As a rule-based society, have we ignored the root of the problems—the reasons the rules were created in the first place? Of course, we need rules to function as a society. Without regulations, we’d have chaos. If we didn’t mandate that in the United States we drive on the right side of the road, the roads would be chaos. But what about over-regulation?
When rules are created on top of rules, we miss a major part of the conversation. Morality. Integrity. Principles. No matter how many rules are created, you can’t create a rule that truly dictates principles. Your moral compass is something that comes from within, and often it’s taught or learned over years and years. There must be an additional component on how to instill morality back into the conversation.
Legality vs. Morality
With the over-regulation of society, what Todd Langford has observed is a shift from, “Is this moral?” to “Is this legal?” Right and wrong take the backseat, and the question of an action’s legality becomes the priority in 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 thinking. Our brains become oriented to the legality of a decision rather than the morality of a decision. The rule, often, does not achieve what it intended to do, because people no longer act out of a sense of morality.
Integrity and Finance
The financial industry fits uniquely into this conversation. The idea of a fiduciary is a fantastic example. Rules have been put in place to make advisors adhere to the fiduciary responsibility they have to their clients. The concept of fiduciary responsibility is a good thing. One step further, however, is that fiduciary responsibility should be the norm. The principle of doing right by your clients, of seeing to their needs above your own, should be internal. It should be something that you do morally.
The laws surrounding fiduciary responsibility are well intended, but the increased regulations of a moral principle have 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. Many have decided that what’s best for the client is fee-only planning. The reason behind it is well-intended, but we believe that this actually undermines what the fiduciary rule was meant to do.
Is Fiduciary Responsibility Fee-Only?
The idea behind fee-only advice is that it protects the client from being sold a product on a commission that will make the advisor more money. And we can set that aside as a possibility because it is one.
But let’s look at the result of mandatory fee-only practice. When your income is dependent on specific fees, it boils down to how many people you can process through the door. When it comes down to that, are you going to take the time to truly educate your clients on what is best for them? Clients come to advisors because they themselves are not experts, and they are seeking advice on the most sound strategies. This often requires time and education. But when your income is based on the number of clients you have, the possibility arises that you’ll push people through the process as quickly as possible. If a client says they want a product, you’ll give it to them, even if education may result in their desire to go a different route. If you don’t have a moral compass, the rule will not fix the problem.
Whether your income is earned through commission or fee, it takes integrity to do the right thing by your client. It takes a sense of morality, and a desire to help people take control of their finance. The fiduciary rule seeks to force morality into the legal requirements of the industry but doesn’t really solve the problem. People will still find a way to “legally” abuse the system if they lack the personal integrity to do the best thing for their clients.
Education and Morality
Now, the fiduciary responsibility does not directly require a fee-only practice, but it has become synonymous to fee-only within the financial community. The fiduciary rule is a good thing. Fee-only practices, however, can be dangerous without a personal moral responsibility from the advisor.
Education, and educating the client on their options, is a key component to this philosophy. Many clients will never know what life insurance is, or how it can operate because it’s a lot of work 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 to look out for yourself, rather than your client, with a fee-based practice. So how can one truly be more responsible than the other, unless on the merits of one's moral compass?
For Todd Langford, the Series 65 exam showcased a legal vs. illegal mindset. Many of the questions revolved around the legality of a choice, rather than the morality of the choice. It seemed to encourage advisors to make choices, even ones that were morally grey, based on whether or not there were repercussions. It was like a guide book on how to sidestep the law. When there are too many rules, ones that don’t address the real problem, this seems to be the underlying message.
We’ll say it again: fiduciary responsibility is a good thing, and it should be something that people do naturally. And if done naturally, you’ll have happy clients who believe in what you do and champion your business. It’s self-sustaining. The commission is secondary, it’s what you get 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.
That’s the core philosophy of Truth Concepts—to educate and reveal the whole truth behind the numbers. It’s designed to be used in front of the client, if desired, so that they can see each step of the process. So the client can ask the right questions and learn.
Can You Oversell Insurance?
There’s an additional argument about overselling, 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, even if they have multiple policies. This prevents a person from owning too much insurance, and it’s based solely on their personal economics.
Where there is some truth to the fear of overselling, is if a client is sold a product with a high premium, and they don’t have the cash flow to support the payments. We all know that cash flow and net worth are two totally different things, and as such, a client may be able to purchase a large amount of insurance in theory, but in practice can only afford a lesser amount. It would be possible for an advisor to suggest that a client pays for something they can’t afford, but that their career remains sustainable is low if their clients are not satisfied.
If your pay is based on your efficiency, are you really going to take the time to educate a client or revolutionize the way they think about money? Would you rather challenge your client, or agree with everything they want? The latter would be a lot easier, but it may mean endorsing a product you don’t believe in.
Whether you work on fee or commission, if your morals aren’t there, neither one will be in the client’s best interest.
Helping Clients Understand Commissions
So how do we help our clients understand the commission-based model? It starts with being open and honest. When we try to conceal how the business operates, that becomes a problem. Life insurance commissions, in relation to what advisors earn on securities or an investor earns on real estate, are actually not what they’re made out to be. In the end, education and vigilance are required when it comes to doing what’s best for your client. 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, take the time to examine why.
We should reject the notion that this industry is a pie, and everyone must scramble to get a piece before the competition can. The world is large, and there are plenty of people out there who need what you can provide. If you allow yourself to even subconsciously slip into that paradigm of “lack” when growing your business, you might find yourself compromising your integrity. When you hold to your morals, your philosophy, and do the best thing for your clients, your business will be sustained.
Have the integrity to do the right thing by your client, whether there is a law in place or not. At Truth Concepts, we believe wholeheartedly in education—learning from the numbers and working from there. This kind of education is not only for the advisors whom we serve but to their clients, who can become empowered to learn these concepts for themselves. Check out our blog post on the Truth Concepts app for ideas for empowering education for your clients. To learn more about the Truth Concepts software, and how to use it in your advising business, sign up for Truth Training today!