I recognize there can be a natural hesitation in talking about fees and costs in the financial services business. After all, talking about costs puts costs front and center in the mind of a client, which in turn places front and center the risk that a client could instead choose a lower-cost adviser.
However, costs are already top of mind in clients' decision-making processes. As such, talking about costs doesn't actually increase the risk that clients might choose a lower-cost adviser but instead builds trust and attracts new clients by giving them the information they need and expect in the current environment, where they can get cost information about almost anything.
Think about it, Amazon has become the fastest-growing retailer ever by making cost comparisons easier and more convenient than ever before. In financial services, Vanguard has become one of the largest mutual fund companies by making low costs the focus of its marketing and their funds. And the number of advisers who focus on costs are growing in numbers, while the number of stock brokers who don't have the same focus on costs is shrinking.
All of the above are clear examples of the magic of focusing on costs, but there's only so much magic to go around. Trying to compete now against Amazon, Vanguard, or well-established RIAs with the scale to offer even lower costs can be a daunting task.
However, while clients and customers can get cost information about almost anything, there's still an asset on their balance sheets for which they're almost never provided comparative cost information. With expenses that vary by as much as 80% between best-available rates and terms and worst-available rates and terms, there is still plenty of magic in talking about costs being charged inside life insurance policies.
Even when clients are presented with policy comparisons, few are getting advice about the fairness of costs. Too often, clients are instead provided with
some comparison of hypothetical premiums, hypothetical cash values and hypothetical death benefits for some limited number of products that isn't a "cost comparison" at all.
So talk with prospects and clients about what they're being charged inside their life insurance policies. Chances are, they don't know. Chances are also good that the broker who sold the policy doesn't know either. By some accounts, as many as 4 out of 10 clients have policies that involve some level of excessive charging. In other words, talking with 10 prospects about the costs being charged inside their life insurance could lead to helping four new clients reduce their costs.
The costs charged inside life insurance policies include: cost-of-insurance charges that make up as much as 85% or more of total costs, and policy expenses for general overhead, product design, underwriting, distribution,
state premium taxes, federal deferred acquisition cost taxes and sales loads (i.e., commissions) that generally make up the remaining 15%. Much of the 80% difference between products with the best-available and worst-available rates and terms comesfrom differences in cost-of-insurance charges.
Show clients and prospects what they are being charged. Get the "detailed expense pages" from the insurance company illustrations that include year-by-year disclosure of premium loads, fixed administration expenses, cash-value-based "wrap fees" (e.g., VUL mortality and expense charges if applicable), and cost-of-insurance charges. At a minimum, compare these costs instead of comparing hypothetical policy values.
In some cases, the client will be astounded by what you show them. Even better, ask that costs be measured against industry benchmarks, as is customary for most other assets. Use this kind of research to build trust and attract clients.
With costs that are 80% higher in some policies than others, there's plenty of magic in focusing on costs being charged in clients' and prospects' life insurance, even after transaction costs to move from a worst-available rates and terms policy to a best-available rates and terms product.
In addition, even when clients aren't being overcharged, being the first adviser to talk with a prospect about the costs being charged in their life insurance can start the trust-building process that leads to making them a client.
(More: State fiduciary rules may be reckoning for life insurance industry)
Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.
