As a life insurance agent, assuming your clients understand a product’s fee structure and have read the disclosures can lead to hard feelings, or worse, an errors and omissions claim.
That’s what happened in one of our Errors and Omissions Claim scenarios. John, the client, rolled over an old annuity contract into a new one on his Agent’s recommendation. The new annuity had several attractive features, including a 10 percent signing bonus and a guaranteed income rider, but two years of flat performance left the account value virtually unchanged.
Another advisor looked over both contracts and told John the old contract’s income stream was worth several hundred dollars more per month than the new one. John filed a claim for negligence and unsuitable replacement of the annuity contract.
What went wrong?
Always Factor in the Fees
First, the old contact would have continued with a 6 percent minimum rate of return on the benefit base; the minimum guarantee under the new contract had just dropped to 4 percent. Second, fees charged on the new contract were .5% higher than the old contract.
The Agent had failed to provide a complete picture of the pros and cons of the switch. The client should have received – and been able to discuss – a side-by-side written comparison of the two products that included all riders as well as fees.
A higher fee is great for the Agent but can significantly affect the client’s return. When clients invest in sizable annuities for retirement income, another .5 percent isn’t chump change. With a $200,000 investment, for example, .5 percent means $1,000 a year off any potential market growth.
Fees – The Other “F-word”
Annuities are complex products; their related fee structures can confuse clients, too. Some Agents find talking about fees difficult and awkward, as if “fee” is a dirty word not used in polite company.
But as an Agent, you provide a service, and providing a service includes fees. If anything, clients want more information about fees and they want it in simple, clear language.
A 2015 survey by North American Securities Administrators Association is instructive. Although the survey involved investors with accounts at brokerage services, Life and Health Agents should be aware of the major findings because some of the same confusion likely exists among their client base.
Don’t Assume Clients Understand Fees
The vast majority (81 percent) of investors said the amount of fees they pay for services and account maintenance over the account lifetime is important to them but far, far fewer had a solid grasp of what fees they actually pay.
A few highlights:
- Although brokerage firms routinely charge service and maintenance fees, 30 percent of investors said their firm had no such charge and 25 percent said they didn’t know whether or not they paid such charges.
- Among the investors who knew they paid service and maintenance fees, 52 percent didn’t know how much they were.
- Almost 90 percent of investors want brokerage firms to use standard, uncomplicated terms to describe fees to make comparisons easier.
Having a formalized process for comparing a client’s existing annuity and insurance products and proposed replacement products is an important business practice for Life Agents. By making the associated fees clear, you not only protect yourself in the event of a professional liability claim but also build trust and the base for a long relationship.
Even if a client decides not to make a change, honesty and transparency go a long way in ensuring that when the time is right, the client will come back to you.
And it can’t hurt when such a client tells friends about a refreshingly honest advisor who took the time to provide a detailed, side-by-side comparison of insurance products.