HOW TO GET EVERYTHING YOU CAN OUT OF EVERYTHING YOU HAVE INTERVIEW FELDMAN: I don’t know why more people aren’t getting their securities license at this point. Besides being able to provide full service to clients, getting the other licenses also makes sense from a compliance standpoint. But that does not mean that commission-based products don’t have their place, right? CLOKE: Yes, and obviously there are a few advisors out there who like to promote themselves as the fee-only folks. But you know, we’re also dealing with insurance products, and we’re dealing with it in the retirement world. What we realized is there are some commission products out there that generate a greater value to the client versus a netted fee, a netted commission product. I’ll give you a real example of this. I do retirement planning for a highly noted colleague of ours --- if I gave you his name you would know him very well. And this particular individual had a sum of money and wanted us to buy zero-commission income for them. It just so happens our firm has both the zero-commission income annuity products and the street commission income annuity products. And the reason for that is this: We never know which one gives the best fiduciary option for our clients. In this particular example that I’m giving you, we went out and we priced the income that we could get based on a start date for a joint lifetime with cash refund. That was for street comp that was probably 3.5%. That is 3.5% a life for service and no ongoing revenue. Then we went out and we got the no-commission product with the same deposit. What we found, surprisingly, is that we had to add $34,000 to the initial deposit to get the exact same income as the 3.5% commission street product. At first, I couldn’t believe it. It was the first time I’d experienced that, which is what made me convinced I needed to test both every time. What I found out is that for street products, the carriers are broad. There are many of them and they’re competing. This netted commission, the no-fee products, exist with very few companies, and there’s almost no competition. And those companies know why most advisors are using that, because they are
promoting themselves as fee-only advisors. If the thing I have to do to be labeled as a fee-only advisor is to charge them $34,000 more for the deposit, versus $34,000 less, how do you think my client
about the five tools that he always uses to fix every repair. Now that’s silly. Mechanics don’t do that. You wouldn’t do that. Why? He’s got a thousand tools in that box. He never
“What we realized is there are some commission products out there that generate a greater value to the client versus a netted fee, a netted commission product.” might feel about that decision? Sometimes the netted commission wins, and I’m going to charge a fee for the advice. And sometimes the commission wins, and I never know. So, how can I be fiduciarily upright and do the best thing for my client if I’m just picking one side of the fence or the other? That’s the reason we built the software to compare. Because there seems to be such a fight out there about the way you’re paid. Is it fees or commissions? Is it insurance or is it traditional investment? We need to embrace all of them without bias. And we need to understand how to put them together and do the analytics to verify what’s absolutely the best for the client from a mathematical perspective. And you can’t do that without dynamic tax calculations, dynamic inflation and understanding the effective fee drag. You can test all those things, in any way together, and you can have a finite answer that if you assume this, this is the best; if you assume that, that is the best. And when you contrast the two, tell me what you like. That’s what we do in analytics. Once we do that, we find if we ignore one or the other, we miss the more efficient one more than 70% of the time. Imagine for a minute that you bought a Cadillac from the Cadillac dealership, and they promised they had the best mechanics in the region. So, two years later, you’ve got a squeaky right front wheel, and you drive it to the Cadillac dealership. The mechanic takes it back to the bay and immediately grabs five tools out of his workbench, and then he runs into the vestibule where you’re drinking coffee and eating a doughnut, and he starts bragging
knows what tools he’s going to use until he puts the car on the hoist and takes the tire off. Imagine for a minute that he goes to the vestibule, not with these five tools, but he calls the owner of the car back to his bay, and he says, “I’ve figured out what the problem is.” He says, “You see that? That a bearing right there on the shaft. We have to take that bearing off and we have to press it back on. We can’t just hammer it off. We’ll damage the shaft and then there’ll be a bigger cost to repair than just fixing the bearing, but we have a problem.” He says, “You see that toolbox up there? You know, it’s wall to wall. I have over a thousand tools in there and I’m really proud of that toolbox. But guess what, there’s one tool I do not like. I hate it. You know what it is? It’s a bearing puller. I hate bearing pullers.” How the heck is he going to fix your car if the one tool he needs on that day, which is rarely used, he doesn’t like? He can’t not like it. He’s got to have the tool in his box. So, we cannot eliminate tools in our war chest. We need to know what they do and how to bring them together, and we need to know how to do analytics. That is what’s going to be required in the new advisor world with all of these regulations and compliance.
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October 2020 » InsuranceNewsNet Magazine
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