Transforming Financial Advisory Services: The Essential Role of Life Insurance in Today's Regulatory Environment
From Regulatory Challenges to Strategic Opportunities: Transforming Client Portfolios with Life Insurance
In the intricate arena of financial planning, Registered Investment Advisors (RIAs) confront a multifaceted challenge that extends beyond asset allocation and strategic investments: integrating life insurance into the financial plans of their clients. Heightened competition has driven HNW-focused practices to significantly grow service offerings in recent years, creating the opportunity for many wealth managers to implement higher and more diverse fee arrangements to supplement these increases in services (Cerulli 2023). Estate planning and tax planning are two of the fastest-growing service areas among HNW practices—rising from 56% to 70% and 29% to 45% from 2017 to 2023 respectively. With 73% of asset managers indicating the independent RIA channel will be the top opportunity for distribution over the next three years, integrating life insurance for estate and tax planning purposes will help RIAs deliver more added value than their competitors.
Life insurance offers the benefit of downside protection and can be used as a hedge against the larger investment portfolio, however the commission-based sales model that dominates the life insurance industry often complicates this endeavor. When properly designed and aligned with financial goals, life insurance plays a pivotal role in developing a holistic financial plan, especially for high net worth individuals. However, RIAs often lack the education, tools, and infrastructure to navigate the walled gardens between carriers and the opaque fine print of neverending product innovations. Moreover, with increasing regulation by way of Reg BI and FINRA, the potential for conflict of interest and the risk of violating fiduciary duty is increasing,
Bias and Its Evolving Context
Bound by fiduciary duty, RIAs must prioritize products that mitigate conflicts of interest, yet infrequently integrate life insurance into their offering—some even view it as financial competition that decreases their AUM. Moreover, because of their bias against life insurance, they see life insurance as a strategy that results in lower wealth for their clients, rather than downside protection or a tax-advantaged wealth accumulation vehicle. This failure to manage risk exposes the client to the possibility of financial disaster given how difficult timing the market is for even the most savvy investors.
The failure to recommend life insurance products as a tax-efficient accumulation or protection tool means many RIAs are at risk of not fulfilling their fiduciary duty. The RIAs that do not recommend the downside protection suffer from overconfidence bias, where they believe in their superior ability to time the market. If and when they do recommend these products, they must rely on shortcuts to their recommendations because of the complexity involved with analyzing the market without the proper tools. This cognitive shortcut is known in psychology as the availability heuristic whereby RIAs rely only on the latest news or recent market performance to inform their recommendation, instead of taking a product- and carrier-agnostic approach to their recommendation. Recency bias means both RIAs and agents tend to recommend the most recent product innovations, evidenced by the concentrated market share of IUL recommendations made by independent agents.
However, the landscape is shifting. Agents and advisors are increasingly scrutinized to ensure compliance with evolving regulations and fiduciary responsibilities. This scrutiny aims to align their practices more closely with the fiduciary standards RIAs adhere to, focusing on the client's best interest above all. Despite this evolution, the core issue remains: how can RIAs reconcile their commitment to their client's interests with the need to navigate an opaque industry traditionally viewed with skepticism? As the iconic Mike Tyson once said, everyone has a plan until they get punched in the mouth. Every RIA needs to understand and plan for the “what ifs” in life, and life insurance is one of the most dynamic ways to do so.
Steps Towards Integrating Life Insurance into Financial Planning
Embracing Due Diligence
In this changing regulatory environment, RIAs must conduct thorough due diligence to navigate life insurance options confidently. This includes assessing the cost of insurance, the financial stability of insurance companies, and the accuracy of policy illustrations. Understanding these factors is essential for RIAs to recommend policies that align with their client's economic objectives, however the complexity of the product and frequency of product innovations means it's increasingly difficult for RIAs to stay informed. They need support, through technology and back office support, to compare the entire product set and be able to communicate the impact of life insurance products on a client’s financial strategy. We built our platform to streamline the due diligence required, and bring more pricing transparency to when costs could vary as much as 60% for the same product across different carriers.
Advancing Knowledge and Expertise
More than one-quarter (27%) of high net worth practices create customized portfolios for every client account, while a combined 40% report use either standardized or adjustable model portfolios constructed within their practices (Cerulli 2023). While this extends outside of life insurance, the takeaway is clear: too few create customized financial plans for their clients. The amount of practices that still rely on standardized or adjustable model portfolios means the portfolio creation process is still riddled with biases, especially when the advisor or RIA lacks the tools, knowledge or expertise in the specific financial asset. The complex nature of the life insurance product set means there is a high opportunity cost to advancing knowledge and expertise with the current industry tools and technology.
Mitigating biases and understanding the nuanced benefits of life insurance will improve when the recommendation tools and distribution channels integrate education into the policy creation process itself—making understanding the strategic applications more easy to understand. The inability for RIAs to clearly communicate the dynamics of life insurance results in them recommending investing more money into what they already know, since traditional investments are easier to explain and what their clients expect. With limited expertise and support systems comes poorer recommendations that ultimately leave the client dissatisfied because not only was their policy not designed in alignment with their goals, but nor are expectations properly established so disappointment always looms large.
Assessing Fiduciary Duty & Recommendations in a New Light
With the life insurance industry facing increased regulatory scrutiny and a push towards fiduciary responsibility, RIAs will need to seek opportunities to engage with platforms and solutions that help them abide by their fiduciary responsibilities. The good news is that 69% of advisors and HNW practices cite streamlining operation inefficiencies and enhancing advisor supporting tools as top tech initiatives in 2023 (Cerulli 2023). These tools are predominantly being utilized to interact with clients (85%) and goals-based financial planning tools (78%). However, the biggest barriers to implementing solutions are ensuring the costs are not prohibitively high for firms, that there is sufficient time to implement solutions, and ensuring there is a proper support staff (Cerulli 2023).
The benefit of our Optifino model is that we can offer our advisor planning and support tools at a cost-effective level, while decreasing the time-constraints of creating a personalized plan and also providing proper support staff. Fiduciary duty and keeping client best interests in mind will only become more complicated with a growing product set and increasing regulation, and without the proper technology to eliminate bias and mental shortcuts, recommendations will not serve client goals and be cause for even more regulation. Optifino helps RIAs offer more personalized service in compliance and as required by the regulatory landscape, while making it both time- and cost-effective to do so.
Leveraging Technology and Seeking Independent Insights
RIAs recognize the need to expand service offerings—towards assets that provide accumulation and protection properties—through technological capabilities that service different products in order to properly appeal to high net worth clients. This is because more HNW individuals are choosing their advisor based on the services and client experience offered—an increase of 7 percentage points in the last five years (Cerulli 2023). In other words, a technology platform that empowers RIAs to service a new financial asset (i.e. life insurance) which can be used for both estate and tax planning in a goals-based model will attract new clients. New innovations in data processing and analytics, including machine learning and AI, significantly reduces the time constraints, the barriers around education for RIA and client, and time constraints around policy optimizations and portfolio design.
However, technology must still be paired with human-expertise, and specifically, human-expertise needs to lead the technology to inspire more trust in the client. The majority of Americans say communicating with an actual person is what makes an interaction with a salesperson or customer service department a good experience (Cerulli 2023). Advanced technology like Optifino’s can significantly aid RIAs in comparing life insurance products, understanding underwriting standards, evaluating pricing, and saving time in doing so, but people trust technology-powered recommendations more when they are confirmed and explained by an expert. We provide the sales support for both RIAs and their clients to guide them through the policy design process, answer any questions, and subsequently manage their policy afterwards.
Paving the Path for RIAs
The focus of RIAs on brokerage accounts and investment portfolios are not only driven by bias, but they hurt the ability of HNW individuals to accomplish their financial goals. RIAs will create renewed success for their practice if they are able to build more holistic financial plans. HNW people overwhelmingly identify wealth preservation as their primary goal (72%), underscoring the importance of tax minimization (63%) and wealth transfer strategies (48%) (Cerulli 2023). Life insurance is one of the most powerful vehicles for wealth preservation, especially when it comes to tax minimization and wealth transfer strategies. RIAs would benefit from prioritizing it more as a strategy to building a holistic portfolio. Now there is finally a partner in Optifino that will help pave the way for RIAs to be able to increase their offerings while not increasing costs or time constraints.
For RIAs committed to delivering comprehensive and client-centric financial planning services, the integration of life insurance into their advisory portfolio is essential. RIAs that embrace technology to provide more holistic service offerings, create more goals-based personalization, integrate education into the consumer experience, and navigate the evolving regulatory landscape will differentiate their practice. Optifino is designed to reduce the biases from an analog industry and meet rigorous due diligence and compliance requirements. Our approach ensures that life insurance strategies are aligned with clients' broader financial goals and reinforces the RIA's role as a trusted advisor in navigating the complexities of financial planning.
Life insurance technology are provided by David M Kleinhandler and Optifino. (“Optifino”). Optifino is a licensed insurance producer in all states where it offers products, and acts as an agent for various insurance companies. License information available here. The information on this website is for informational purposes only. Products and specific product features may not be available in all states, and other limitations or restrictions may apply.
David M Kleinhandler California License: 0B65035
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