Planning's New Dynamic

Wealth, and the Evolution of the Agency Mission

Advanced planning strategies for the evolving high net-worth marketplace

by Derek Archey CFP

Mr. Archey isVice President Comprehensive Planning, Inc. a Michigan based independent brokerage general agency dedicated to providing collaborative planning solutions for all your client’s insurance needs. For more information visit Comprehensive Planning, Inc. is a LifeMark Partner Agency.

“It is not the strongest of the species that survives, nor the most intelligent, it is the one most adaptable to change”
– Charles Darwin.

I was watching a movie trailer for one of the new superhero films and the hero, as a joke, tried to change into his superhero costume inside of a phone booth. The process took so long, he failed to prevent a robbery.

I laughed at the scene, but also wondered if my 9-year-old son would know what the phone booth was, or why it was even on the street corner to begin with. It was another reminder that the one constant in life is change.

When I first began my career in 1999, my agency kept a library of term insurance rate books, and would quote rates by manual calculation as often as using an illustration. The federal estate tax exemption was $650,000, and the top tax rate was 55 percent.

Now rate books are stored digitally as PDF files and nobody bothers to look at them. Full-spreadsheet comparisons can be generated instantly at the push of a button, policies may be applied for with e-applications, the estate tax exemption is currently $5,490,000, the top rate is 40 percent, and the entire future of the estate and gift tax rates regime is in question. What does all of this mean for advisors and brokerage distribution?

It means advisors and distributors must continue to evolve as well. Increasingly, the pressures of technological, regulatory, and legislative change are forcing the industry to bifurcate. Automation and process improvements are impacting the lower end of the market, but the high net-worth segment demands even more individualized and personalized service. Successful advisors are migrating away from planning, based on pure tax liability calculations, to a goals- and objectives-based approach to solve the unique issues facing an increasingly diverse client base.

The emerging, complex family

My agency is frequently involved in cases related to estate equalization for blended families, transfers of closely-held business, and planning for special needs. Advisors managing these cases are not simply doing tax math, but are assisting their clients in determining complicated family issues. I have had more than one advisor tell me during cases such as these that they aren’t just the client’s financial advisor, they are also their friend, personal therapist and marriage counselor. Perhaps the American College will adapt to this and develop an advisor/therapist certification! Two case examples serve to illustrate the trend.

In the first case, an advisor knew a wealthy woman who had divorced and remarried. Her ex-husband owned a family business where one of her two daughters was employed. Since the divorce, the woman had become very successful investing in real estate. She wanted to establish a trust, funded by life insurance, for the benefit of her children but also, in particular, her grandchildren. In her own words, she wanted to use her rental income to “leave a separate legacy of my own.” The conversation was focused on her legacy and her family, not on taxes owed to the federal government. Unfortunately, after considerable underwriting, she was not insurable at attractive rates, but her second husband was. After much additional discussion, we settled on a strategy of insuring his life to fund a policy for her daughters’ benefit thereby providing the funding for her multigenerational trust.

In the second illustrative case, an advisor was engaged by a man who owned a business worth over $100 million. His two children were involved in the business and were minority owners in the company. Each was already wealthy in his own right and would stand to be worth quite a bit more once they inherited the rest of the business. The advisor was seeking $5 million of permanent coverage to be owned by one son’s fiancée, as part of a prenuptial agreement intended to help preserve the family wealth. This brought up emotional questions of family equity to future and current spouses that require delicacy and careful consideration. Questions of prenuptial, and in some cases postnuptial agreements can be resolved using insurance products, but negotiations are fragile and can be time-consuming.

Effective distributors in this environment are not just sales people, but educators. All of this takes significant time

The case involved wealthy parents, two adult children, a fiancée, a current spouse, and numerous attorneys for several interested parties. It revolved as much around the human element and the emotions and feelings of all family members involved as it did around the numbers. And again, estate taxes were not the primary concern. Today’s advisor needs to be prepared to roll up his or her shirt sleeves and venture into the middle of these complicated matters. Brokerage distribution must be prepared to assist the advisor in these complex and sensitive matters.

Greater Need for Flexibility

These highly-individualized cases require flexible products to best suit client’s A needs. The products considered here were not the guaranteed no-lapse universal life plans that were popular for the better part of two decades. We analyzed and recommended contracts that offered cash value or liquidity features in future years.

These were young insureds. What would happen if circumstances changed in 15 or 20 years, which they are almost certain to do, for better or worse? What if they no longer needed the policies or desired better ones? A guaranteed no-lapse universal life, essentially a “term for life,” simply would not have worked as well.

Because advisors with high-net worth clients are increasingly pressured to perform more diverse roles, they need specialist partners that they can rely on. Brokerage distribution is well-positioned to play the part, if distributors recognize the opportunity. This is reflected in the increasing number of distributors working with the advisor directly at the point of sale.

Direct Distributor Involvement

Direct distributor involvement is even more important, as carriers increasingly promote indexed universal life, products with guaranteed liquidity features, and living benefits features. According to LIMRA’s fourth Quarter Retail Life Insurance Sales Survey, IUL represented 56 percent of UL and 21 percent of all individual life premiums for 2016. These products take time to learn and to explain, not just to advisors, but also to clients. Effective distributors in this environment are not just sales people, but educators. All of this takes significant time. Luckily, agencies that adapt and embrace technological improvements can free up talented people to perform these roles.

A case in point is our firm’s access to industry-leading product-benchmarking software. One day last fall, as I walked out of my office, I overheard our lead marketing associate on the phone discussing the features of two particular indexed products, in-depth, as it related to the meeting the client’s retirement income needs. This conversation lasted quite some time. When she hung up, I told her I was impressed with the conversation, and she responded by saying that the benchmarking software had allowed her to quickly narrow the product choices down to a manageable number.

She could then spend less time running numbers and more time talking to the advisor about features and benefits. In the past, it would have easily taken an hour or longer to do the work to generate needed numbers even before the call took place.

My father likes to say “necessity is the mother of invention.” Advisors and brokerage distributors cannot choose the regulatory, technological, economic and legislative landscape in which they want to operate. All that we can do is choose how to best adapt to them. Currently there are many advisors and distributors doing just that: by embracing the efficiencies offered by changes in technology and process, they have the capacity for more in-depth interactions with their clients and form real partnerships based on trust and expertise.

The high-net worth client demands individualized and specialized service to meet an increasingly diverse set of goals and objectives. Those that adapt, collaborate with distribution partners, and evolve their use of time-saving technologies will continue to be successful. For those who do not, I suggest a cruise to the Galapagos Islands. ◊