David, How Are You Compensated?

This article is very timely. I was at a professional conference a month ago and had the idea to write this article at that time. Since then, there is currently a bill sent before the California state legislature, sponsored by the California Department of Insurance, promoting a new, higher level, more scrutinized "best interest" bill that has already swept the country. Now, if you've ever read Atlas Shrugged, you know the legislation bills can have titles that sound good, but can do far more damage. In the book, there was the "Anti-dog-eat-dog" rule and the "Equalization of Opportunity" bill as a couple of examples. One was written to sound good, but nearly destroy one of the good competitive railroad companies and force a given customer to use a less competent competitor. The other was to limit one's business ownership interests to one which was squarely aimed at Hank Rearden who created a symphony of companies to all work together to create his Rearden Metal.

That all being said, the new "best interest" bill is primarily a compensation disclosure form masquerading as a "fiduciary bill" requiring new levels of disclosure than required anywhere else in the country. Quite frankly, the industry doesn't like that, and I don't like it either. It will stifle the vast majority of the industry for getting insurance policies and contracts in the hands of residents that need those benefits.

For me, I say "Judge me based on what my contracts will do for you, not the compensation I get for placing them." My compensation should be irrelevant, but there are other forces that think that the only reason we sell these contracts... is because of our compensation. I have written about that before here: compensation does drive behavior. I also believe that some insurance is better than none, more is better than less, and a "bad policy" will still pay out a death benefit.

All of that being said, until commissions are no longer allowed (which truly are in the best interests of the client rather than paying fees out of pocket), I will continue to market my services and earn my commissions for putting plans, strategies, and contracts in place to do what I (and the insurance companies) promise they will do.

When commissions for selling insurance contracts become outlawed, I will charge fees because that will be the requirement. (I'm not sure it will ever come to that.)

You cannot buy me. You cannot have me as your agent or advisor unless you are a client who has purchased at least one insurance contract from me. I come with the contract. Now, that being said, I've done the math and I am personally ready for commission disclosures. The proposed bill required a 10-year compensation disclosure. The form I was working on... was going to disclose 20-years of compensation. I guarantee that I will be the greater bargain compared to the taxes, investment advisor fees, and estimated cash flow difference required for a competing financial and retirement cash flow strategy. I am worth my commissions and I'm (almost) ready to put that in writing. (Almost only because it is a lengthy form that requires a lot of calculations.) If I'm not ready to put it in writing, I won't recommend that anyone go forward with what we've previously discussed. When I know I can make a substantial difference, I will go on the offensive with these disclosures. No problem.

How do commissions work for insurance policies?

Yes, commissions are built into the policies, but not in the way we often think. It's not like real estate where you simply get less because you paid a real estate broker a commission to sell your home. It's not like it's a hard 'markup' on a product to ensure that you must pay more for what you want.

Insurance commissions are paid out of the insurance company's reserves and those expenses are eventually re-couped by the policy that was sold. The longer it is in-force, the better it works out for the insurer to recoup their original commission expense.

Why not invest your money outside of an insurance company and "keep the difference"? Because you're not buying an investment or security (unless you're purchasing a variable insurance contract that have mutual fund sub-accounts). It's an insurance contract with its own unique advantages that you get with these contracts you cannot get outside of them.

Even though I'm ready to disclose anything and everything... judge me based on what I can do for you, not the compensation I'm getting.

Quite frankly, it's irrelevant.