The stock market is both rational and irrational. It’s rational in the long run, because companies are either profitable and grow, or they go out of business. In the short run, stock prices fluctuate based on human emotion. Investors react to political speeches, social media trends, and geopolitical concerns. Last week, the S&P 500 set a new all-time high, largely based on remarks by President Trump calling for lower interest rates and lower oil prices.
Also last week, I had several conversations about how advisors are paid, and the impact of that compensation on clients. There are three different compensation models, and each of them has a different standard of care for clients. I want to emphasize that I believe the majority of professionals in insurance and financial services care about their clients and are doing good work for them, regardless of how they are paid. But a consumer should understand the differences.
The first way an advisor can be paid is as an insurance agent. An insurance agent can also be licensed to sell securities. If they are only licensed as an insurance agent, they can sell fixed products, such as fixed annuities and life, health, disability, and long-term care insurance. For life insurance in particular, they can sell term life insurance, which has a fixed premium for a set period of time. The commission on this varies, but is often around 80% of the first year’s premium. Permanent life insurance, which may be called whole life or universal life, has higher premiums and will usually pay a larger commission the first year, followed by ongoing commissions in future years.
Fixed annuities generally pay out an up-front commission, which may vary from two to eight percent of the total amount you invest. None of this implies that the insurance isn’t needed, or that you should not be purchasing it. But asking how much they are receiving, and why they recommend one product over another, is important. It’s also important to note that an insurance-only agent cannot provide financial plans; they can only provide incidental advice related to the sale of the product. They are also not obligated to evaluate other products or solutions and recommend the best or least expensive option. So long as their recommendation is suitable, meaning there is a valid reason for you to buy the product, they have done their job.
Insurance agents can also hold a securities license, which allows them to sell variable annuities and life insurance in addition to the fixed products already discussed. They may also provide advice incidental to the sale of products. While the securities license adds an additional layer of oversight, they are still not subject to a fiduciary standard. The SEC recently created a best-interest standard, which requires additional disclosures for professionals with a securities license. It does not require those professionals to act in your best interest; rather, it requires conflicts of interest to be disclosed, and a client’s best interest served as well as possible given those conflicts.
Agents who work directly for an insurance company may receive a higher payout on securities transactions if they sell more insurance. They may also need to sell a certain amount of insurance products to receive health insurance, administrative support, and office space. Again, everyone needs to be paid for their work; earning a commission does not mean an agent is not serving his or her clients. But there is an inherent conflict of interest that the client should be aware of. Next week, we’ll discuss Registered Representatives, followed by an explanation of Investment Advisor Representatives.
ur action item this week is to check out your advisor on finra.org’s Broker Check. Terminations, suspensions, and fines are serious red flags.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.