the securities industry is split about 50/50... maybe leaning more towards 60/40 these days as education and awareness has increased.

So how do you personally rationalize taking commissions under a Fiduciary Duty?
 
The fact that being a "fiduciary life insurance agent" is not a real thing. That is what stops me from putting it in writing.

If by "not a real thing" you mean, has not been existence before me, I think you are right. But now that I have declared myself in this capacity, that statement is no longer true. I am that very thing. And I defy anyone to tell me that I can't make a fiduciary commitment to my clients and still get paid by the insurance commitment. No one has the authority to tell me I can't make that commitment. No one. And no one has the authority to tell my clients that they have to pay me out of pocket to gain fiduciary guidance. Not while I'm offering it in exchange for exclusive representation rights.

Just because something has not yet existed does mean that it can never show up on the scene. Here I am. I may be an *** for trying this; but, I'm real.



I do realize that some states allow agents to work on a fee only basis to make recommendations. And they are prohibited from taking commissions on those recommendations in most of those states.

The rules do not preclude taking commissions. They do preclude taking commissions and accepting fees for the same advice. In other words, you can't double-dip.

But a fee only life insurance advisor is not a legal Fiduciary in those states as far as I know. If I am incorrect please direct me to the state regs stating so.

The fiduciary obligation is not established by statute, but instead by contract. That said, I think anyone who gets paid for advice directly by the client would be pretty foolish to think they would escape being held to a fiduciary standard in that advisory relationship. They would have to have a lot of disclaimers in their contract. And even then . . . it'd be pretty edgy if you ask me.

Also, as an agent who works in multiple states. I have no clue if I am even allowed to say that in many states. Especially the ones that do not have regulations regarding fee based agents.

Just about every state allows for fee-based insurance consultants at this point. They have different terminology; but, they all allow it. It would simply be a matter of acquiring a license in one state and then, of course, just like when you write a case in a new state, if the relationship develops with a client from a state where you have no license, then you get licensed in that state.

I am only licensed as a life insurance counselor in Texas at this time because I've not had occasion to provide advice or a fiduciary commitment outside of my state. Yet. But if I do, that is one of the extra, tangible cost burdens that accompanies this particular business model: I have to get both licenses.

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We will have to agree to disagree on the many vs. most term. I would say that the securities industry is split about 50/50... maybe leaning more towards 60/40 these days as education and awareness has increased.

Ok. Experientially, I can just say that when I introduce my business model to most people in the financial services industry, the majority of people look at me like, "WTF? How can that be?"

So how do you personally rationalize taking commissions under a Fiduciary Duty?

Practically speaking, I think the analog to real estate representation is the best explanation and anecdote I can offer. I have actually drawn heavily on my time as a Tenant Rep in commercial real estate to craft my practice and create the Exclusive Representation Agreement.

Ethically speaking, I really just flip the argument back to the person asking the question.

How could I NOT accept commissions as compensation when the commissions are, in most cases, already irreversibly built into every life insurance policy? How could I possibly say I'm serving the client as a fiduciary when my very compensation model forces my client, if I were fee-only, to pay out of pocket for things that the insurance commission could easily cover?

Wouldn't that be putting my own pride and convenience in front of the client's best interests? Like the doctor who refuses to file claims with insurance carriers because he "just doesn't want to f&ck with it."

In my view, I think a true fiduciary life insurance consulting engagement actually demands that the professional be licensed and able to receive compensation from willing third parties. That is what is in the best interests of the client for the simple reason that it keeps the client's bill down, or in my case, obviates it completely.

It would be one thing if, like in real estate, commissions could be negotiated out of the deal. Then you could theoretically whack all the commissions down, make the product more efficient, and then just take the fees as a check from the client. I have heard of some real estate guys who actually do it that way. But as you and I know, that's not how life insurance works (in most cases, and 100% of term life cases, which is most of what I write). The comp is built in and that's that.

(But even in real estate, I would argue that the comp being built into the transaction and paid by the homeowner is best for the client because it reduces the basis if you back it out. But this is a bit of a digression.)

My point is that, because of how life insurance is set up, the most favorable financial terms for the client are those in which he/she can 1) have fiduciary representation with 2) no out of pocket costs. At least that is how I see it. And that is what I offer.
 
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Being held liable to a fiduciary standard isn't a contract thing. It's how you hold yourself out to the public. It's truly a perception thing.

Aside from having the appropriate analyst licenses to charge fees for your advice, and regardless of any additional commission compensation, if you promote yourself at a higher level, you can be held liable at that level.

 
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Michael it seems like you are assuming that disclosure helps the client make an informed decision. The table on your website is nothing more than an interesting "ahhh ok". The only way to compare like insurance policies is through net cost and surrender cost values. That is the way that has been codified.

This fractional APR is nominal in every instance. It could be argued that outside of Mass Mutual, it doesn't even exist.

You are overloading your clients and hindering their decision making process. If there exist fee-based advisors in your market and you reverse your commissions back to the client to provide a "fiduciary service" it could be argued that you are rebating the client.


Since you use this table in your sales presentation, have you run it by each company's compliance department and gotten approval? I will make the boldest claim: This is an elaborate form of twisting wrapped up in non-existent fiduciary technobabble.
 
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You are overloading your clients and hindering their decision making process.

I completely agree with this. While this may be considered a "sales standard", but:
- More insurance is better than less.
- Some insurance is better than none.
- Selling on an affordable basis is better than waiting until the client can make a lump-sum annual payment.

Since you use this table in your sales presentation, have you run it by each company's compliance department and gotten approval? I will make the boldest claim: This is an elaborate form of twisting wrapped up in non-existent fiduciary technobabble.

Michael has an insurance analyst license - a license that 99% of the board does NOT hold. (MaxHerr is the only other one on this board that I know of that does have an analyst license.)

Unless he is selling a particular policy, this all falls under his expertise and liability as an analyst. I'm sure he has archived and referenced various illustrations and can call the whole thing a "supplemental report".
 
Being held liable to a fiduciary standard isn't a contract thing. It's how you hold yourself out to the public. It's truly a perception thing.

Aside from having the appropriate analyst licenses to charge fees for your advice, and regardless of any additional commission compensation, if you promote yourself at a higher level, you can be held liable at that level.

www.youtube.com/watch?v=Vz1j-twrsIU

GREAT post. And something that most folks don't get.

Still, I'd say that people who put it in writing are assuming more liability than someone who is just holding himself/herself out as an expert.
 
Well, if I were to put together a fiduciary agreement - or some kind of engagement agreement, it would have to be in CONSIDERATION of something = money.

That means I would have to have the appropriate licenses as needed (insurance analyst for insurance policy analysis; Series 65 for securities analysis). It could also mean having a separate business entity as you NEVER want checks made payable to a producer's name directly.

Then you would need to hire an attorney to draft the agreement as to your responsibilities and when the engagement agreement ends and the duties have been fulfilled under the agreement.

Lots of time and money to do that properly. I'm sure you've done that, but that's not for everyone on this board.

 
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Being held liable to a fiduciary standard isn't a contract thing. It's how you hold yourself out to the public. It's truly a perception thing.

Aside from having the appropriate analyst licenses to charge fees for your advice, and regardless of any additional commission compensation, if you promote yourself at a higher level, you can be held liable at that level.

In a litigious capacity, claiming you have enhanced expertise does open you up to increased liability. That is true in any and every industry.

And regulatory agencies do consider any "titles" you may give yourself in the promotion of your business when they review your conduct if a complaint or audit arises.


However, just because someone calls themselves a "Fiduciary" does not mean that person is held to a defined and regulated Fiduciary Standard.

There are no state or federal regulations for life insurance that define a Fiduciary Standard within the sales of life insurance policies or a non IAR giving fee based advice on a life insurance policy.


If there are laws on the books defining a "Fiduciary Life Insurance Agent" and the exact standards they are held to, then I am all ears.

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Michael has an insurance analyst license - a license that 99% of the board does NOT hold.

I could be wrong, but not all states recognize that license.

And other states allow fee based analysis with a normal agents license.

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Unless he is selling a particular policy, this all falls under his expertise and liability as an analyst. I'm sure he has archived and referenced various illustrations and can call the whole thing a "supplemental report".

But he sells policies too. He is the insurance equivalent of a "hybrid firm". At least most state insurance regs that cover fee based agents prohibit double dipping.
 
An insurance analyst works for the client:

Life and Disability Insurance Analyst

Authorizing Act: Section 1848 of the California Insurance Code (CIC) reads, in part:
A Life and Disability Insurance Analyst is a person who, for a fee or compensation of any kind, paid by or derived from any person or source other than an insurer, advises, purports to advise, or offers to advise any person insured under, named as beneficiary of, or having any interest in, a life or disability insurance contract, in any manner concerning that contract or his or her rights in respect thereto.

The mere act of receiving a fee is what creates the fiduciary responsibility because the contract now has consideration.

Consideration legal definition of consideration

consideration. n. 1) payment or money. 2) a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties, and is the essential reason for a party entering into a contract.


I doubt that the standards in TX are much different.
 
Michael it seems like you are assuming that disclosure helps the client make an informed decision. The table on your website is nothing more than an interesting "ahhh ok". The only way to compare like insurance policies is through net cost and surrender cost values. That is the way that has been codified.

This fractional APR is nominal in every instance. It could be argued that outside of Mass Mutual, it doesn't even exist.

You are overloading your clients and hindering their decision making process. If there exist fee-based advisors in your market and you reverse your commissions back to the client to provide a "fiduciary service" it could be argued that you are rebating the client.


Since you use this table in your sales presentation, have you run it by each company's compliance department and gotten approval? I will make the boldest claim: This is an elaborate form of twisting wrapped up in non-existent fiduciary technobabble.

In general, I think these are valuable and valid challenges that I will take under consideration. Some of it resonates more than others. In either case, thank you. I'll give it some thought and make a reply tomorrow.

The last line kind of undercuts the rest of it a bit. Are you being serious or just sort of dropping a bomb to see if I'll explode?

If you really think I'm twisting, I really want to know how you got there. That's a pretty serious allegation. As is the rebating. Nothing I do or have ever done meets the definition of rebating. I do not compensate the client or any of his professionals from my commissions. That is rebating. I don't do that.
 
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