I am currently working with a Life Insurance client, in this instance the previous agent did not work in the “best Interest” of my new client. This client was financing the purchase of an airplane and needed to buy insurance to protect the lending organization, the previous agent completed the aviation questionnaire but never submitted to the underwriter before the policy was issued. This means if the client had died while flying his airplane the client would not be covered.
I recently read an article from Don Shaughnessy that was posted on Money FYI which covered this topic, I wanted to share his thoughts with you but in my everyday ‘client speak’.
The province of Ontario has decided that the individuals who sell life insurance will be judged by a new litmus test to determine if they have given the correct advice. Unfortunately, the words and concepts that the Ontario government is using have little significance to the general public. The new rules to adjudicate the advice given to a client by a life insurance agent will be based on the arbitrary term called “in the client’s best interest.”
How do you determine what is in the ‘Best Interest’?
The difficult part will come in the future when the advisors must try to explain the recommendations the same way as the clients understand it.
That is assuming they understand it at all.
Here are some examples of situations that might be difficult to explain.
Does the client understand the idea of their own ‘Best Interest’? If no, then how is the advisor to know? Should the life Insurance agent use some sort of template that says this is the “balanced” idea or that it produces the best possible outcome. The problem is that predicting the future is not easy to assess. Clients tend to only remember the best outcomes and not any of the less desirable outcomes that were explained to them.
- Does the idea of best interest include a time element? With interest rates at historically low levels, many Universal life policies do not work as originally intended. Does that mean the sale in 1992 was not in the client’s best interest? Clearly some other plan may have worked better, but using only what was is known the day it was arranged, what does it mean if it was not in the clients “best interest?”
- Does the advisor require universal knowledge of products available including ones that are proprietary and unavailable? If it can be shown that there was another product that was more in the client’s best interest somewhere in the world and it was unknown to the advisor, has the best interest been neglected?
- Does the client’s best interest necessarily mean flexible enough to change as circumstances change? If so, which circumstances? If a product only works in a high interest environment, how then can one reasonably anticipate that such an environment will not persist. On the other hand what if the advisor cannot anticipate the change or the client initiates the change? A divorce can alter the ability to pay and in some cases, the need. If a participating policy could result in a large loss to quit after a few years, is the advisor responsible? As circumstances evolve, it is clearly not the Life Insurance policy that determines if the policy was not in the client’s best interest.
The regulators seem to be focused on things advisors and their clients should already take for granted. Define the problem. Assess resources. Assess the fit with other products or plans. Create options where possible. Maintain privacy and security. Comply with the laws of Canada. The undefined part is where the issues will live.
We should understand the motives of both the buyer and seller.
“It’s not what happens to you, but how you react to it that matters.” Epictetus
There needs to be more open discussion and understanding required in order to answer the tougher questions or disagreemnets will be resolved in the judicial system. Understanding the circumstances on the day the life insurance was sold can help resolve this problem. The best way to do this is to complete a “needs analysis” to determine the correct amount of insurance needed. To deal with “best interests” is problematic because by itself, it does not form a complete picture.