It's time to get serious about advice

I was challenged the other day when I was told, "you have to stop thinking about financial planning as being something unrelated to life insurance advice".

Tuesday, May 4th 2021, 11:20AM

by Jon-Paul Hale

While this may be the perception of the person who said it, it isn't strictly my current view. However, it does raise some issues we should discuss as an industry.

To the person who said this to me, thank you! Contrary to belief, I'm not as inflexible as I may seem - often quite the opposite.

The point around this discussion is how far down the rabbit hole should we be going with our advice?

And from the engineer in me, the answer is as far as is needed to get the correct answer. Which to the academics out there sounds about right, but not so much for the majority.

And this is part of the challenge in what we do - where is the "good enough" line?

I'm not bagging any particular approach here, they exist for good reasons with target audiences and the needs they serve. Just like selling only $500k blocks of life cover from a particular provider is also okay, if appropriately scoped and disclosed.

One thing I have challenged advisers about in the last 20 years is the question of "how do you give advice?". My point being, I haven't had many who can answer that question.

As professionals, this stuff is bread and butter for us yet we are largely silent on how we do what we do.

Having been initially recruited into the industry to help with electronic advice and underwriting systems, the one thing that struck me was they were all too complex.

Too complex for either the adviser or the client and the added complexity didn't add to client outcomes, which is part of our challenge.

I've seen a raft of systems over the years, some good, some horrible, but they have all been trying to do one thing - define advice for the client accurately and consistently. Yet, we still can't articulate to our peers how we come up with the sum assured for a client.

Now I do have a process and it combines many factors; The academic piece in the form of a written approach to advise for clients - not the SOA - but how you get to the answers for the SOA.

The psychology of the client situation and the typical client I work with.

And the ease of conveying advice in a way the client understands it and can act on it.

I have seen many fantastic systems for the academic approach - if they lose their job at age 53 due to a disability and can't work for a while, we know the last cent of that impact.

The problem is these systems often fail to appreciate the psychology and the understanding of the client.

Often very good with high net worth clients with a business background, largely hopeless for clients that can't read graphs and struggle with basic financial literacy - it's a game of scale.

At the same time, the other end may have no process of advice, has some level of psychology (read sales), and an excellent ability to communicate to the client. The advice is about how much cover you can shoehorn into the $56.70 the client has for insurance in their budget (which is usually out by a mile).

Somewhere in the middle is a typical adviser, okay on the academic piece (using a SOA someone gave them). Okay on the psychology (they bumble through it and get some cover). And they manage to connect and communicate with the client enough to understand they need more than just life cover.

On the whole, most of us are in the middle and it's a balancing act. Yet we need to be better at all aspects of what we do.

At the same time, I struggle to see the need to be overly analytical on the numbers and most people see me as analytical. We know what happens to people when bad things happen, and we don't need a computer to figure out how much cover people need either.

But we need to be better than we have been, both in understanding the advice we give and writing it down in a way that clients and peers can understand it.

Does life insurance have a relation to the client's financial plan? Most definitely. Do we need to calculate how much they spend on bread a week to provide risk advice, definitely not.

And that's the point. Due to its very nature, risk management is uncertain. Most assumptions in financial plans don't stand the scrutiny of life regarding risk management and the events that happen. And no one takes all the insurance cover they should - they can't afford to. So it's all flawed right from the beginning.

In 20 years in this industry, I have learned that no one ever does what you expect they will.

Events happen, relationships split, jobs and industries change unexpectedly and none of this is in a typical financial plan. To be too tight on the calculation risks having the plan fall apart.

It's the difference between a thoroughbred and a polo pony.

The first is excellent on the track and looks stunning but breaks easily and falls short everywhere else when not on the track.

The polo pony may not be as pretty, but it has legs. It won't win at the gallops but it has the stamina to take the knocks and endurance to still be there at the end.

That's what we need in a risk plan - it's flawed to start with and it's going to be beaten to crap over the years. At the end of the day, it needs to be there to respond. It may not be pretty, but the family on the receiving end will still be grateful it was there.

Literally, it is horses for courses. I'm okay being a little rigid on flexibility at the cost of accuracy, as being in the target area is better than shooting for the bullseye and missing.

Where do you sit on this? And why?

Tags: advice risk Jon-Paul Hale Life insurance