The Life Insurance Agent as Financial Planner

There are two major trends occurring with the insurance and risk management aspects of financial planning. First, many traditional life insurance agents are becoming financial planners, not just in title but in terms of their products, services, and fiduciary responsibilities. Second, financial planning is rapidly transitioning from a sales model to an advisory model. The regulatory, economic, and demographic factors that are driving these trends are less important than their consequences. As life insurance agents become financial planners, and as financial planners become true advisors, the whole area of insurance and risk management has the potential to be better integrated into financial planning. Insurance is no longer just a one-off in planning.

A recent conversation with Michael Finke, chief academic officer at The American College of Financial Services, offers some insight into the consequences of having life insurance agents become financial planners. He points out that, “In most cases it’s not the client’s goal to maximize wealth, but to meet his or her financial goals. This brings in the issue of failure, and failure happens when the client has unexpected losses. Add to the equation the typical client’s aversion to risk, and the need to avoid failure is compounded.”

Finke’s point is that insurance agents have already been trained in risk management and can factor the fear of failure into the financial plan. He notes that “to deal with the client’s risk aversion, advisors must understand idiosyncratic risk and offer risk-pooling options.” So, in addition to the normal steps associated with financial planning, these former insurance agents bring in a strong understanding of risk-reducing products. Life insurance and annuities aren’t just off-the-shelf products to consider in designing a retirement portfolio. They are integral to the process of pooling risk as a financial planning strategy.

Tempering the Systematic Withdrawal Rate

A key aspect of financial planning is preparing for retirement. To find something quick, easy, and quotable, many people refer to “the 4 percent rule” as a magical metric that tells the consumer how much to withdraw each year in order to retire successfully. This well-known rule of thumb hypothesizes that if a couple invests in an appropriate portfolio mix, during retirement they can safely withdraw an inflation-adjusted 4 percent per year from their savings. Financial advisors generally recognize that this approach is not intended to be strictly applied, nor is it meant to be an unchanging rule. Yet this systematic withdrawal rate approach remains a baseline strategy in retirement income planning.

As life insurance agents move into the financial planning space, we may see less use of the 4 percent rule as an initial reference point. As risk managers, these practitioners may be more likely to first concentrate on ensuring there will be a sufficient level of retirement income for the client. In other words, instead of looking at the retirement income challenge as a probability question, they will look at it as a risk-avoidance issue. The idea for many clients is to lock in as much of a floor of predictable income for retirement necessities as possible, and only then consider how to invest for discretionary income.

Professor Wade Pfau at The American College of Financial Services has a new book that focuses directly on that point: How Much Can I Spend in Retirement? His key theme is that the consumer should forget “safe” and instead identify the optimal withdrawal rate. He posits that portfolio spending must be taken out of the vacuum and instead be subjected to risk analysis. Writes Pfau, “No single solution can cover every risk. It requires a framework that incorporates your client’s capacities, flexibility, and emotional comfort.”

He specifically recommends that four interrelated factors be considered: longevity risk aversion, reliable income sources, spending flexibility, and availability of reserves. The idea is to not just create a high-probability withdrawal rate but to test that rate against the client’s attitudes and resources.

This kind of analysis is very much in the seasoned life insurance professional’s wheelhouse. A trained insurance agent is attuned to probing for risk attitudes: What level of risk can the client both afford and withstand?

Retirement Risk or Retirement Income?

Having financial planners with a background in risk management increases the pool of clients who can benefit from advisor-based planning. In this post, I’ve often tried to redefine the retirement piece of financial planning as a retirement risk exercise versus retirement income calculation. At least for some retirees, they would rather live on a fixed income safely than gamble with their wealth for a bigger payout. These clients may benefit more from an advisor trained in managing risk. Consider the following simple scenario.

Bobbi and Ruby are twin sisters who have built up the same retirement capital and plan to retire at the same time. Bobbi is a lifelong risk-taker and Ruby is highly risk averse. How might their retirement planning differ now that it’s time to decumulate?

Bobbi, the risk-taker, would take her defined-benefit plan in a lump sum and invest it, along with her savings, in a portfolio weighted toward equities. She would primarily generate income by taking a systematic withdrawal from her portfolio, using Monte Carlo or similar modeling to ensure that she has a high likelihood of not outliving her portfolio. She might occasionally tweak her portfolio makeup and withdrawal rate, but her approach would be to maintain a withdrawal strategy with an acceptable probability of succeeding.

Ruby, the risk-averse sister, would instead seek to cover her retirement cash flow needs as much as possible using assured sources of income. So, she would maximize her Social Security, take an annuity from her defined-benefit plan, and use commercial annuities and bond ladders to create ongoing income. Her approach is to first ensure she has enough income to pay basic necessities, and only then worry about investing.

The question here is not which sister is right; the question is what strategy is optimal given their respective attitudes about risk?

Consider the systematic withdrawal approach used by Bobbi. This strategy can generate an income that has a high probability of maintaining a balance in Bobbi’s portfolio throughout life. In fact, in many of the possible historical market scenarios that could occur, she will be leaving a significant legacy for her heirs. The challenge, however, is that she may be taking too much or too little initial income, depending on market conditions. In a positive market scenario she may be missing out on opportunities to better enjoy her wealth during retirement. After all, the systematic withdrawal rate approach seeks to generate an income that will work in even the worst market conditions. On the other hand, a bad market could mean she’s taking too large a systematic withdrawal. And this approach doesn’t address what happens if she fails due to unexpected longevity or a particularly bad sequence of returns. In other words, what happens if the withdrawals she takes exhaust her capital while she’s still alive? Does failure mean she just missed her last rent check before she died, or does it mean she spent several of her final years in poverty?

Meanwhile, Ruby wants to lock in peace of mind by providing a floor for her income needs. Through her annuity-heavy approach, in good or bad markets she has reliable sources of income. She has insured against both sequence-of-return risk at the beginning of retirement and longevity risk at the end. These streams provide an income she can’t outlive. The question, however, is at what cost? Could she have generated a higher income by investing more of her capital in equity markets? And what about in inflation? Both fixed annuities and most defined-benefit plans do not adjust for the cost of living. Hyperinflation may result in the buying power of her income being severely compromised. Lastly, this approach essentially relinquishes control of her assets to outside parties; she has little opportunity to change her cash flows once set. She may be paying a high price for her risk aversion.

The Trend Is a Positive

Financial planning is not a panacea. It’s a process. And financial planners exist to make this process work better than a do-it-yourself approach. Traditional financial planning has, however, been tilted more toward clients like Bobbi than Ruby. Efficient frontiers take precedence over risk-pooling. And when it comes to the retirement-planning part of the equation, the focus is on portfolio management and probability theory.

It is not surprising that this is the traditional approach to financial planning. Many planners came from wealth management backgrounds. They often started as stock brokers or financial advisors. A further concern is that some financial planners have traditionally been more advocates than advisors. These individuals were taught to identify the client’s income gap and fill it by recommending products targeted at yield. Success was measured more by investment return than customer peace of mind.

This approach to financial planning may be fine for a risk-taker such as Bobbi. She is willing to accept risk in order to obtain yield and can accept the ebb and flow of generating income from equities. But it can be problematic for a risk-averse client like Ruby. The prospect of uncertain cash flows and an ever-changing financial position is scary and unsettling to Ruby. Further, her insecurities call for help from someone who is more her advisor than her broker.

The new trend will populate the ranks of financial planners with more advisors attuned to helping clients like Ruby. As more life insurance agents become financial planners and more financial planners become fiduciaries, there will be a move away from portfolios and products toward planning and professionalism. This trend will be particularly appealing to the risk-averse client. A risk-taker like Bobbi may be able to work well in a caveat emptor financial environment, whether she is working with an insurance agent or a stock broker. In contrast, a risk-averse person like Ruby stands to fare better when working with a planner. Her risk issues are being addressed not in a vacuum but rather as a part of her overall financial plan.

A sign of the times is how The American College of Financial Services is approaching the education of the financial planner. Traditionally, a sizeable number of The College’s students have come from the insurance industry, and many of its courses were focused on insurance-related topics. But now a major focus for The College is on two designation programs that target financial planning. The first, Retirement Income Certified Professional® (RICP®), was introduced 5 years ago. The College’s newest offering is the Wealth Management Certified Professional® (WMCP®). As Michael Finke puts it, “The WMCP® program emphasizes accumulation of wealth, while RICP® emphasizes the decumulation of that wealth.” These programs, however, still place a significant weight on teaching risk management, and they seek to integrate these concepts into the traditional financial planning aspects of portfolio design.

If these trends continue, insurance and risk management will increasingly become a subset of financial planning. And for many consumers, that’s good news.

This article was originally published in the Journal of Financial Service Professionals 72, No.2 (2018): 39-42, copyright 2018, Society of Financial Service Professionals. 

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Steve Parrish is an independent consultant, providing thought leadership for financial service organizations. He joined The College in 2015 as Adjunct Professor, providing training in the CLU® and RICP® programs.