Riskinsurance has long been a wallflower at the financial planning party. Hampered by the depressing reality that the client may not be around to spend the benefit, risk insurance has the perception of being harder to sell than wealth creation, tax minimisation or retirement planning strategies.
However, with the new Financial Services Reform Act (FSRA) requiring financial advisers to address all of a client’s potential needs, risk insurance advice has become a necessity. With a mandate to specifically ask about and consider their client’s risk cover, financial advisers must either incorporate risk protection into the financial planning process or bring in a specialist partner to address this area of their clients’ needs.
Either way, the FSRA’s “Know Your Client” rule puts risk insurance firmly on the financial planning agenda. Financial advisers have two options: do the bare minimum to comply with risk insurance compliance standards; or seize the opportunity to create a more complete service.
In current market conditions, with advisers finding it harder to get clients through the door, it’s an opportune moment to add value, particularly with an established range of products that dovetail so appropriately with the financial planning process.
Financial advisers who don’t think risk insurance belongs within the financial planning portfolio should reconsider. The traditional view that risk insurance products are separate from financial planning is a myth created because of the way the two industries have developed.
While the investment market is extremely young, risk insurance has been around since the late 1700s. Risk insurance products are tied to more old-fashioned sales techniques and have a perceived consumer heartland of ‘sensible’ people with responsibilities.
By contrast, wealth creation, born in a time of sophisticated marketing, is positioned as being for successful, more entrepreneurial risk takers: smart people who are making the most of their income. Life agents are often seen as ‘salespeople’, whereas financial planners position themselves as consultants. No one boasts about having a meeting with their insurance salesman, whereas people consider their financial planner to be a social asset.
These distinctions are entirely fictional.
Many people with life insurance probably also need the services of a financial planner. Equally, anyone with dependants or debt, particularly a mortgage, needs to consider insurance. Entrepreneurial risk takers used to the high life are just as much in need of risk insurance as their less flamboyant neighbours. In fact, as they have more to lose, risk insurance may actually be a higher priority for this target group.
The fact is that, far from being somebody else’s problem, risk insurance is actually the glue that holds any financial plan on a solid foundation. By integrating risk insurance within a financial planning service, advisers can add value to their offering and their credibility.
The very first thing a responsible financial planner should do when meeting a new client is to evaluate their insurance position. There’s no point starting to construct a portfolio if, heaven forbid, the client meets an untimely death, and his or her partner and kids are left with a $500,000 mortgage and no income.
Positioned in the right way, starting with risk assessment can create a very positive relationship between adviser and client. The adviser is seen as being genuinely concerned and responsible, particularly if the policies found to meet any insurance gaps provide additional cover for the equivalent premiums. It can be an excellent exercise in demonstrating that you are looking out for the client’s interests and seeing the big picture.
From a compliance perspective, it’s particularly important that you don’t allow clients to rely on their investments as a substitute for insurance.
Other than the very wealthy, anyone who believes their investment portfolio will take care of them and their family should disaster strike, should think again. An investment portfolio is there to fund a particular quality of life, assuming all goes well.
If you’re really serious about looking after your clients’ financial welfare, you have to start with risk protection before you look at opportunities for wealth creation. Otherwise, you leave your clients vulnerable. It’s the equivalent of teaching someone to fly a plane and sending them up on their first solo flight without a parachute.
If a new client is inadequately protected, you should work out reasonable cover based on their life and financial position and arrange their cover either through your own company or through a third party.
Then you can talk about risk tolerance, asset allocation and portfolio construction, secure in the knowledge that you have put a safety net in place and acted responsibly in the best interests of your client.
Helen Troup is head of risk insurance product management at INGAustralia.
