Should Insurance Agents Provide Financial Advice and Services?

see no evil

(Photo credit: McBeths Photography)

Over the last few weeks I’ve had the opportunity and fortune to work with graduate students on a number of financial and ethical issues presented to them in their classes. Of the many issues presented there was one issue that we discussed (argued) over more than any other topic; it was the suitability versus fiduciary standard.

Most of our readers know that our firm not only follows but embraces the fiduciary standard where we are legally bound to act in the best interests of our clients.

This brings me to the title question of this piece – should insurance agents provide financial, advice and or financial services?

Most, if not all insurance agents are held to the suitability standard which means that as long as the product fits certain aspects of the client profile it’s therefore suitable and the agent can sell the product. Often the word suitability is synonymous with sales – meaning that suitability is a sales standard.

So what happens when this standard is also allowed when agents who are securities licensed start selling financial products such as mutual funds, variable annuities, and variable life insurance? Is the same standard of care that’s good enough to sell auto and home insurance all that’s needed to guide a client’s retirement funds? I would argue it isn’t.

The other question this raises is can an insurance agent be a servant to two masters? That is, can they effectively work with clients on their property and casualty insurance needs and their retirement portfolios? Again, I would argue no.

Early in my career I owned a property and casualty insurance agency. Most property and casualty (P&C) companies have to focus on their “bread and butter” which is auto and home insurance with a bit of life insurance tossed in. I was licensed to sell mutual funds as well and had a small group of clients that I worked with in these areas. However, my main focus had to be P&C. By contract, I had certain auto and home policy numbers to hit or my business would be in jeopardy of closing. How could I focus on meeting the retirement needs and plans of my clients when I had to worry about cross-selling auto and home policies? I couldn’t. I’m not saying others couldn’t as well – it just becomes extremely difficult.

Another reason why I couldn’t effectively work with my clients’ investments was because of the contract I had with the carrier I was affiliated with. By contract, I was obligated to put the interests of the insurance company first; my clients’ interests second. Note: This is how most insurance companies with captive agents operate.

I can remember sharing with a company VP my plan to study and sit for the CFP® exam. His exact words were, “That’s great – but if you pass the exam, you are not allowed to advertise you’re a CFP®.” When I asked why, I was told that because of my contract I could not be a fiduciary – something the CFP® requires in financial planning engagements. Note: It was because of this that I sold my agency and made the gradual move to the fiduciary model.

So to answer my title question my answer is no. The reason is self-evident: If an insurance agent is required by contract to not act in the best interests of their clients, then how can clients know that they are getting what’s best for them? In addition, many captive agents can only sell the products of their respective company. Again, how can this be in a client’s best interest if they are limited to a handful of proprietary (and often much more expensive) options?

Knowing that I have whacked a hornet’s nest with some of our readers (the insurance agents), I’m open to the thoughts of all of our readers. What do you think? Another way to look at this is; what standard would you want if it were your finances and investments?

Post originally appeared as Should Insurance Agents Provide Financial Advice and Services? on Getting Your Financial Ducks In A Row

The post Should Insurance Agents Provide Financial Advice and Services? appeared first on Getting Your Financial Ducks In A Row.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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