Infuriating. Insurance salesperson poses as a “financial advisor”, gives a “plan”, uses it to sell unwanted product. THIS is why we need a fiduciary standard.
“r/personalfinance – My husband and I are idiots. We’ve been bamboozled by a financial advisor.” https://t.co/5dhE6lNfkg
— MichaelKitces (@MichaelKitces) June 3, 2018
Earlier this week Michael Kitces shared a Reddit thread highlighting a couple who had a terrible experience with a “financial advisor”–financial advisor is in quotes because this individual was far from a financial advisor; after reading the couple’s experience, there is no doubt the “advisor” was nothing more than an insurance salesperson who violated their trust, put her own self-interest first and most likely committed some type of fraud.
I’ve included a link to Reddit below, but here’s the short version: Couple meets with advisor. Couple is pitched different types of insurances and Roth IRAs. Couple decides to move forward with Roth IRA, but not insurance. Couple begins to see ACH deductions for insurance they did not want. When confronted, advisor dodges questions and does not correct the problem. Couple feels bamboozled.
Without question, the salesperson’s behavior was inexcusable, if not criminal, and while the focus should have been on her deceit, many of the comments I read on Reddit, Twitter and Facebook focused on the amount of insurance recommended, the type of insurance, and other details that while somewhat important, weren’t really contributors to the issue at hand.
These comments led to many different thoughts running through my head, and I thought I’d share them here…
Financial Advisors Aren’t Supposed To Recommend Only What Clients Want Or Think They Need
Recommending disability and additional life insurance were actually strong recommendations, given the information provided on Reddit. The couple was expecting a child, appeared to be doing well financially (exhibited by the ability to save $17,000) and appeared to be underinsured and at risk, if either were to experience a long-term disability. The salesperson was not at fault for the insurance recommendation because the clients were not interested in insurance; the salesperson was at fault for fraudulently starting the insurance policies without the client’s final approval.
Now, let’s not give the salesperson too much credit; I don’t doubt for a second the reason she recommended life and disability insurance is because she worked for a large insurance company. This is evident in the structure of the whole/term life combination recommended for the young couple. Term insurance most likely would have been sufficient, although the compensation for the salesperson would have been significantly less.
But let’s get back to my initial thought; the comments from the peanut gallery claiming the salesperson should have never recommended the insurances because that’s not what the couple was looking for were off base. A financial advisor, which this individual clearly was not, has the responsibility to identify weaknesses in their client’s financial situation and to create a plan to address these weaknesses. Rarely are all planning recommendations actions clients want to do, or even know they should do.
A financial advisor’s job is to tell clients what they NEED to hear and do, not what they WANT to hear and do.
Financial advisors are constantly recommending clients to work longer, save more, invest differently, set up estate planning documents and even purchase life and disability insurances. These are not typically things clients want to do, but they are all very important components of a financial plan. I won’t defend the salesperson’s actions in the story, but I will contest that it is not a financial advisor’s job to tell clients what they want to hear, or recommend only what they want to do.
A true financial advisor is willing to have those difficult conversations, educate the client, and answer questions until the client is confident in making an educated decision regarding the recommendations.
It should come as no surprise that many individuals don’t trust financial advisors, especially after reading about this couple’s experience; there are far too many salespeople posing as financial advisors creating financial carnage. Can you imagine being this couple and trying to trust a financial advisor in the future? Hopefully, they have been able to stop the insurance premiums, disassociated with this salesperson, and can eventually find a financial advisor they can trust to help them with their planning needs for their young family.
The Recommendations Themselves Weren’t That Bad
As I mentioned, the recommendations for insurance were not out of line; from the little information provided, the amounts recommended seemed reasonable. It’s the vehicle, whole life insurance, recommended that is problematic. Rarely is whole life insurance as good as the illustration shows, and most likely, this couple would have been better off with term insurance and investing the difference in a second Roth IRA (or deductible IRA depending on tax situation), paying down debt, building a larger emergency fund, or starting a 529 plan.
Disability insurance is an often overlooked aspect of a financial plan, but for younger professionals is extremely important. I’ve written about this before…check here and here for a refresher. The salesperson was not wrong in her recommendation for disability insurance, but implementing the policy without the client’s consent was a big no-no.
The unfortunate part of this story is the couple will most likely always be leery of recommendations for life and disability insurance, even if they are appropriate recommendations. Hopefully, this experience doesn’t lead to a future GoFundMe campaign.
Situations Like This Highlight The Benefit Of Working With A Fiduciary (Fee-Only Get The Nod)
I share Michael’s frustration in his tweet.
Working with a fee-only financial advisor does not guarantee clients will never be misled or taken advantage of; it does, however, lessen the chances of experiencing a situation like this one.
This salesperson was conflicted because she stood to make a higher commission selling whole life insurance policies instead of term insurance; in addition to the higher commission, salespeople at insurance companies often have quotas they must hit, which adds additional pressure to make recommendations that are not in the client’s best interest. I don’t know that this is the case for this particular salesperson, but it is common practice and I wouldn’t exclude it from the conflicts present.
On the other end of the spectrum, when a fee-only advisor, a fiduciary, recommends insurance there is rarely compensation to the advisor; there are situations where advisors are paid referral fees for sending clients to insurance agents, or they may even have a separate business that places the insurance and is compensated—in either scenario, this information should be disclosed. But in most cases, the recommendation for insurance is made because it is what is needed and best for the client and the financial advisor has no skin in the game.
Clients Should Know What They Are Signing
I’m afraid the practice of signing paperwork without really understanding what is being signed is far more common than you’d expect. While this couple was deliberately misled about the impact of the paperwork being signed (told it was to get the process started, but nothing was final), they should have never signed the paperwork until they were completely comfortable and understood what they were signing. In addition to signing the applications, they also provided their bank information, which is not a requirement (they obviously did not know this, but now you do) to get the process started making it easy for the salesperson to implement the insurance policies before they were ready.
Never sign anything if you don’t understand what you’re signing…this goes for anything in life, not just finance.
Could It Have Been Miscommunication?
The actions of the salesperson after the couple realized they were paying for the insurance lead me to believe it was not a case of miscommunication or misinformation. But part of me wondered if the salesperson was inexperienced and did a poor job of explaining and setting expectations.
If It Doesn’t Feel Right, Stop Immediately
It sounded like the couple had plenty of reservations about the advisor and her recommendations—there’s nothing wrong with stopping and cutting your losses with the time spent in the initial meetings.
Trust your gut.
“Financial Advisor” Isn’t Cutting It
The title “financial advisor” has come to mean a number of different things…insurance salesperson, CPA, stockbroker, financial planner, and anyone else who manages to pass a couple of exams. Until there is a separation in title between sales professionals and true financial advisors, many more couples and individuals will be left feeling bamboozled by a “financial advisor”.
Progress is being made, despite the Department of Labor’s Fiduciary Ruling being repealed, but there is still a long way to go before individuals will clearly be able to identify a financial advisor from others masquerading as one with ulterior sales motives.
I sympathize with this couple, but I also applaud them for sharing their frustrations in a public forum. Hopefully, others can learn from their misfortune and avoid similar experiences. In addition to having stories like these shared on Reddit, Facebook, Twitter and the others, there will continue to be a force of advisors trying to educate the public through blogs, podcasts, tweets and more.
The Good Fight will be fought, and it will be won.
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.