The Circumstances Under Which You Should Consider It
- Why you shouldn’t mix insurance sales with investment advice.
- The importance of doing business with a specialized salesperson.
- Three rules to follow to minimize conflicts of interest when shopping for financial products.
The question of the week comes from a reader who asks, “Do you think the only kind of advisor one should hire is a fee based one? I was told by a commission person that when they have a client buy an insurance policy they HAVE to take a commission. Is this true?”
To answer that question, we must make a distinction between personal financial advice and investment advice. While they may sound similar, they’re actually as different as night and day.
Personal financial advice (insurance, savings, budgeting) is usually uncomplicated. The correct actions to take are well-proven and straightforward with few conflicting opinions.
The reason this is true is because the risks, costs, and outcomes are known and fairly predictable. Because the action steps are uncomplicated, the conflicts of interest resulting from the advisor receiving a commission are manageable and acceptable.
You can do your own research, apply business common sense, and make a reasonably intelligent decision.
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Investment advice is different. It’s subtle shades of gray because investing is a risky bet on an unknowable and unpredictable future. Five different experts will provide five different opinions – each conflicting with the other.
It’s a dynamic, evolving process where the quality of your investment returns is dependent on the expertise and decision process of the person managing your assets.
In short, it’s anything but straightforward, making commissioned sales incentives a bad idea.
My rule is to keep things as simple as possible by not mixing insurance sales with investment advice.
I’ve never purchased an insurance product for an investment or an insurance product from someone who sells investments. I don’t go to generalists who sell all financial products (investments, insurance, etc.) to purchase specialty products.
In other words, I don’t mix things up. I keep things simple and straightforward.
If I want insurance, I shop for insurance from insurance salespeople. If I want specialized investments, I seek the appropriate vendor who specializes exclusively in those products. If I want generic investments (stocks, bonds, ETFs, etc.), then I shop for brokerage services based on my brokerage needs for that portfolio.
I buy only from specialists – experts in their unique fields. I suggest you do the same to minimize conflicts of interest. Don’t collapse your various financial needs into one vendor – keep it separate.
For example, the guy I buy my home insurance and auto policies from represents a single company and has sold this one insurance line for his entire career. I’m buying the insurance company as much as his expertise in this specific line of insurance.
I love the fact that I can call him with any question regarding the insurance products he sells, and he knows the answers off the top of his head.
He’s an expert in his field, and the company is top of the line. He receives a commission on the sale, and I see no conflict of interest because he has no hidden incentive – it’s all easy to understand and straightforward business.
The woman I buy my health insurance policy from is a specialist in health insurance – that’s all she sells and she’s paid a commission as well. She represents many different health insurance carriers and helps me choose the right insurance policy to fit my specific needs.
While this could represent a potential conflict of interest to direct me to a higher compensation policy, my experience in working with this individual is that she does represent the client’s best interests.
The policy she recommended was carefully matched to my needs from the many available, and when we had a problem with the company, her staff intervened on our behalf to resolve the problem in our favor.
I appreciate her service and expertise, and I would never begrudge her a commission. She earns and deserves every penny.
Notice that each of my insurance representatives are specialists – that’s all they sell – and they usually represent a single company or type of product line. They’re experts in those product lines and receive commissions on what they sell.
I have no problem with a commission in that situation because I shop them based on their expertise and the insurance product they represent – commission included. The incentive to sell me the insurance is overt and nothing is hidden.
That’s very different from investment advisors who recommend investments from basically the same menu of choices as other competing advisors offer, while also pitching insurance and anything else financial.
They’re basically “used stock salesmen” offering the same stocks, bonds, ETF’s and similar mutual funds as everyone else. They’re in the “relationship” business where they seek to establish your trust, then use that trust to satisfy (sell) all your financial product needs.
In this case, you’re paying for their relationship and service, but seldom are you getting a true expert in all the financial products they represent. In that situation, a commission is a problem.
Below are some simple guidelines summarizing how to minimize the conflicts of interest when shopping for investment and personal financial products:
- Never mix personal finance product sales with investment product sales because nobody can be an expert at all of them. A jack of all trades is a master of none.
- When purchasing personal finance products, always buy from experts who specialize in their specific product line or niche area.
- It’s okay to pay a commission for expert service on personal finance products like insurance – just use business common sense and do your homework first so you’re a knowledgeable buyer.
- Don’t mix investment advice with investment product sales because it’s a conflict of interest. Keep investment advice separate from investment product sales by paying for each service separately.
What you’ll notice in these rules is how they narrowly define the service rendered to match the compensation provided so conflicts of interest are minimized.
The other thing I like about these rules is how it connects me with experts in each narrowly defined niche so I benefit from a deeper level of knowledge from each vendor.
My concern in your question is you may not be clear about these distinctions, causing you to collapse the issues.
Hope that clarifies.
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