Articles by Nick Dyer

Despite all the violent rollercoaster bouncing around in the equity markets today, the most volatile and temperamental investment vehicle in the fi nancial services world is still the variable life insurance policy. Not only are these contracts linked to the stock market according to the wishes of the client or advisor (the subaccounts are basically mutual funds inside the policy wrapper), but all market volatility is greatly magnifi ed by the fact that every up and down also determines the cost of insurance within the policy. If the market turns bearish, the amount at risk--the difference between the face amount and the value of the accounts; in other words, the amount the insurance company would have to pay out of pocket if the policyholder died--goes up, meaning the cost of covering that extra amount goes up too. Imagine that you have a term policy whose face amount goes up whenever the market goes down, and you have to liquidate your stock positions at a loss to pay the increased premium.

Debate over new fiduciary language from the CFP Board and the FPA has focused on the risk management aspects of life insurance, though some of the conclusions have gone unchallenged, and others reflect industry biases.

Many advisors think of risk management as representing a client’s exposure to market volatility or the Beta factor of a portfolio. However, risk comes in many other forms, too. As a fiduciary advisor, it is your duty, both ethically and legally, to advise your clients about many forms of risk and risk management.

It is difficult to accept the premise that multiple illustrations address the issue of impartial and unbiased selection if all of the products represented are restricted to the commission venue. Although compensation is not the line of demarcation to the fiduciary issue, it certainly makes it necessary to look at all product venues, including fee adviser policies (no-load, low-load, non-commission products).

Thanks to the SEC, history is in replay mode, and the consumer again is at the bottom of the pile. On April 12, 2005, the SEC adopted Rule 202(a)(11)-1 (aka the Merrill Lynch rule), which appeared to ban brokers from providing financial planning services (i.e., something more than incidental advice) under Washington-based NASD's rules of fee-based services.

While the spotlight of fiduciary standards is focused on investment activity and asset management, only a small number of advisers are connecting the dots to challenge some compromising standards. Debate seems to be so narrowly focused as to miss the larger picture of consumer enlightenment and choice.

Are we sitting on a litigation time bomb with a short fuse? At the FPA Success Forum in Philadelphia, I was invited to speak on the topic of bringing value added service through the use of no-load life insurance on a fee-transaction platform. Since my handout material did not arrive in time, I took the opportunity to integrate some of my concerns about the lack of awareness and fiduciary responsibility into the area of life insurance planning. The transition from the old paradigm of insurance selling to the new paradigm of insurance planning brought to the universe of life insurance practice a fundamental change that was so subtle that most of us didn't recognize it: Fiduciary Responsibility. This paradigm shift occurred with the introduction of a new concept in life insurance design, that being universal life and later, variable universal life.

One of the most perplexing problems facing planners today is how to deal with the current estate tax provisions. The Economic Growth and Tax Relief Reconciliation Act of 2001 has been fodder for count less jokes. As one estate tax attorney stated, the only concrete plan is for the client to decease in 2010. As we all know, the controversial sunset provision reverses all of the act's changes in 2011 by restoring the tax rules in effect before enactment of the law. Hence, while the act totally repeals estate taxes in 2010, any client who survives beyond December 31, 20100, will again face an erosion of up to 60% of their taxable estate.

Illustrations are the basic selling tool of the insurance industry for variable universal life (VUL) products. Unfortunately, clients and most advisors do not understand--or discuss--the many misleading components that are instrumental in the creation and design of these hypothetical projections.

Starting in 2010 we are putting together various webinars to cover a host of topics. Make sure to check your e-mail for announcements and invitations to these Member Events.

Time is a strange commodity. It is both relevant and irrelevant. It represents seasons and mechanical function. Einstein referred to it as a Fourth dimension. We track time by seconds, minutes, hours, etc. as a way to keep every one on the same page. Without time, we would never be “on time”. And yet, we experience the swiftness (a busy schedule) as well as the agonizing slowness (a one hour boring conference seems to last forever) of time. We mark the age of a person in years, yet that statistic has no bearing on the health, attitude, and whether that person is vibrant or not. Because of this, statistical averages are elusive.

Does a Variable Universal Life illustration compromise our fiduciary responsibilities?

Consider:

1. The VUL is sold as a concept, supported by an illustration.
2. The Illustration is a “Point-of-Sales” tool.
3. The client has to sign-off on the illustration and all of the (often brushed aside) caveats.
4. We have also actively used these illustrations for comparison purposes or to quasi-analyze different policies.

Our Life Analyzer is the hottest buzz with faculty and students at the Financial Planning department of Texas Tech University (TTU), which is considered to have the premier CFP Board Certified Financial Planning curriculum in the country. Over the past few weeks, we have held one demo for the faculty and one demo for advanced students (PhD and Masters program) and the excitement has been overwhelming. Our joint educational venture with TTU is opening a new paradigm of risk management/life insurance realities and thinking. The class projects being creates will analyze existing policies held by the university’s foundation.

The following strategy can be very beneficial for an older client who: (1) has a need for stabilized or increased guaranteed cash flow, (2) has a desire to transfer wealth, (3) has charitable inclinations.

Capital Leverage

(1)
Client is in their 70’s and has been taking a 5% conservative annual income stream ($65,000) from their account that had been worth $1.3 million. This account has fluctuated downward and is now worth $1 million. This creates the dilemma of receiving a reduced cash flow of $50,000 or increasing the annual distributions to a 6.5% factor, which will also invade capital.

There are numerous articles and discussions currently taking place with reference to retirement planning. This, of course, is due to the fact that our age wave is rolling into the late 50’s and early 60’s where retirement is becoming more of a reality than that of a distant future objective. The impact of this reality brings with it a major element of reconstructing a fee-venue practice, new product design, and planning methodology of properly liquidating assets (or an estate), as opposed to the experience we have all been accustomed to - creating the estate/net worth.

Dodd bill would make reps fiduciaries

Consumer groups on board, but SIFMA prefers House approach that could redefine ‘fiduciary’. The senate draft unveiled last week eliminates the “broker-dealer exemption” from the adviser registration provisions under the Investment Advisers Act of 1940, effectively requiring brokers providing advice to register as advisers and be subject to a fiduciary standard. That standard would be the same applied to advisers and would require them to put the client’s interests first. The House bill would require all brokers providing advice to abide by fiduciary standards, but would give the Securities and Exchange Commission the discretion to write regulations defining those standards. The SEC revision of fiduciary standards could result in rules closer to those which brokers work, which require only that products be suitable to the investor. The Obama administration’s plan would require brokers to come under a fiduciary standard.

“We wish to thank Joe for his presentation to our group of CPAs. He provided our group a very informative presentation from a fiduciary viewpoint concerning the risk management of life insurance. It became quite clear to us that he knows his subject area very well. We learned things about the structure and the mechanics of life insurance that will certainly assist us as we consult our clients. Many of the participants left the presentation with actionable ideas. Thanks again, and we look forward to other future opportunities to learn from his experience.”

“I have relied on Joe Maczuga as a resource for clients with estate and/or business succession planning issues that are more complex than usual. Joe's approach to life insurance planning is, if not unique, very rare. As a fee-only planner, helping clients save thousands of dollars in commissions on a life plan reinforces the value of the advice they pay me for. It would be hard to find anybody more knowledgeable than Joe Maczuga in the field who works this way."