Insurance Companies?
It used to be your local insurance agent would only sell you insurance products - in particular life, health, car, and home insurance. Now the same agent wants to help you plan your financial future and sell you investment products. The question is should you buy financial services and products from an insurance agent?
Leveraging the Customer Base
Insurance companies use the same cross-sell strategies as the banks. Their agents have spent years building relationships and selling traditional insurance products. Then the agents use the relationship, and the associated trust, to sell you planning and investment products.
- Is the agent offering alternative products because he or she is an expert in those products or is the agent selling the products to take advantage of his or her relationship with you? There is a 95% probability the answer is the latter.
- An agent's primary business asset is his or her relationship with you. Agents are trained to maximize revenue per relationship.
- Insurance companies refer to this as leveraging relationships when agents cross-sell multiple products.
- This strategy is good for insurance companies and agents, but bad for you.
Company Names
A high percentage of insurance companies own Broker-Dealers (BDs) and Registered Investment Advisory (RIAs) firms. These subsidiaries may have very different names than their insurance-company owners to obscure the relationship. You'll have to read the fine print to learn the true ownership structure of the BDs and RIAs.
Planner vs Agent
In the past, more than 70% of all financial planners were former insurance agents. They called themselves planners to avoid the stigma of being called insurance agents. The change in title did not create planning skills, but it was a sales gimmick that made them more acceptable to investors.
The All Insurance Solution
A major red flag (extreme risk) occurs when your advisor is a licensed representative of an insurance company and 100% of his or her recommendations are insurance products - for example, annuities and life insurance. These products pay the highest commissions in the financial services industry and produce substantial profits for companies, but they are rarely the best alternatives for all of your investment needs.
Proprietary Products
Most insurance companies produce their own (proprietary) products. Most of the products are very mediocre in regard to their performance and risk characteristics, but they generate two to four times more revenue for insurance companies versus third party products that may have superior characteristics. You are making a serious mistake if you buy from agents who restrict your choices.
The Casualty Agent
Perhaps the single most abusive practice of insurance companies is to license casualty agents to sell investment products. This means your agent for automobile insurance can also sell you mutual funds and variable annuities. Very few casualty insurance agents have the knowledge to provide competent financial advice that will help you achieve your goals. These agents have one purpose, to take advantage of an existing relationship with you and cross-sell additional products.They make more money and your financial future just became more risky.
