Tag Archives: financial advisor

Broad Array of Roles for Disability Coverage

In the world of disability insurance, most financial advisers think of personal income protection. This is only the beginning of the possibilities that the adviser may be able to provide to safeguard clients, their businesses and assets. There are many products available within the disability insurance realm and diverse opportunities to provide your expertise.

Diversity of Product:

Key Person

The most valuable asset in a business is the people. Imagine if one of your key executives had an illness or an accident and was unable to work and continue creating revenue and profit for your company. What effect would this have on the bottom line? How would you replace the lost revenue?

Retirement/Deferred Compensation

At a closely held, family owned business, benefit plans favoring the family and the senior management are important for retention and reward. Over the past year, a non-qualified deferred compensation plan is put in place for the top 10 executives. What happens if one of the executives becomes sick or hurt and is unable to work and contribute to the plan? Can the plan be funded? If yes, how?

Contract Fulfillment

The board of a company just signed the largest contract in company history for a new CEO. The contract has financial guarantees, performance bonuses and the other usual language. What happens if the CEO becomes ill or has an accident and is unable to perform his duties? The company is on the hook for the financial guarantees. Should this be funded out of company cash flow or have the liability transferred through a disability insurance policy?

Loan Protection

There are more than 21 million small business loans valued at more than $600 billion. Business loans are taken out for business-related expenses, such as:

  • Purchase or expansion of a practice or business
  • Purchase of a large piece of equipment
  • Facility renovations
  • An increase in working capital or build-up of inventory
  • Purchase of a building or land for a business

It may make sense to provide disability insurance to cover the business loans in the event the business owner has a disabling accident or illness. There are separate insurance policies or riders to a traditional policy that provides benefits to cover the loan or loan payment obligations.

Impaired Risk

Perhaps a client will not qualify for traditional or even non-traditional coverage because of an extensive medical history. Impaired risk coverages can work for pre-existing medical conditions.

Diversity of Opportunity:

QSPP Can Prevent Dysfunction and Disruption

  • Could you continue to pay a disabled employee’s salary from your business?
  • How long could you afford to pay a salary?
  • Would the payments you pay be deductible to your business?

It is the American dream: turn a simple idea into a start-up and, through innovation, hard work and the right people, grow that start-up into an industry leader. It may seem obvious that a business owner would want to do everything to protect the people who help grow the business. As the business grows, however, offering everyone the same protection in the case of injury or illness may become difficult. Owners have a tendency to focus on partners, executive staff and key employees. This is a completely logical line of thinking, but without a Qualified Sick Pay Plan (QSPP) in place, it could put the business at high risk.

A QSPP is a formalized plan determining who will be paid, how much will be paid and how long salary will be continued when employees are unable to work because of an injury or illness. The plan can have different determinations for different classes of employees within the company. It can also be self-funded, or funded through an insured product, such as disability income policies.

Why a QSPP?

There are two key reasons: tax implication of benefits paid and potential precedent. The Internal Revenue Code states that wages paid to a disabled employee may not be deductible as a business expense unless they are paid under a salary continuation program. Without a program in place, any payments made are not deductible by the business and are fully taxable to the employee.

The implementation of a plan allows a business to deduct wages paid to employees who cannot work, and an employee can receive qualified benefits tax-free. The absence of a QSPP could result in the IRS disallowing benefits paid to an employee as sick pay. This would have serious tax implications on the employer and the employee.

An even greater danger to an employer is the existence of benefit payment precedent. It may seem completely logical to continue the salary of key employees responsible for revenue growth, but, without a QSPP, any sick pay for any employee creates a precedent of the same pay for all employees. Any variation between employees could be viewed as discrimination. To eliminate this risk, it is important to create a formal, written plan stating any differences of salary continuation length or frequency between classes of employees before an employee needs to use it.

How Is a QSPP Implemented?

A QSPP requires two components: a plan resolution and plan letters to employees.

A plan resolution is drafted and executed by the company’s board. This resolution defines the classes of employees, how benefits will be paid and how long they will be paid.

Plan letters communicate the information to the employees. They can be class-specific.

How Can Benefits Under a QSPP Be Funded?

This is an important consideration. A QSPP can be fully self-funded, fully insured or a combination. If a plan is fully self-funded, the company can be burdened with all of the responsibility of determining who cannot work and how long they can’t work and of paying benefits from company accounts during a time when, depending on the person who cannot work, the company may need the funds the most. Additionally, the FASB 112 Accounting Rule makes a company become an insurance company by requiring it to carry the present value of future claims as a liability on the balance sheet if it chooses to self-fund a salary continuation program. Two implications of FASB 112 are:

  • Companies with self-funded disability programs must set aside all the money upfront
  • This requirement can significantly reduce profits while increasing liabilities

Under a QSPP plan with disability income insurance, the insurance company determines when your employees cannot work, the insurance company determines how long they cannot work and the company pays smaller, regular payments for the benefit during a time when all employees are actively at work. A fully insured plan not only takes much of the liability away from the employer, but it also allows the company to predict future plan costs. Disability income insurance premiums are level for the life of the policies. Three tax shelters of an insured salary continuation program are:

  • Premiums paid are deductible as a fringe benefit expense (IRC Section 162(a)).
  • Employer premiums are not included in employee’s taxable income. (IRC Section 106).
  • A special tax credit may be available for employees that are permanently and totally disabled (IRC Section 22(b)).

In working with the son of the owners of a medium-sized technology security firm, I learned that Mom and Dad would take care of the son if anything were ever to happen. As a financial adviser, what do we do now? A conversation about the company benefits and what the parent/owners wanted to have happen with their family and their employees created an opportunity. By educating the clients on sick pay plans, we were able to provide better recommendations to the owner (parents) for the benefit of the son and the other employees while keeping the firm in legal compliance.

Divorce Settlements

Most if not all settlements include division of assets and liabilities owned by the parties. Additionally, when appropriate, especially if there are children involved, there is an alimony agreement. What happens to the continuing alimony payment if the payer becomes sick or hurt and unable to earn the income to make the support payment?

With the divorce rate at 50% or higher for U.S. marriages, there is an opportunity to protect a spouse and provide the children a source of income used for living and educational expenses. The solution is to place a disability insurance policy on the payer, with the spouse as beneficiary.

Occupational Diversity

Students, coaches, umpires, golf professionals, chefs, race car drivers, comedians and musicians, to name just a few, are thought to have a hard time obtaining disability income insurance. They are not hard to insure if you are able to go a little deeper within the traditional markets or outside to the non-traditional markets.

Our hobbies sometimes position us to have access to people in these diverse occupations. One of my hobbies is to watch, listen and learn from professional speakers. It has been a privilege to spend time with some of the all-time greats. I am always amazed at their accessibility if you step forward and participate. Once, I hosted Chris Gardner, who became nationally know for his life story through the movie “Pursuit of Happiness,” where his role was played by Will Smith. As Chris and I began building a relationship, he learned about our firm, and it became evident that no one had spoken to him about protecting his flow of income from a disabling accident or illness.

There are many diverse opportunities for you as the adviser to protect your client’s flow income, business entity and valued assets. Think beyond personal disability insurance and help your clients understand their needs to secure their financial foundations.

Restoring the Agent-Client Relationship

There has been a lot of frustration in the insurance industry from both those who sell it and those who need it. Both camps are suffering financially, and both can do better if they get together on vital insurance protection, but they just can’t seem to hook up without jumping through hoops. In an era of hyper-information and instant communication, this disconnect may seem crazy, but it’s real. In a time of chaotic change, an online meetup service would be valuable to agents and consumers alike to repair that agent/client relationship and put the personal touch back into insurance.

Financially challenged agents and consumers

Incomes have stagnated for insurance agents and the general public alike, and the route to better times seems unclear for both sides. According to the U.S. Bureau of Labor Statistics, the mean annual salary for insurance sales agents inched up only 2% between 2010 and 2014. In 2010, it was $62,520.  In 2014, it was $63,730. Furthermore, the field has become overcrowded, with 18% more agents vying for the business in 2014 than in 2010.

The general public has fared no better. Following the Great Recession, which began in December 2007, the wealthiest Americans have done well. The “rest of us,” however, continue to struggle. The proportion of American households defined as “middle-income” remained stagnant from 2010 through 2014, at about 51%, according to a Pew Research Center study. Back in 1970, the “middle-income” percentage was 10 points higher.

The potential for pocketbook improvements

Both insurance agents and their prospects could do better financially if they could somehow get together more quickly and smoothly – through a matchmaker or intermediary.

It’s easy to see how agents could profit. With, say, a 10% to 50% increase in qualified leads per month, a corresponding jump in income could be expected. And with other efficiencies through more nuanced matchmaking, even greater income increases might be forthcoming – through enhanced referrals, for example.

It’s a little more complicated to see how connecting more smoothly could financially benefit insurance buyers. It becomes clear, though, when one goes to the heart of what insurance is for.  It’s for mitigating risk, which can be expensive. It also means personal benefits such as improved health and well-being. For example, good guidance from an agent can:

  • Make the difference between paying and not having to pay for home repairs after a type of storm damage not covered by an “economy” policy the agent advised against.
  • Preserve a family’s estate by convincing the family, early on, of the prudence of securing long-term-care insurance. This could be a financial game changer for millions of families that are now exposed. According to industry estimates, about 90% of those who could benefit from LTC insurance do not own a policy. And one of the biggest causes of bankruptcy is uncovered health expenses, especially in the later years!
  • Help keep clients safe and whole through an auto policy with safe-driving incentives. The potential benefits range from lower premiums to higher lifetime incomes because of avoiding accidents that might interrupt the ability to work.

As technology and society evolve, good guidance from an insurance agent may affect people’s pocketbooks and lives in more significant ways than ever. More and more agents can:

  • Team with financial advisers to foster sound budgeting, savings, investments and money management.
  • Influence their clients’ health by recommending policies, now starting to appear, that come with fitness incentives. The financial win here is double: lower premiums for keeping up one’s wellness routine and greater lifetime earnings through enhanced vitality and work-span.

The matchmaker solution

A good matchmaking service brings insurance agents and buyers together in very efficient, human ways. It starts with search and ends with introductions and contact.  It includes:

  • A search function to locate agents for a particular type of insurance (auto, critical illness, health, homeowners, life, long-term care, Medicare supplement) in a particular geographic area.
  • A list of agents with their pictures and names visible, for the buyer to peruse and select from.
  • Details about each agent, including:
    • Insurance lines and carriers represented.
    • Agent’s biography or background description.
    • Reviews or testimonials with ratings (usually one to five stars).
    • Link to the agent’s personal or business website.
    • Other information ranging from a location map to social media links.

Limited matching has existed for a few years. Some generic consumer rating and matching services embrace insurance agents. They include Yelp and Angie’s List. General search services, such as Google and Bing, serve as de facto matching services, but in a very spotty way. Insurance associations develop leads that are sold to agents but do not typically provide free online access to individual agents.

Robust agent-buyer matching, with all the above elements, is ready for prime time. In 2015, Agent Review, the first complete rating and matching service designed specifically for insurance agents and insurance buyers, was introduced.

Are We Finally Getting Close to a Single View of the Customer?

The concept of the single view of the customer has been around for ages. I remember some significant single-view projects of insurers from the early 1990s. Many insurers have continued to strive toward this elusive goal. Now that the customer experience is front and center in insurers’ strategies, it’s time to revisit the single view, aka the 360-degree view of the customer.

Three questions must be addressed: 1) What is single view anyway? 2) How does it relate to the customer experience? 3) What is the state of the industry?

What is a single view anyway?

Having a single view of the customer means that the insurer and any front-line individual dealing with the customer understand the full context of the relationship. This normally includes information such as the customer’s personally identifiable information (PII), products currently owned, relationship history and the named agent/producer (if applicable). Ideally, this is summarized for a quick snapshot of the relationship.

Creating a single view is complicated by two main factors. First, the complexity and often siloed natures of IT systems make it difficult to have a common view. The evolution of channel options and technologies makes it a constant challenge to coordinate across the different systems. The second challenge relates to any company using independent agents, financial advisers, brokers or other producers. The producer does not typically share all the customer information with the insurer. Usually, the producer just passes along the minimum information needed for underwriting and servicing the customer. In addition, the producer may place insurance coverages for a customer with multiple insurance companies. The producer may have more of a single view of the customer’s insurance and financial services products and needs than the insurer has.

How does single view relate to the customer experience?

As challenging as it is, creating as complete a picture of the customer relationship as possible is essential today. Improving the customer experience is an SMA 2015 Imperative and a top strategic initiative for many companies and a key driver of business and IT strategies. Any touch point, whether human or digital, should be informed by the context of the customer relationship. An agent, customer service rep or adjuster should understand the value of the policyholder. While everyone is entitled to fair service that satisfies the contractual obligations, the level of attention and expertise applied might vary for an individual or business with a 20-year history and multiple policies vs. a new customer with just one small policy.

A related question is, “Does the customer have a single view of the insurer?” Customers do not want to repeat information, experience delays in service, be presented with incorrect information or find that their favorite mode of interaction is not available or current. This is causing insurers to move toward providing an omni-channel environment, enabling policyholders to interact using whatever devices and channels they want at any time — and making the transactions and interactions transfer across channels in real time. Ultimately, providing a world class customer experience requires the insurer to have a single view of the customer and vice versa.

What is the state of single view in insurance?

How many insurers have actually achieved this single view? According to SMA research, 35% say they have assembled a single view, but only 8% can present that view in real time to the individuals interacting with a policyholder. Another 46% do not have single view today but are working on it. There are also significant differences based on the size of the insurer. More insurers with less than $1 billion in premium actually have a full single view in real time than do their counterparts with more than $1 billion. This is likely because the smaller companies’ product and distribution environment is less complicated than that of the larger companies. On the other hand, virtually all insurers with more than $1 billion are at least working on achieving a single view, whereas 30% of the smaller companies have no plans.

Single view and improving the customer experience are inextricably linked. Business and IT strategies and plans should always consider the implications for both of these objectives.

The Rise of the Robo-Advisers?

The robots are here. Not the humanoid versions that you see in Hollywood movies, but the invisible ones that are the brains behind what look like normal online front-ends. They can educate you, advise you, execute trades for you, manage your portfolio and even earn some extra dollars for you by doing tax-loss harvesting every day. These robo-advisers also are not just for do-it-yourself or self-directed consumers; they’re also for financial advisers, who can offload some of their more mundane tasks on the robo-advisers. This can enable advisers to focus more on interacting with clients, understanding their needs and acting as a trusted partner in their investment decisions.

It’s no wonder that venture capital money is flowing into robo-advising (also called digital wealth management, a less emotionally weighted term). Venture capitalists have invested nearly $500 million in robo-advice start-ups, including almost $290 million in 2014 alone. Many of these companies are currently valued at 25 times revenue, with leading companies commanding valuations of $500 million or more. This has motivated traditional asset managers to create their own digital wealth management solutions or establish strategic partnerships with start-ups. Digital wealth management client assets, from both start-ups and traditional players, are projected to grow from $16 billion in 2014 to roughly $60 billion by end of 2015, and $255 billion within the next five years. However, this is still a small sum considering U.S. retail asset management assets total $15 trillion and U.S. retirement assets total $24 trillion.

What has caused this recent “gold rush” in robo-advice? Is it just another fad that will pass quickly, or will it seriously change the financial advice and wealth management landscape? To arrive at an answer, let’s look at some of the key demographic, economic and technological drivers that have been at play over the past decade.

Demographic Trends

The need for digital wealth management and the urgent need to combine low-cost digital advice with face-to-face human advice have arisen in three primary market segments, which many robo-advisers are targeting:

 

  • Millennials and Gen Xers: More than 78 million Americans are Millennials (those born between 1982 and 2000), and 61 million are Gen Xers (those born between 1965 and 1981); accordingly, this segment’s influence is significant. These groups demand transparency, simplicity and speed in their interactions with financial advisers and financial services providers. As a result, they are likely to use online, mobile and social channels for interactive education and advice. That said, a significant number of them are new to financial planning and financial products, which means they need at least some human interaction.

 

 

  • Baby Boomers: Baby boomers, numbering 80 million, are still the largest consumer segment and have retail investments and retirement assets of $39 trillion. Considering that this segment is either at or near retirement age, the urgency to plan for their retirement as well as draw down a guaranteed income during it is critical. The complexity of planning and executing this plan typically goes beyond what today’s automated technologies can provide.

 

 

  • Mass-Affluent & Mass-Market: Financial planning and advice has largely been aimed at high-net-worth (top 5%) individuals. Targeting mass-affluent (the next 15%) and mass-market (the next 50%) customers at an affordable price point has proven difficult. Combining automated online advice with the pooled human advice that some of the digital wealth management players offer can provide some middle ground.

 

Technological Advances

Technical advances have accompanied demographic developments. The availability of new sources and large volumes of data (i.e., big data) has meant that new techniques are now available (see “What comes after predictive analytics?”) to understand consumer behaviors, look for behavioral patterns and better match investment portfolios to customer needs.

 

  • Data Availability: The availability of data, including personally identifiable customer transactional level data and aggregated and personally non-identifiable data, has been increasing over the past five years. In addition, a number of federal, state and local government bodies have been making more socio-demographic, financial, health and other data more easily available through open government initiatives. A host of other established credit and market data companies, as well as new entrants offering proprietary personally non-identifiable data on a subscription basis, complement these data sources. If all this structured data is not sufficient, one can mine a wealth of social data on what customers are sharing on social media and learn about their needs, concerns and life events.

 

 

  • Machine Learning & Predictive Modeling: Techniques for extracting insights from large volumes of data also have been improving significantly. Machine learning techniques can be used to build predictive models to determine financial needs, product preferences and customer interaction modes by analyzing large volumes of socio-demographic, behavioral and transactional data. Big data and cloud technologies facilitate effective use of this combination of large volumes of structured and unstructured data. In particular, big data technologies enable distributed analysis of large volumes of data that generates insights in batch-mode or in real-time. Availability of memory and computing power in the cloud allows start-up companies to scale on demand instead of spending precious venture capital dollars setting up an IT infrastructure.

 

 

  • Agent-Based Modeling: Financial advice; investing for the short-, medium- and long-term; portfolio optimization; and risk management under different economic and market conditions are complex and interdependent activities that require years of experience and extensive knowledge of numerous products. Moreover, agents have to cope with the fact that individuals often make investment decisions for emotional and social reasons, not just rational ones.

 

Behavioral finance takes into account the many factors that influence how individuals really make decisions, and human advisers are naturally skeptical that robo-advisers will be able to match their skills interpreting and reacting to human behavior. While this will continue to be true for the foreseeable future, the gap is narrowing between an average adviser and a robo-adviser that models human behavior and can run scenarios based on a variety of economic, market or individual shocks. Agent-based models are being built and piloted today that can model individual consumer behavior, analyze the cradle-to-grave income/expenses and assets/liabilities of individuals and households, model economic and return conditions over the past century and simulate individual health shocks (e.g., need for assisted living care). These models are assisting both self-directed investors who interact with robo-advisers and also human advisers.

Evolution of Robo-advisers

We see the evolution of robo-advisers taking place in three overlapping phases. In each phase, the sophistication of advice and its adoption increases.

 

  • First Generation or Standalone Robo-Advisers: The first generation of robo-advisers targets self-directed end consumers. They are standalone tools that allow investors to a) aggregate their financial data from multiple financial service providers (e.g., banks, savings, retirement, brokerage), b) provide a unified view of their portfolio, c) obtain financial advice, d) determine portfolio optimization based on life stages and e) execute trades when appropriate. These robo-advisers are relatively simple from an analytical perspective and make use of classic segmentation and portfolio optimization techniques.

 

 

  • Second Generation or Integrated Robo-Advisers: The second generation of robo-advisers is targeting both end consumers and advisers. The robo-advisers are also able to integrate with institutional systems as “white labeled” (i.e., unbranded) adviser tools that offer three-way interaction among investors, advisers and asset managers. These online platforms are variations of the “wrap” platforms that are quite common in Australia and the UK, and offer a cost-effective way for advisers and asset managers to target mass-market and even mass-affluent consumers. In 2014, some of the leading robo-advisers started “white labeling” their solutions for independent advisers and linking with large institutional managers. Some larger traditional asset managers also have started offering automated advice by either creating their own solutions or by partnering with start-ups.

 

 

  • Third Generation or Cognitive Robo-Advisers: Advances in artificial intelligence (AI) based techniques (e.g., agent-based modeling and cognitive computing) will see second generation robo-advisers adding more sophisticated capability. They will move from offering personal financial management and investment management advice to offering holistic, cradle-to-grave financial planning advice. Combining external data and social data to create “someone like you” personas; inferring investment behaviors and risk preferences using machine learning; modeling individual decisions using agent-based modeling; and running future scenarios based on economic, market or individual shocks has the promise of adding significant value to existing adviser-client conversations.

 

One could argue that, with the increasing sophistication of robo-advisers, human advisers will eventually disappear. However, we don’t believe this is likely to happen anytime in the next couple of decades. There will continue to be consumers (notably high-worth individuals with complex financial needs) who seek human advice and rely on others to affect their decisions, even if doing so is more expensive than using an automated system. Because of greater overall reliance on automated advice, human advisers will be able to focus much more of their attention on human interaction and building trust with these types of clients. 

Implications to Financial Service Providers

How should existing producers and intermediaries react to robo-advisers? Should they embrace these newer technologies or resist them?

 

  • Asset Managers & Product Manufacturers: Large asset managers and product manufacturers who are keen on expanding shelf-space for their products should view robo-advisers as an additional channel to acquire specific type of customers – typically the self-directed and online-savvy segments, as well as the emerging high-net-worth segment. They also should view robo-advisers as a platform to offer their products to mass-market customers in a cost-effective manner.

 

 

  • Broker Dealers and Investment Advisory Firms: Large firms with independent broker-dealers or financial advisers need to seriously consider enabling their distribution with some of the advanced tools that robo-advisers offer. If they do not, then these channels are likely to see a steady movement of assets – especially of certain segments (e.g., the emerging affluent and online-savvy) – from them to robo-advisers.

 

 

  • Registered Independent Advisers and Independent Planners: This is the group that faces the greatest existential threat from robo-advisers. While it may be easy for them to resist and denounce robo-advisers in the short term, it is in their long-term interest to embrace new technologies and use them to their advantage. By outsourcing the mechanics of financial and investment management to robo-advisers, they can start devoting more time to interacting with the clients who want human interaction and thereby build deeper relationships with existing clients.

 

 

  • Insurance Providers and Insurance Agents: Insurance products and the agents who sell them also will feel the effects of robo-advisers. The complexity of many products and related fees/commissions will become more transparent as the migration to robo-adviser platforms gathers pace. This will put greater pressure on insurers and agents to simplify and package their solutions and reduce their fees or commissions. If this group does not adopt more automated advice solutions, then it likely will lose its appeal to attractive customer segments (e.g., emerging affluent and online-savvy segments) for whom their products could be beneficial.

 

Product manufacturers, distributors, and independent advisers who ignore the advent of robo-advisers do so at their own risk. While there may be some present-day hype and irrational exuberance about robo-advisers, the long-term trend toward greater automation and integration of automation with face-to-face advice is undeniable. This situation is not too dissimilar to automated tax-advice and e-filing. When the first automated tax packages came out in the ’90s, some industry observers predicted the end of tax consultants. While a significant number of taxpayers did shift to self-prepared tax filing, there is still a substantial number of consumers who rely on tax professionals to file their taxes. Nearly 118 million of the 137 million tax returns in 2014 were e-filings (i.e., electronically filed tax returns), but tax consultants filed many of them. A similar scenario for e-advice is likely: a substantial portion of assets will be e-advised and e-administered in the next five to 10n years, as both advisers and self-directed investors shift to using robo-advisers.