Guess what? There’s room for both…
by Alex KimMr. Kim is vice president for public policy with Finseca, the rebranded industry group uniting the former AALU and GAMA associations. Visit www.finseca.org.
In the second in a series of articles focused on today’s advisory career, Finseca’s Alex Kim discusses attitudes toward advisor compensation.
Are you of the mindset that fees are better than commissions? Or do you fall into the camp that commissions are better than fees? Either way, you’re wrong.
The right answer is that there is room for both if the objective is to ensure more people have access to holistic financial advice so they can achieve financial security for themselves and their families. And given how many millions of people have a tremendous need for financial security today, we should all be firmly in the all-of-the-above category.
The need for financial security is staggering.
LIMRA research finds there are an estimated 60 million uninsured and underinsured American households, with an average coverage gap of $200,000. In total, that equates to roughly $12 trillion dollars. Add this to the serious problems looming with Social Security, which the Congressional Budget Office projects will become insolvent in 2034 – at which point, without reform, the finances will require a 25% cut in benefits. Clearly, more planning and advice, not less, is the solution.
For those of you who aren’t familiar, more than a year ago Ernst and Young did a study comparing investment-only strategies with those that incorporate permanent life insurance and annuities. The conclusion was notable and yet, not given nearly the attention it deserves. EY found that if a consumer deploys just 30 cents of every dollar saved into permanent life insurance and annuities, they will yield better outcomes – for both retirement and legacy goals.
We also know – that the best way to achieve holistic financial security – is by working with a financial security professional. The trusted human guide is the indispensable ingredient. That’s right, having a conversation about what a person or a family’s planning needs may be are vital. A robot can’t replace that.
A few months ago, Shlomo Benartzi – a former UCLA economics professor who is doing research to quantify the value of the professional advice – published a piece in the WSJ. Professor Benartzi noted, “For the typical employee, this big picture advice is worth an income boost of 2.51%, or roughly 6.93% relative to their 401(k).” And though “there is little data on holistic financial advice,” his initial research has concluded that such advice could equal a 7.5% pay raise.
So, despite what some may believe, the simple truth is that the commission-based model is a more effective tool in some instances. Each method obviously brings unique advantages that cater to any number of diverse needs and preferences, creating a balanced and comprehensive approach to financial advice. But regardless, the reality is consumers need to be allowed to make the choice for themselves as to which path they’re going to pursue based on their individual needs and personal goals.
Accordingly, this is why it is so important that we get the regulatory framework right on this issue. As we’ve already seen as a result of New York’s Regulation 187, consumers can be hurt when we get the regulations wrong.
For us, a metric that clearly points to the harmful effect of the regulation is the decline in the number of people covered by individual life insurance. In 2021, for example, the policy count in New York was down 15% from the 2018 total, the year before the rule took effect. Over the same period, however, the policy count nationally increased by 3%. So, fewer people are getting life insurance in New York at a time when New Yorkers and the rest of the country, clearly need far more of it.
New Life Policies In Decline
As a colleague of mine recently shared, there’s also data from MIB, a life insurance industry leader in data collection and risk assessment, showing that there was a 13% decrease in the number of new life insurance applications from 2018 to 2022 in the state of New York. In 2021 alone, NY saw a -3.16% decline in new life insurance applications from the prior year. Whereas Connecticut saw a 5.87% increase in life insurance applications and a 3.39% increase on the national level, during that same timeframe. In addition to this, we’ve also heard about how burdensome it is for advisors to serve their clients.
One thing to also remember is that financial security professionals who serve their clients, American families and businesses, and are compensated by commissions reach a broader spectrum of Americans at different levels of income, age, gender, and ethnic background. To reach our goal of financial security for all, we certainly need more of that too.
The next time you hear someone trying to argue for one form of compensation or another, please encourage them to remember that consumers should make the choice that best fits their need. Because, again, with more than 60 million American households that have no or not enough life insurance, it’s clear that many millions of people and their families have a need for the benefit of the protection of a true financial security plan. And regardless of which option they pick, we should be celebrating everyone who is taking the steps to get themselves and their families to a place of financial security.