Rules are necessary for a functioning society, but some rules seem to ignore the root of the problem, which is morality. When laws attempt to require a level of morality, they often exacerbate the very thing they’re meant to prevent. In this case, we’re talking about fiduciary responsibility.
Over-regulation causes us to miss a major part of the conversation. Morality. Integrity. Principles. When you attempt to regulate morality, your moral compass shifts from right vs. wrong, to legal vs. illegal. And that is a slippery slope. There must be an additional component: morality must be reintroduced to the conversation.
Let’s focus, for a moment, on the broader picture. With the over-regulation of society, we have observed is a shift from, “Is this moral?” to “Is this legal?” Right and wrong take the backseat, and people prioritize legality in their decision-making. One example is shopping carts and parking spaces. We’ve likely all experienced the thrill of finding a parking spot and realizing that a shopping cart has been left there, essentially eliminating the space. Is it legal to leave the shopping cart wherever you want? Yes. But is it the considerate thing to do? In a busy parking lot, it’s far from practical to park your car in the middle of the road, get out, and move a rogue shopping cart. Thus the parking lot is not functional because of one abandoned cart.
When there are so many rules and laws, ways to be legal and illegal, we get wrapped up in that mindset. Our brains become oriented to the legality of a decision rather than the morality of a decision. What’s more is that the rules rarely achieve what they were created to do, because people abandon the morality behind the legislation in favor of the legality altogether.
Integrity in the Financial Industry
The idea of fiduciary responsibility is a fantastic example. Rules have been put in place to make advisors act as fiduciary for their clients. This is, without a doubt, a good concept. The next step, however, is to claim that fiduciary responsibility should be the norm. The principal of doing right by your clients, of seeing to their needs above your own, should be internal. It should be something that you do because of your moral compass.
The laws surrounding fiduciary responsibility are well-intended, but the regulation of a moral principle has adverse effects. To begin with, the concept of a fiduciary is not laid out in black and white terms, though many act as though it is so. Many have decided that what’s best for the client is fee-only planning. Yet while the reasoning seems to follow a logical thread, we believe that this actually undermines what the fiduciary rule was meant to do.
Fee-Only: Is it Better?
Those who believe in fee-only advice argue that it protects the client from being sold a product on commission that will make the advisor more money. This is a possibility, but we would argue that it is not in the advisor’s best interest. We think you’ll see why.
First, let’s examine the result of a mandatory fee-only practice. When your income is dependent on fees, your needs boil down to how many people you can get in and out the door. You may not feel the need to push any particular product, as long as you can hit a quota. When your income is based on quantity over quality, are you going to take the time to truly educate your clients on what is best for them? Or will you instead forgo the education, and give them what they think they want? Clients come to advisors because they themselves are not experts, and they are seeking advice. This often requires time and education. Without a moral compass, the rule will not fix the problem.
When the conversation is flipped, it’s easy to see the flaws in the logic of a fee-only practice. Each route has it’s pros and it’s cons, and the solution is for advisors to act with integrity, and for clients to seek out advisors who are willing to educate rather than sell.
Education and Morality
Now, the fiduciary law does not directly require a fee-only practice, but it has become synonymous to fee-only within the financial community. Fiduciary is a good thing. Fee-only practices, however, can be dangerous without a personal moral responsibility from the advisor.
Education, and educating clients on their options, is a key component to the Prosperity Economics Movement. When you consider the Principles for Prosperity, they’re based on personal empowerment and thinking for oneself. As a result, it is the fiduciary responsibility, and moral responsibility, to educate clients. When a client is empowered to take part in this process, they’ll be more satisfied with their results and they hold the tools to make intelligent decisions.
Many clients will never know what life insurance is, or how operates, because it’s a lot of work for advisors to set up a policy. And if an advisor gets paid the same amount whether they sell a life insurance policy or some other type of product, they think they may as well save time and give the client what they think they want.
There is just as much of an incentive for advisors to lookout for their own interests first within a fee-based practice. So how can one truly be more responsible than the other, unless on the merits of one’s moral compass?
We believe that when you put the focus back on integrity, you open your practice up to more success. By acting in the best interests of your clients, you’ll have happy people who believe in what you do and champion your business. This sustains itself, and it requires only that you care for your client’s financial well-being.
The commission is secondary, it’s what you receive for doing right by your client—it shouldn’t be something that drives your decisions with your clients at all. And when you take the time to educate the clients, put them in a position of power and control within their own finances, they’ll receive value. You’ve turned your relationship into a partnership.
Can You Oversell Insurance?
There’s an additional argument about overselling in a commission-based practice, but in reality the life insurance industry makes it nearly impossible to oversell. Insurance companies will only insure a person up to their economic human life value. This prevents a person from owning too much insurance, and it’s based solely on the client’s personal economics.
There is some truth to the fear of overselling, because of the higher premiums of a whole life insurance policy. This is based in the fear that whole life insurance is a waste of money because you can get term insurance for much cheaper. We have plenty of material that proves otherwise. Of course we understand that someone’s economic human life value may not reflect their cash flow, but any advisor that pushes a client toward something they can’t afford will not last long.
Whether you work on fee or commission, if your morals aren’t there, neither method will be in the client’s best interest.
So how do you help your clients understand the commission-based model? It begins with transparency. When you act like there is something to hide, you reduce your credibility. By standing for education first, and remaining vigilant, you will find clients that are perfect for you. Help your clients to see your principles and values, and do so proudly. Never hide behind what you do, and if you feel that you have to, examine that.
We should reject the notion that the financial industry is a pie, and everyone needs to hoard and protect their piece of the pie. The world is large, and there will always be clients. You couldn’t help everyone even if you tried. Be generous with your knowledge, and help people to step into a mindset of Prosperity. If you allow yourself to even subconsciously slip into a scarcity mindset, you might find yourself compromising your integrity. If you hold to your morals, your philosophy, and do right by your clients, Prosperity will find you.