Complex business (e.g., COLI, buy/sell agreements, pension plans) and estate planning cases (e.g., insurance funded trusts) can pose significant compliance risk to agents who are involved in them even when the agent is not the lead advisor or driving force in the sale. This is due to the fact that the agent is responsible for the sale of the insurance products involved in the sale.
The greater the amount of the sale, the more likely the policy owners will take legal action if policy owners' expectations are not met or if there are later concerns about its effectiveness, suitability or compliance with tax and legal regulations. The original advisors may be replaced by new ones who may question the case and potentially undermine its appropriateness in the minds of the clients.
In addition, business and estate planning cases are often big sales which have the potential to blind an agent to a potential problem. It is human nature to focus on the value of a goal and minimize potential problems. Bigger sales are often more complicated, but they sometimes do not receive the additional scrutiny they deserve to make certain they are fully compliant.
Agents need to examine the compliance aspects of a number of steps in the complex case planning process to avoid potential problems. Only if they carefully evaluate these aspects of the sale and document them can they be assured that they have minimized the compliance risk of their involvement in the case. The following is a summary of the key compliance aspects of some of the key steps in the complex case planning process.
1. Working with other advisors
Complex business cases often involve company staff and executives as well as outside advisors, such as accountants, lawyers and insurance agents. Estate planning cases also can involve a number of advisors which can multiply if family members have separate advisors. Each advisor has a role to play in the sale and it is critical that these different roles are understood to avoid potential compliance problems.
Advisors should only provide advice and counsel in their area of expertise. For example, an insurance agent should provide counsel on insurance-related matters, but should avoid providing advice and counsel on issues for which he or she does not have the required training, license or background. If the agent does provide advice on issues that he or she is not qualified by license or training to advise on, that can create significant compliance and liability issues.
It is best when working with other advisors to have a document that describes the roles and responsibilities of each of the advisors in the case. Often a brief memo circulated among the advisors is sufficient. This memo can help the agent if questions later arise about who gave what advice.
It is also important to also have a document that describes the compensation agreements between the various advisors. Questions about improperly shared commissions, rebates, kickbacks, etc., can be avoided if there is a document that spells out the basis of the compensation received by each advisor. Sometimes the most important part of the compensation agreement states that there is no shared compensation. If other advisors balk at documenting their compensation arrangements, the agent is wise to document and circulate his or her compensation arrangement to answer any questions that may arise after the sale.
2. Setting appropriate expectations
Early in the sales process, the agent must set appropriate, realistic expectations of what the insurance products he or she is proposing can and cannot do. Advisors may have incorrect and unrealistic expectations regarding costs, features and benefits, because they are not knowledgeable about insurance products. The greater the number of advisors and clients involved in the sale, the greater the potential for miscommunication and unrealistic expectations.
They may communicate these incorrect expectations to the clients, further complicating the agent's job. Unfulfilled expectations are a leading cause of complaints and dissatisfaction with insurance purchases.
3. Maintaining documentation of information
If questions arise after the sale about the features, benefits, costs, etc., of the insurance products sold, the agent should be able to document the information used to communicate this information.
This documentation includes all memos, e-mails, presentations, copies of illustrations shown, analyses of costs and benefits presented to the client, samples of vendor graphics (e.g., a picture of how cash is used to fund the product and the resulting benefits) or company sales materials used at any point in the sales process. Often this documentation will answer any questions about what was said as well as support the appropriateness of the sale of the product.
An agent should also consider whether or not to have any sales material that he or she has created specifically for the case approved in advance by the company whose product he or she is presenting. This can protect the agent from presenting potentially incorrect or misleading information.
4. Competition with others
Often on a business or estate planning case, there is competition between agents and insurance companies as the clients and their advisors seek to get the most cost-effective product. An agent is wise to avoid company-bashing or making disparaging remarks about other agents or companies.
Only publicly available information about a company's financial situation should be used. It is often best to obtain competitive information from the company whose product is being presented, so that the agent can rely on its accuracy and compliance with regulations.
5. Documented disclosure of key features
In most complex cases, there is a long planning process involving multiple options and alternatives. Reviews by advisors, questions by clients and changes in objectives can result in a number of alternate approaches and plans before the plan is finalized and its specifics are determined.
Because of the potential for misunderstanding due to the long, involved nature of the planning process, the agent should document that he or she disclosed all of the key features of the final plan. This is often a review of information provided during the planning process, but it can be critical if -- during the planning process -- the advisors and clients have confused the features and benefits of the different approaches. You don't want promises to be made and expected to be kept based on products or features that might not be in the final plan.
6. Integration of insurance, legal and tax aspects
Many complex cases have complicated and involved legal and tax aspects that must be integrated into a final plan, so that the plan accomplishes its objective. The insurance products sold are only one part of this plan.
Though it is not the agent's responsibility to document all of the aspects of the plan, it is wise to recommend that one of the advisors documents how the various parts of the plan are to work together to achieve the client's goals. This document can help the client better understand how the plan is supposed to operate, thereby, reducing future complaints.
Should the plan fail to meet the client's objectives, this document can help protect the agent from accusations that he or she failed to provide a suitable product.
7. Suitability review
The agent must review the suitability of the insurance recommendations so that he or she is confident that all of his or her key responsibilities have been fulfilled. This review should be documented. It should describe the process the agent used to read a recommendation, why the recommended product was chosen and the alternative products considered and why they were not recommended. It should be shared with the advisors and clients.
Suitability doesn't end with the sale. Clients' situations change. The plan should specify how suitability will be reviewed periodically and reassessed. Agents have an ongoing responsibility to stay in touch with their clients to review their situation on a regular basis.
On complex cases, it is often wise for the agent to ask someone who is knowledgeable to review the agent's suitability analysis to confirm that the choice of product was appropriate.
8. Replacement review
Complex cases may involve a replacement of a prior insurance product. The agent should review his or her recommendations to determine if the replacement is appropriate and in the best interests of the client.
Often agents include a detailed rationale for the recommended replacement in their suitability documentation. This can be especially valuable if state replacement regulations do not require that the agent provide a rationale on the state-required replacement form. This detailed rationale should be shared with the advisors and client. This can avoid possible future questions about the appropriateness of the replacement.
9. Completion of paperwork
The agent is responsible to see that any applications and company forms are properly completed and witnessed. It is improper to allow other advisors to complete applications and forms and to allow these forms to be completed and signed without the agent as witness. Any state-required forms for replacements and suitability must also be completed correctly, signed by the client and witnessed by the agent.
If there are questions regarding who should sign applications and forms, the agent should request written directions from the company, so that if questions arise later on, the agent is protected.
10. Follow-up regarding changes in laws and regulations
The agent has a responsibility to monitor plan performance involving the insurance products he or she sold. As regulations and laws change, the agent is wise to bring these changes to the attention of the client and his or her advisors. Though the client's advisors are typically responsible for monitoring the legal and tax changes that may impact the plan, the agent can provide a valuable service by alerting them.
Dennis (Denny) Groner, Ph.D., CLU, ChFC is a consultant to U.S. and international financial services companies on compliance and market conduct. He has written a number of books and articles on the subject. Mr. Groner can be reached at DenGroner@aol.com.
