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Also available as podcast (Episode #157)
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Can I Offer Insurance Solutions In The RIA Model?
TL;DR – The RIA model generally provides far more flexibility with how you can run your practice. Consequently, an exciting part of transitioning your practice to the RIA model is contemplating the services and investment solutions you’d want to offer your clients upon making the transition. Providing insurance solutions to clients is one such option. However, several variables affect whether and how you can offer these solutions.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
Can I offer insurance solutions in the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #157.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, start out by heading to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode, we’re going to answer the question: if you were to transition your practice into the RIA model, could you offer insurance solutions with your clients?
Some of you are already doing that in whatever type of model you’re in now, and you might want to ensure that if you were to transition to the RIA model, could you continue to do that if that’s something you aspire to do?
Or for the circumstances where you’re not doing it currently, and maybe it is something you want to do going forward. And so you’re trying to understand if you can check that box as well.
I’ll start with this… the short answer to the question, in theory, yes, you can offer insurance solutions in the RIA model. That’s the very short answer. In theory, yes, you can. There are some details, which we’re going to get into, but the short answer is in theory, yes.
Now, two topics to start with.
First, there is a loud debate at times of whether you should or not. Now, let me give you both sides of that camp.
There are some advisors and teams out there that have RIAs that are very loud and very proud and feel you should only be so-called “100% fee-only.” Meaning that the only way you should be compensated is the advisory fee paid by the client to you, and that nothing should be done on a transactional basis, whether that’s brokerage business still through maybe a friendly broker-dealer, or in the case of today’s topic, insurance solutions. Because that might result in a commission to you.
That is one school thought.
Well, there are other RIAs who feel insurance is an important part of the conversation they have with clients, to talk about the liability side of the balance sheet as well and how they’re going to protect their assets. And so insurance is a normal part of that conversation.
Which granted the fee-only people would probably say this first part as well.
But the other side says…. “If I’m going to have the insurance conversation, and for many clients there is a need, for example, for perhaps that they have term life insurance. I am going to talk about that and I am going to help them obtain (in this example) term life insurance.”
Which yes, you could potentially refer that client down the street to some other insurance provider, or just explain what they need to do and hope that they go follow up.
But there are some advisors that argue… “I’m already explaining it to the client, and so to the degree I can be the one to provide it for them, that’s going to be easier for the client. Our clients are asking for us to just do everything in-house. And so it does make sense that we provide that service, even though it might result in a commission.”
And likewise that RIA can’t call themselves “100% fee-only,” but because of the value proposition of the RIA in servicing the client, they do want to offer insurance solutions.
Those are two different camps. It’s not to say that one is right and one is wrong. That’s not at all the case. Again, it just matters where do you fall in that spectrum? And to the degree you say… “I want to be able to offer those insurance solutions,” that’s what we’re talking about here on today’s episode.
And then the second initial main point, and this is more of a technical thing, but just to clarify it, it’s technically not the RIA itself that’s offering the insurance.
As keep in mind, the RIA is the entity, a Registered Investment Advisor. The individuals, the financial advisors underneath it are what are called Investment Advisor Representatives, IARs.
So, the RIA itself is not offering insurance solutions, because an RIA provides advisory services for a fee.
What’s occurring when an “RIA” essentially offers these services, it’s the individuals, the investment advisor representatives within that RIA that are insurance licensed, and who are effectively offering the insurance.
That’s semantics, but just from a technical logistical standpoint, I wanted to point that out.
And so on this episode, when I talk about as an RIA you can offer insurance, that’s just because that’s a common phrase and common way to say it. But from a technical standpoint, it is as I just described it.
The next thing I would point out is many of you that might be considering transitioning to the RIA model are coming from some sort of broker-dealer type scenario or affiliation model currently. That could be a wirehouse, that could be an independent broker-dealer, maybe a bank broker-dealer, whatever the case is.
And so part of the question is, if you want to offer insurance products, when and how, if at all, is a broker-dealer still involved, or does it need to be involved? Is it required?
To answer that, I’ll give two examples.
First, if you want to offer variable annuities for a commission. And the reason I clarify for commission is because there are now an abundance of fee-based variable annuities, which is handled separately, and that can be done on a fee-only basis under the RIA.
But if you have a need or want to offer variable annuities on a commission basis – keep in mind a trail that is being paid off of a variable annuity that was originally sold on a commission basis, that trail is technically considered a commission as well.
So to the degree you might say… “I don’t aspire to do any new commission-based variable annuities,” but you might be sitting on a healthy amount of ongoing trail revenue from those, which is a whole separate topic of how you could perhaps solve for those variable annuities. I’ve done episodes on that.
But let’s say you want to keep the status quo. Well, keep in mind that trail revenue is a commission. So, in that case, you might still need some sort of broker-dealer arrangement to be able to offer variable annuities because a commission-based variable annuity is both an insurance product, which requires you to wear your insurance hat, and a broker-dealer product, which requires you to wear your registered rep hat and be affiliated with a broker-dealer.
If you’re in the RIA model, that might be under what is often referred to as an RIA-friendly broker-dealer. I’ve done episodes on what that is.
But just know, there are some insurance products that still do necessitate some sort of broker-dealer involvement, and there are different ways to perhaps solve that. Which again is beyond the scope of this episode, but just know that a broker-dealer might come into play.
Now, the flip side to that is oftentimes when I’m talking to advisors and teams and this topic comes up and they want to offer insurance solutions, the only insurance they do is maybe term life insurance, or maybe fixed annuities.
Which the reality with those, and that’s just two examples, there’s other kinds of insurance products, but those two term – life insurance and fixed annuities – are insurance-only products.
Those are not, unlike a commission-based variable annuity, those are not insurance and broker-dealer products.
Now, you perhaps have been accessing those insurance products through your current broker-dealer, because your broker-dealer has either an insurance subsidiary or is aligned with some third-party solution.
And perhaps you’re even required to do it through your “broker-dealer” because they want to take a payout on the insurance as well. Or simply that’s just the easiest way for you to access those solutions currently, is to do it through your broker-dealer. But it doesn’t necessarily require that a broker dealer be involved going forward, again, if you are using insurance products that don’t necessitate a broker-dealer.
The reason I dove into the whole broker-dealer thing is yes, you could potentially offer insurance products going forward, but you need to understand what products is it you desire to offer, and when a broker-dealer may, or may not, be involved in that.
This is why it’s important to get into the details on this sort of thing. But if you’ve sorted all that out, and you do want to offer insurance products or insurance solutions for your clients, there are two main components that go into that.
First, the logistical way to access those insurance products, And second, the necessary disclosures that come with doing so.
Let’s break those down into two pieces.
From a logistical perspective, how are you going to access those solutions?
As I just noted, in your current situation you might be accessing them through your broker-dealer. Well, in the going forward state, how are you going to access them?
I’ll give you a couple examples of how RIAs, or technically the IARs underneath them, access insurance products.
First, there are third-party platforms that have been built, which to use a grocery store analogy, they’ve said…. “Hey RIAs, think of us as a grocery store. We’ve gone out to all these different insurance carriers with all these different products and we’ve put them all up on a shelf side by side for you and we’re going to help you choose why you might want one carrier or one product over another. And behind the scenes, we’ve done all the piping and paperwork process for you to utilize these solutions.”
And so accessing them through one of these third-party insurance platforms is one way to logistically access them.
Another way is you might go directly to a specific carrier.
Now, not all insurance carriers work directly with, for instance, an IAR of an RIA. But perhaps you’ve been using insurance products where you’ve gone direct to them. Maybe you have a good relationship with a wholesaler at that firm that helps you sort through their products, and you like them as a carrier. So potentially you access them by going directly to the carrier.
A third example of how to access from a logistical standpoint is to use an IMO.
An IMO is basically a middle person between you (the person providing the solutions to your clients) and the insurance carriers. It’s not essentially a platform, but the IMO is kind of a middle person. Now they would say… “Don’t think of us as just an increased cost. This is all the value that we provide for you. Maybe it’s doing casework on a particular scenario that you have with the client and helping you do the legwork and figuring out what kind of solution is most appropriate and who are the carriers that provide it.”
So there are IMOs that can add value there as well. And as a result of that they help you logistically access those products as well.
That’s not an exhaustive list, but it drives home the point that if you want to offer insurance products, you need a way to logistically do it.
Now the other side of that coin I mentioned is disclosures.
At a bare minimum as an RIA you must disclose several things. Typically disclosures are found in the firm’s, what’s referred to as, an “ADV.” And in this case, there are two parts to an ADV.
There is a specific section of ADV Part 2 where you must disclose if any of the IARs – again that’s the individuals, the financial advisors, working under the RIA – if any of them have other financially related affiliations.
Being insurance licensed is an example of another affiliation that must be disclosed in the ADV. It’s basically saying… “We have IARs, we have financial advisors working here at the RIA, some of which might be the ones that are helping you, that are also insurance licensed and are able to offer insurance products.”
So, it’s disclosed in the ADV Part 2.
And then back to the earlier example that if you are going to help your clients with insurance and you feel that it’s better for you and them to do that in-house, well, it is what it is, if it generates you a commission, that is arguably a conflict of interest in the sense that if you are providing advice to a client and part of that is perhaps to suggest (as an example) term life insurance, and as a result you’ll generate a commission from the sale of the life insurance, there’s arguably a conflict of interest with that.
Now, that’s not to say that conflicts of interest are all bad. That’s not the case at all. In this example it shows that if there’s a genuine need for the client to have a product, and you feel it’s easier and better for the client if you’re able to offer it in-house to them, you’re not doing anything unworthy in that sense, but there’s still nonetheless the conflict of interest.
In the RIA space, disclosures of conflicts of interest is the name of the game. But don’t worry about how you would draft the verbiage in the ADV. It’s a whole different topic, so I’m not going to get into it here, but if you’re going to have your own RIA, you hire a compliance consulting firm that helps you create the ADV. They know the language to include if you’re going to offer insurance products.
So, don’t worry about how you would write that out or document that, but just know that that will be part of the disclosures.
And of course, you should make sure your clients understand how it works as well that when you’re providing them advice and if they do choose to access insurance solutions through you that that will generate a commission for you.
I realize with many insurance products, particularly things like term life, the commission is fairly nominal anyway. So I realize many of you are not doing this for the revenue primarily. It’s as a convenience and value add to the client.
But even if it’s a small commission, or it could be a larger commission if it’s a large fixed annuity type transaction, either way, you need to disclose it.
Now, the last thing I’ll add, which I talk about often in these episodes, if you’re considering going to the RIA model, there are multiple pathways into the model.
Some of you will do all your research – that’s a big part of what I help advisors and teams with – and some of you will conclude that you should have your own RIA. Others of you will conclude that you should perhaps join an RIA. And as I often say, there are all different flavors of RIAs you could join, with all different value propositions.
Don’t come into this with any preconceptions about what that entails or that you wouldn’t want to consider that. Some of those pathways won’t be of any interest to you, but there others you might find very attractive. And so just come into this with an open mind as you begin this process.
But just know if you conclude after doing all your homework that joining an RIA is the better path for you, if you want to offer insurance, keep in mind you need to make sure that that RIA you want to join enables you to offer insurance products.
Back to what I said at the top of the episode, there are some RIAs that loudly and proudly say they are 100% fee-only, and they only generate revenue from the fee they receive from the client. They do not sell any brokerage products, they do not sell any insurance products, etc.
So, if you are desiring to do insurance products and you are looking at an RIA (to join) that does not allow you to do that, well, that’s not going to be a fit, and you want to identify that on the front end.
Now, there is a growing preponderance of fee-based insurance solutions out there. So some of these 100% fee-only RIAs possibly are still offering some sort of insurance products, but they’re doing it on a fee basis versus a commission basis.
But the devil’s in the details on exactly what any particular RIA may or may not enable you to do with your clients. So be aware that is part of your due diligence you’d want to do.
Now, many RIAs do allow their advisors to offer insurance products. Part of their value prop is they have figured out all the pieces that are needed to run an RIA. They’ve procured the custodians, they do the compliance, they’ve procured a tech stack, etc.
And one of those pieces, to the degree that RIA makes it possible to offer insurance solutions, is they’ve perhaps procured a relationship with one of the third-party insurance platforms.
And so if you say… “I want to do insurance products,” they might say… “Great, not only do we allow that, we’ve done the due diligence, we’ve partnered with this insurance platform, and here’s how easy it will be for you to offer these solutions to your clients.”
Others RIAs do that and also say… “If you want to use our insurance platform, great. Or if you want to use an IMO, or you want to go direct to a carrier and do it as an outside business activity, have at it, you can do that as well.”
I don’t mean to say all this to make it more complicated than it needs to be, but just again, if you’re looking at joining an RIA, just know there’s that black and white question (Can you even offer insurance products as part of that RIA?), and then there are several details that go into it as well.
Like I said at the top, my name is Brad Wales with Transition To RIA. This is the type of thing I help advisors and teams with all day long is exploring the RIA model in general, exploring all the pathways into the model. But because this is such a big process and a big decision, you do need to get into the weeds on all these variables, including, do you want to offer insurance products to your clients going forward? Let’s look at what you’re doing currently. Let’s look at what you want to do going forward. How logistically would that look? What pathways are still going to be available to you or not?
Again, I’m happy to have that conversation with you as well. There is a lot that goes into it. You want to make sure you do your due diligence correctly in that regard.
First things first, though, head to the website at TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series.
And at the top of every page is a Contact link. Click on that, and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA related, I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
And with that, I hope you found value in today’s episode, and I’ll see you on the next one.
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