Monday, October 26, 2015

A Call to Action re: The DOL Conflict of Interest Rule

As the U.S. Department of Labor seeks to pour through all of the comment letters received, in an attempt to finalize its "Conflicts of Interest" rule by early 2016 (with a later effective date), Wall Street and the insurance companies are pouring hundreds of millions of dollars at lobbying efforts, and misleading television ads, to stop this very important development. Permit me to share some stories, and some thoughts:

The "Suitability" of a Replacement Annuity. Ms. Grange (not her real name) was a 74-year old retiree. In her IRA account - her sole source of funding for her retirement needs other than her social security check - she had previously been sold a variable annuity. She desired to "annuitize" this investment - i.e., turn it into a lifetime income stream. She went back to her broker (i.e., registered representative of a broker-dealer firm, also registered as an insurance agent). Her broker advised her to roll it into a new immediate annuity, to generate the income stream. Later Ms. Grange came to see me. I discerned that the effective rate of return, assuming she lived to age 95, was only 1%. But her prior annuity would have provided a rate of return of 4.5%, with the same assumption. And, a little analysis would have revealed that her rate of return would be even high had she waited until age 75 to annuitize her prior annuity, under the annuity contract's provisions. Both annuities were from strong insurance companies. In essence, Ms. Grange was getting a lesser monthly check from the new annuity than from the one she already had. The new annuity had no benefit to her. Why did the broker do this? To generate a new commission for himself. Plain and simple. I had a securities law attorney analyze the case, to see if a complaint in arbitration made sense. "Little chance of recovery," he replied. The new investment was "suitable." The broker had no fiduciary duty to the client.

The Plan Sponsor: Hung Out to Dry. An employer established a 401(k) plan for his employees. Not well-versed in the intricacies of such plans, he sought advice from a "retirement plan consulting firm." The firm, not a fiduciary (despite their use of the term "consultant") recommended a selection of high-cost funds for the plan, from their affiliated insurance company. Years later the employer (plan sponsor) was sued by his employees for breach of the plan sponsor's fiduciary duty of due care. The employees prevailed, and the plan sponsor / employer was forced to come up with a huge sum to reimburse the plan (in addition to paying substantial legal fees). What happened to the retirement plan consultant? Nothing! Because the "consultant" was not a fiduciary, and the investments recommended - while high-cost - were "suitable." Why had such high-cost funds been recommended? Because they paid the consultant, and its affiliates, greater compensation.

The Retiree and the Illiquid, Mis-valued Non-Publicly Traded REIT. Another prospective client approached me. Age 68, she was advised by her broker to place all $800,000 of her savings and investments (held in both IRA and non-IRA accounts) into non-publicly traded REITs (all with the same REIT sponsor). I grew suspect. Aside from obvious lack of portfolio diversification this strategy entailed, her statements still reflected a $11 per share price for the REIT shares - the same as the original offering price a few years before. Yet, during this time commercial real estate prices had fallen substantially. Moreover, there was a 10% commission paid to the broker by the REIT upon the sale of this product, in addition to "marketing reimbursements" paid to the broker-dealer firm. It was obvious that the REIT shares were not valued correctly on the brokerage statements. My due diligence uncovered other problems with the REIT. (See this article.) Shortly thereafter, FINRA required the REIT to restate their per share valuations. Later the brokerage firm was fined. Why did the broker sell such an illiquid investment, when many other investments (including publicly traded REITs) were available? To generate higher commissions and fees. Plain and simple.

The Call Center Employee, the Inappropriate IRA Rollover, and the New Retiree. A gentleman, upon his retirement, called the "retirement consultant" to his current 401(k) plan (a large mutual fund complex), seeking guidance on how to commence distributions from the 401(k) plan. The call center employee "advised" the gentleman to roll over his 401(k) plan into an IRA with the same mutual fund complex. The call center employee also "recommended" an asset allocation, including specific funds. Only problem was, the retiree could have stayed in the plan and received the same asset allocation at far lower cost, using the "institutional shares," rather than the higher-fee "retail shares."

Additionally, the retiree had some employer stock in his 401(k) and no advice was provided on the potential to save a substantial amount in taxes. The employer stock had been rolled over into the IRA (and then sold therein) without any consideration given to the Net Unrealized Appreciation (NUA) strategy.

Also, the new retiree was age 57; under the 401(k) plan he could take distributions without early retirement penalties (as the plan offered this provision, which is available under §72(t)(2)(A)(v) of the Internal Revenue Code. Now this gentlemen approached me, to assist him to get money out of his IRA. To avoid the pre-age 59.5 penalty, we set up substantially equal periodic payments. But this was much less flexible than what had existed under the 401(k) plan.

There are major planning issues present when a rollover from a 401(k) to an IRA takes place. See Section XI of my DOL comment letter.

But, simply put, the call center employee was only trained to encourage IRA rollovers - into more expensive mutual funds at that. The advice provided was not as a "fiduciary" - it was neither expert nor done under a duty of due care. Why was this advice given? Simple - it paid the for-profit mutual fund company more money.

The Retiree, the IRA, and the Variable Annuity. A couple came to me, perplexed. They had invested their IRAs in variable annuities, some ten years before. Despite their relatively even allocation between stock funds and bond funds in the various sub-accounts they were advised to invest in, and despite a substantial increase in the stock market over the past five years, their variable annuity's value had only gone up a little. I reviewed the contract. Not surprising, with the riders attached, the variable annuities had total annual fees and costs well in excess of 4% annually.

The clients were perplexed. What about the 7% "guarantee" they had been promised. I explained that this guaranteed rate of return was only effective if they annualized the annuity. But, if they did that, the annuitization rate offered in the variable annuity contract was far below that which was available today.

Why had their broker recommended this variable annuity, rather than mutual funds which were far less costly? Probably because this variable annuity did not mandate any break-point discounts (which reduces the commission charges). (Many variable annuities still don't do this, creating a perverse incentive for brokers to recommend variable annuities rather than mutual funds, to avoid lower commissions.)

Under a proper due diligence analysis, this variable annuity was inappropriate for their IRA accounts. So why had it been recommended? Simple - it resulted in higher commissions to the broker and the brokerage firm.

Economic incentives matter, and they matter a great deal. When a salesperson has the opportunity to receive much higher compensation from the sale of one product, compared to another, the allure of the investment product with the higher compensation (and higher fees to the client) nearly always win.
These insidious conflicts of interest cause great harm to the financial and retirement security of our fellow Americans. The academic research in this area is compelling – higher-cost investments lead, on average, to lower returns. In fact, there is a strong negative correlation between the total fees and costs of an investment product and the returns of that product over the long term, relative to similar investments.

Conflicts of Interest Lead to Poor Investment Recommendations. Conflicts of interest are insidious. The incentivize bad advice to be given.

Disclosures of conflicts of interest are insufficient to protect investors. Indeed, disclosures may actually cause even worse advice to be given. According to Prof. Dalian Cain, Yale School of Management, in “The Dirt on Coming Clean: The Perverse Effects of Disclosing Conflicts of Interest,” “Conflicts of interest can lead experts to give biased and corrupt advice. Although disclosure is often proposed as a potential solution to these problems, we show that it can have perverse effects. First, people generally do not discount advice from biased advisors as much as they should, even when advisors’ conflicts of interest are disclosed. Second, disclosure can increase the bias in advice because it leads advisors to feel morally licensed and strategically encouraged to exaggerate their advice even further. As a result, disclosure may fail to solve the problems created by conflicts of interest and may sometimes even make matters worse.”

The Necessity of the Fiduciary Standard for Providers of Investment Advice. Fiduciary duties are imposed by law when public policy encourages specialization in particular services, such as investment management or law, in recognition of the value such services provide to our society.  For example, the provision of investment consulting services under fiduciary duties of loyalty and due care encourages participation by investors in our capital markets system. Hence, in order to promote public policy goals, the law requires the imposition of fiduciary status upon the party in the dominant position. Through the imposition of such fiduciary status the client is thereby afforded various protections. These protections serve to reduce the risks to the client that relate to the service, and encourage the client to utilize the service. Accordingly, the imposition of fiduciary status thereby furthers the public interest.

Some might opine that financial literacy efforts can fulfill this role. Yet, the body of academic research, and my own experience in dealing with thousands of clients, reveals that financial literacy efforts only significantly assist consumers with basic personal finance training, such as in expenditures budgeting and saving for future needs. However, the complexity of the financial markets, and the limits of time each consumer possesses to devote to training in finance, renders the vast majority of consumers unable to become investment experts or to understand the many terms and concepts required, even with the aid of a multitude of disclosures. We are just as likely to turn a consumer of financial services into a highly knowledgeable designer and manager of her or his investment portfolio as we are to turn a patient needing a brain operation into a neurosurgeon. 

We must recognize that the combination of specialization and interdependence found today is essential to the progress of our society. This combination fosters both the development of new knowledge and expertise. It provides great benefits to consumers, provided the advice is delivered with a high degree of due care and in the consumers’ best interests. It enables consumers to place the fruits of their hard-earned labor to work in the capital markets, with the expectation that the returns offered by the markets will be returned to the consumer, less a reasonable amount for professional-level compensation to the specialist.

America Itself Needs the Fiduciary Standard, to Promote U.S. Economic Growth. In my nearly 30 years as an estate planning and tax attorney, and in my nearly 15 years as a fiduciary investment adviser, I have possessed the opportunity to review hundreds of clients’ investment portfolios. When the clients’ investment portfolios were advised upon by either broker-dealer firms, by dual registrants (firms and individuals with both securities broker/dealer licensure and registered investment adviser licensure), or by insurance agents, the allure of high-fee investment and insurance products was nearly always too strong to resist. Over 95% of the time, in my reviews of hundreds of clients’ portfolios, I discerned high-cost investments, tax-inefficient portfolios, or both.

The high costs of Wall Street’s services and products not only engender the retirement security of individual Americans, but also impair the American economy. As the role of finance has grown ever larger, instead of providing the oil that ensures the American economic engine churns efficiently, the peddling of expensive investment products to Americans has led to a sludge that impairs the vitality and threatens the future of not only our fellow Americans, but Americans itself.

The growth of the financial services industry has grown to an extraordinary proportion of the overall U.S. economy. As stated in a recent article by Gautam Mukunda appearing in the Harvard Business Review: "In 1970 the finance and insurance industries accounted for 4.2% of U.S. GDP, up from 2.8% in 1950. By 2012 they represented 6.6%. The story with profits is similar: In 1970 the profits of the finance and insurance industries were equal to 24% of the profits of all other sectors combined. In 2013 that number had grown to 37%, despite the after effects of the financial crisis. These figures actually understate finance’s true dominance, because many nonfinancial firms have important financial units. The assets of such units began to increase sharply in the early 1980s. By 2000 they were as large as or larger than nonfinancial corporations’ tangible assets …. " Gautam Mukunda, “The Price of Wall Street’s Power,” Harvard Business Review (June 2014).

The result of this excessive rent extraction by Wall Street is impairment of the growth of the U.S. economy. As Steve Denning recently noted in Forbes:
The excessive financialization of the U.S. economy reduces GDP growth by 2% every year, according to a new study by International Monetary Fund. That’s a massive drag on the economy–some $320 billion per year. Wall Street has thus become, not just a moral problem with rampant illegality and outlandish compensation of executives and traders: Wall Street is a macro-economic problem of the first order … Throughout history, periods of excessive financialization have coincided with periods of national economic setbacks, such as Spain in the 14th century, The Netherlands in the late 18th century and Britain in the late 19th and early 20th centuries. The focus by elites on “making money out of money” rather than making real goods and services has led to wealth for the few, and overall national economic decline. ‘In a financialized economy, the financial tail is wagging the economic dog.’
Steve Denning, “Wall Street Costs The Economy 2% Of GDP Each Year,” Forbes (May 31, 2015).  
Wall Street’s lack of legal and ethical constraints have been opined by many as the root cause of the financial crisis of 2008-9 and the resulting recession in the United States, from which we still have not fully recovered. As Jack Bogle, founder of Vanguard, observed: “Self-interest, unchecked, is a powerful force, but a force that, if it is to protect the interests of the community of all of our citizens, must ultimately be checked by society. The recent crisis—which has been called ‘a crisis of ethic proportions’ – makes it clear how serious that damage can become.” John Bogle, “The Fiduciary Principle,” (June 22, 2009), adopted from a speech given to the Columbia University School of Business, New York City, NY, April 1, 2009.
Wall Street's large broker-dealer firms, and the insurance companies, are currently contributing tens of millions (if not hundreds of millions) of dollars to attempt to get the U.S. Congress to stop the DOL's efforts to protect plan sponsors (employers), individual Americans, and to restore U.S. economic growth. Literally, each week dozens of their lobbyists descend upon Capitol Hill. National television ads, of a very deceptive nature, have been expensively produced and now run.
Again and again, I hear ... those who advocate for the fiduciary standard of conduct, and the reduction of conflicts of interest that so pervade are simply outgunned.
BUT ... each of us can help. Please contact your U.S. Representative and U.S. Senators today. Tell them you support the DOL's Conflict of Interest Rule, and that Congress should NOT intervene, at the behest of Wall Street and the insurance companies. Tell them the DOL rule to substantially reduce the conflicts of interest in financial services is right for plan sponsors, right for individual Americans, and right for America itself.
Call, fax or e-mail your U.S. Representative and U.S. Senators today. Get your colleagues, friends, family members, and clients to also contact them. TODAY. Because tomorrow may be too late.
For more information, please visit Save Our Retirement.
Thank you. - Ron

Saturday, October 10, 2015

Let's Change Professional Standards of Conduct - for ATTORNEYS - to be like FINRA's rules.

James Robert Underwood, Esq. and William Michael Lowenstein, Esq. gathered at 6:00 p.m., for their weekly cocktails at the University Club, perched high atop the law firm's building just north of the financial district.

After ordering, James leaned over to his colleague, stating: "William, we need to change the way we get paid. Here we are, practicing law, and helping our clients buy and sell small, closely-held businesses as their outside corporate legal counsel. But we just get paid our hourly fees."

William replied: "Our hourly rates are $750 an hour. Do you want to increase our rates?"

James answered: "No, our hourly rates are in line with the market. But, it's just not fair. I have friends who are stockbrokers, who barely work three days a week, and they make far more than I do."

William concurred: "Yes, that's true. We went to college, then three years of law school, and then we worked 70-hour weeks as associates. Here we are, about to become junior partners, and yet we still put in the long hours. And the senior partners do, as well. Yet there are brokers who never even finished college who make far more than I do, live in more expensive neighborhoods, take many more vacations, and don't seem to work very hard at all."

James responded: "Like I said, we need to change how we get paid."

William: "What do you have in mind?

James: "Well, here is what I was thinking. Every time we help a client buy or sell a small business, let's take 5.75% of the purchase price as our fee."

William: "That could be a lot of money, if we start charging commissions. But I don't like the fact that we would not be receiving ongoing compensation."

James: "Not a problem. We'll also charge 0.25% a year, each year, of the value of the corporation, for as long as our clients hold the stock."

William: "That sounds better. But what if the clients don't like the up-front commission?"

James: "Then we'll just charge 1% a year of the value of the corporation, for as long as the clients own the corporation."

William: "Do we need to provide ongoing legal services for this fee?"

James: "Not really. We'll just act as custodian of the stock certificates, and each quarter send out an invoice for these custodial services."

William: "Sounds pretty favorable. I could go for that."

James: "But it gets better. Suppose we are representing the purchaser of a business. We can ask the sellers of businesses to pay us annual fees, to help them promote the sale of their business. We'll call them 'shelf space' fees. And, on each transaction, we can get kickbacks from the transfer agent of the stock - we'll call it 'payment for order flow.'"

William: "Now that's really challenging the ethics rules that govern attorneys. How will we get around them?"

James: "We don't. Given the huge sums of money we'll be making, we will use part of our profits to lobby the Bar Associations to change the ethics rules. We don't want to be constrained in our business practices, after all. Government should not be interfering with how we make a living, anyway."

William: "That's a great idea. What ethics rules will we have to change."

James: "Well, first there is that pesky rule that attorneys can't enter into transactions with their clients, as it would create a conflict of interest, unless separate legal advice is obtained by the client. That rule has to go."

William: "I agree. I think it should be fine to be paid fees from the seller, or the transfer agent, even if we also are paid by, and pretend to represent, the buyer."

James: "And then we'll have to eliminate the restriction that attorneys' fees be reasonable. We should be able to extract whatever rents we want to, from each transaction."

William: "Yes, if we do that, then on larger transactions where we do charge a 5.75% commission, and get paid tens of thousands if not hundreds of thousands of dollars, no one can claim our fee is unreasonable then. But don't we still have a duty of care?"

James: "We'll have to change the standards of professional conduct there, as well. We'll just state that we can't be sued as long as the transaction is 'suitable.'"

William: "Suitable? What does that mean?"

James: "Well, it's a pretty nefarious concept. We'll just let the arbitrators decide. And, oh, by the way, all of the arbitrators will need to be approved by our Bar Association, as well. And arbitration will be mandatory."

William: "But don't we also possess a fiduciary duty of loyalty to our clients, as well? And if we try to get rid of the duty of loyalty, won't consumers object."

James: "Oh, we'll just say we're acting in our clients' 'best interests.' But we will re-define the term 'best interests' - through our new ethics rules - to mean 'suitability' - nothing more.

William: "How will we call ourselves then? Legal counsel? Legal advisors? Don't those terms imply a relationship of trust and confidence."

James: "Not a problem. We'll just have our regulatory body opine that lawyers can call themselves anything they want, even 'advisors' and 'counsel' and 'consultants' and 'managers' - even if the lawyers actually represent the other party, not the client."

William: "Just one more thing. Attorneys are fiduciaries to their clients. They owe clients strict duties in transactions they provide advice upon, including due diligence, the duty to avoid conflicts of interest wherever possible, and the duty to be completely honest and candid with their clients."

James: "We'll have the rules of conduct changed. Lawyers won't be fiduciaries to their clients anymore. Of course, clients won't be aware of the change, as we will still call ourselves 'legal counsel' and 'legal consultants' and 'legal counsel.'" But, let's not be concerned with clients. After all, we don't want to restrict our new business models.

William: "I love it. I can see myself relaxing on the beach in the Caribbean now, at that conference for transnational attorneys, with all of the costs of attending paid by third parties who want us to direct our clients their way."

James: "Therein lies the beauty of it all. Multiple streams of income, paid in ways the client never realizes. We hold out as trusted advisors. But we don't have any real duties to the client anymore. And we make a ton more money. We'll be able to work far less, and receive huge commissions and fees similar to 12b-1 fees. It will be glorious."

William: "Let's call our friends at the Bar Association, right away. And let's make certain you and I get on the Board of the Bar Association, next year, or get hired as staff members, so we can ensure the rules get changed as fast as possible. I'm certain our firms will give us large bonuses if we devote ourselves to keeping the standards of professional conduct low."

James: "It's a deal! No more fiduciary duties. We attorneys will no longer be constrained by those burdensome principles-based fiduciary duties. We'll make millions!"

Sunday, October 4, 2015

Tax-Free Exchange of Life Insurance Policies Meant for Retirement? A Case Study.

Let me state up front that I'm not a big fan of cash value life insurance. In my mind, permanent (i.e., cash value) life insurance is best suited for permanent needs (such as liquidity needed to pay estate taxes). Most other life insurance needs, such as the need to replace lost income, can be dealt with through term insurance (and, today term policies can be found for very long periods, and with conversion privileges just in case the need becomes permanent.

But, cash value life insurance has another attribute - protection from claims of general creditors, at least in many states.

While some states (Florida, for example) offer a generous exemption from creditor claims for homestead, and some states offer protection from creditor claims for annuities, a much larger number of the states offer protection from creditor claims for the cash value of life insurance policies. In a state where other exemptions are limited, such as Kentucky, a person engaged in a high-risk profession (such as certain medical practices) might well decide to contribute to a cash value insurance policy over time.

(Arguably other asset protection strategies, such as the use of limited liability companies, certain types of asset protection trusts, should also be explored. But these were not that common 25 years ago, and even 15 years ago, when the physician took out these life insurance policies.)

Often life insurance is sold as a retirement funding vehicle. The general principle is that withdrawals can be made from life insurance policies up to the amount of the cost basis (generally, the sum of premiums paid for life protection, but not for certain riders). Thereafter loans can be taken from the policy.

Care has to be taken in such instances that the life insurance policy does not become a Modified Endowment Contract (MEC). If MEC status results, then any withdrawals become subject to income tax, to the extent of gains in the policy. Most life insurance policies are designed to avoid MEC status by meeting the "7-pay" test.

After the seven-year requirement is met, further testing to avoid MEC status is generally not required. But, if modifications are made to the policy to increase the death benefit, or (in certain instances) to decrease the death benefit, MEC status should be tested (before making the changes).

Recently I had the occasion to opine on four cash value life insurance policies for a physician. Two were whole life policies, and each policy had been in force for more than 20 years. Two were variable life policies, and both of these were 14 years old.

The physician was close to retirement. Premium payments had been made annually on all of the policies. The policies were issued by an extremely strong life insurance, in terms of financial strength. The insurer was a mutual insurance company. Strong dividends were paid, the result of both a conservative yet effective investment portfolio maintained by the insurer, as well as close attention to underwriting. The physician's long-time insurance agent stood by to assist with the changes needed to the policy, and was ready to assist with its defunding over time by obtaining new illustrations and, as necessary, obtaining testing of changes to the policy by the insurance company to ensure that Modified Endowment Contract status would not result.

Of course, some changes were needed in the way the existing policies were structured. These changes should have been considered several years before, in my view. Such as reduction in the death benefit, to reduce mortality charges. Eliminating paid-up additions (PUA), not needed. Possibly choosing to have future dividends distributed, rather than re-invested, upon entering retirement. The variable life insurance investment choices made for an all-equity portfolio in the policies, with a growth tilt; a more evidence-based investing strategy could have been deployed and should be deployed now.

With proper restructuring (in a manner that would not result in MEC status), cash-free withdrawals up to the cost basis of the policies could take place (along with further reductions, at such times, of the death benefit).

Thereafter, loans could be taken against the policy; however, at the present time the spread between the loan rate and dividend rate was 2.5%. Any large amount of loans could easily trigger a lapse of the policy. But, consideration could be given to a tax-free exchange to a form of annuity contract, as a means of avoiding concerns about lapse, while still accessing the policy's cash in full. (Annuities are not protected, except at minimal levels, from claims of general creditors in Kentucky; hence, any rollover to a low-cost, no-load annuity should not be done for many years - i.e., until the possibility of creditor claims was far less.)

While the strategy above is well-known, managing the policy during the retirement (decumulation) period can prove to be difficult. Far too many horror stories exist of policies that lapse and cause tremendous income tax burdens.

And, while this strategy does have its proponents, from a pure investment standpoint investing in low-cost, passively managed investments using a moderately conservative investment strategy, and purchasing term insurance, nearly always results in far superior returns over the long term. Why? Because the relatively high fees and costs of permanent cash value policies affect their returns.

In this case, such fees and costs might be considered the price of "asset protection."

At this point another insurance agent entered the picture. Things got more complicated.

In fact, this is why the physician contacted me.

Another insurance agent had provided the physicians illustrations for a "new" type of policy - an equity indexed universal life (EIUL) - that could provide better returns than the existing four policies, combined. The insurance agent proposed an EIUL policy funded by a tax-free exchange of the existing policies, plus tens of thousands of dollars a year in additional premiums for several years. The death benefit of the policy would be about four to five times the total premiums paid.

Why did the new insurance agent recommend this new policy? Because the investment returns in the EIUL policy "would be better." Equity indexed products are also touted for their downside protection - "you can't lose money in them" was what the physician recalled being told by the new insurance agent.

Ahem ... wait a moment, I beg to disagree.

Let me point out that the surrender fees on these policies approached 20% of the cash value of the insurance policies. And that these surrender fees would decline slowly - but would only terminate after 15 years. (Those surrender fees largely go to recoup the commissions paid to the insurance agent, paid mostly upon the sale of this product and when additional premiums are paid.)

Let me also point out that mortality expenses (the cost of insurance) and other policy charges result in a drain against the policy, if the investment returns are zero in any year. (As would occur, under the policy terms, if an index option was chosen and stock market returns were negative.)

Also ... (1) life insurance companies can decrease the participation rate; (2) companies can and do impose caps on the upside potential; and (3) index returns don't include dividends paid by companies in the index. Other restrictions exist which may limit the actual returns. In essence, the insurance company has shifted much of the investment risk to the policy owner. And the insurance company had a great deal of control over the policy's terms.

But, alas, insurance agents will no doubt point out that the EIUL product should be considered a "fixed income investment" and should be only compared to other fixed income products, like C.D.s. The comparison isn't a good one, since most CDs are FDIC-insured. There is a risk of loss if an insurance company defaults - which does happen.

Of course, if the insurance agents want to "compare" to another "fixed income" investment - how about the existing whole life policy, paying a nice 5.5% dividend, that the client had now?)

The physician requested that I evaluate the new insurance proposal. It was a no-brainer.

There was no need to pay a new agent many tens of thousands of dollars in commissions. There was no need to incur a new surrender charge period, and effectively hamstring the ability of the physician to undertake cash withdrawals from the new life insurance policy for many, many years. There was no need to abandon the outstanding financial strength of the current insurance company nor the excellent experience ratings found within the policy.

Fees and costs matter. Even in cash value life insurance policies.

While EIUL policies have performed well over the past 15 years, during these highly volatilie markets, there is no assurance that the underlying strategy behind EIUL policies (invest in fixed income investments, use part or all of the interest to purchase call options on indices) will work well in future years.

Don't get me wrong. I think the investment strategy of investing in fixed income investments, and using the interest earned (or part thereof) to purchase call options on an index, is a valid one. The costs of implementation of this investment strategy, in this instance, were just far too high.

But - was attention being paid to other financial planning needs? To other investments? To asset protection?

Kentucky is unusual in that, due to a Kentucky Supreme Court decision, there is no absolute time limit to filing a medical malpractice claim. There is a time limit from when the injury should have been discovered. But, unlike states that possess a 10-year or 12-year absolute time period for bringing claims, Kentucky has no such absolute limit.

Obviously, the client had other accounts. Qualified retirement plan accounts. The client's spouse had taxable accounts. With retirement approaching, a tax-efficient withdrawal strategy was needed, so as to take advantage of the potentially lower marginal income tax rates in future years.

And, of course, the timing and method of undertaking social security retirement benefits was a key decision for this couple.

The new insurance agent had not spoken of the need for comprehensive planning, nor of planning for a tax-efficient decumulation strategy with all resources looked at, rather than looking at each asset in isolation.

A fiduciary perspective ...

The new insurance agent was doing what he was trained to do - sell life insurance. And the marketing strategy (tout the wonders of EIUL policies) was one that, no doubt, generated substantial sales and a most comfortable living for the insurance agent.

This physician was astute. The physician didn't sign off on the new policy, when it was presented. But the physician may have done so in the future, had we not had a chance encounter at a reception, and had the physician not shared with me the physician's concerns about whether to go with the new policy or stick with the old ones.

Also, as I asked questions of the physician, I discerned that the physician was unaware that neither insurance agent, in this instance, was obligated to act in the physician's best interests (i.e., under a non-waivable fiduciary duty of loyalty). The physician "trusted" both agents, even though neither was a fiduciary, and the insurance agent-customer relationship was an arms-length one.

Without my fortuitous intervention, the physician may well have: (1) made a costly mistake upon entering retirement, losing tens of thousands of dollars to new commissions and other fees; and (2) not restructured the existing policies to reduce the fees and costs of these to lower levels, thereby enabling a better outcome (as to the policy growth and ability to withdraw funds from same).

The physician here was lucky. To receive advice from a fiduciary. To receive truly objective advice.

Most consumers are not so lucky.