As the name of our company suggests, when we at Fiduciary Life Insurance Services agree to help someone acquire life insurance, we only do so under a fiduciary standard of care – an obligation we put in writing. However, because of how contract law works, the obligation becomes legally valid only if there is an exchange of value. In other words, if a client wants to have a fiduciary commitment from us, that client must offer something in return. The “something” that we ask for is very simple: loyalty (with regard to the pending transaction). That exchange of commitments – fiduciary care for client loyalty – is expressed in the form of a very simple agreement we call an Exclusive Right to Represent (ERR) which we supply to every client at the outset of our working relationship.
A Familiar Contract in an Unfamiliar Setting
In the world of insurance, such a contract will seem unfamiliar for one very simple reason: until now, it hasn’t existed. Or at least we’ve never seen one if it does. But in other industries, it is quite common. In fact, most people have already used an ERR in a very familiar industry: real estate.
. . . most people have already used an Exclusive Right to Represent in a very familiar industry: real estate.ERRs are common in the real estate world, especially for buyer’s agents and tenant representatives. Most seasoned real estate professionals will ask a client to agree to exclusive representation before they will agree to represent a prospective home buyer or building tentant. Why? Because that understanding provides them with assurance that when they spend time, energy, and money trying to locate your property, they will be compensated when the inevitable transaction takes place. The ERR forms a mutually-agreeable loyalty bond. The agent sits on the client’s side of the transaction table – not the property owner’s. In return, the client makes sure that the built-in commissions (of the home sale or lease) go only to his/her agent.
The Loyalty Exchange & Its Benefits
Like a buyer’s agent or a tenant representative in real estate, we at Fiduciary Life Insurance Services pour (and have poured) an enormous amount of time, energy and money into technical product knowledge, market awareness, software, and professional relationships that help us find the best possible products for our clients. All of those resources – time, energy, and money – are part of the fiduciary “drive” that is intrinsic to the way we do business. The client’s interests come first. We leave no stone unturned. We turn off the sales “noise” and replace it with common sense. And we keep everything in the open – even when our industry (unlike the real estate industry) makes it difficult to do so.
Part of what fuels our fiduciary drive is not merely the assurance of future compensation; but it is also the raw trust expressed by each client in the agreement itself. It is very motivating to be told by a client that something very important depends on us and only us. It is an honor that builds esteem and self-confidence: psychological commodities that improve any person’s effectiveness, whether in work or play. When a client names us as their Exclusive Representative, they are saying they believe in us. And that brings out our best.
It is very motivating to be told by a client that something very important depends on us and only us.
Of course, the money still matters. And when we see that we have been named Exclusive Representative for a client, we are relieved of any personal financial distractions or worries associated with a transaction. In the absence of any oddities such as discovering that someone is uninsurable (rare) or that the best product for a client does not entail a commission (rarer still), we know that we are going to be paid for the hard work and value we are putting into a deal.
All in all, the ERR establishes both a financially safe and highly motivating working environment. And it provides the clients with a legally-binding assurance that we are working exclusively on their side of the transaction, not any insurance company’s. For us, it is an intuitive arrangement expressed on two sides of a single page. And our particular contract also has an easy out: if the client isn’t pleased with the way things are going, he/she can opt out with 24 hours written notice. It’s that easy. We don’t use the contract to put chains on a relationship. We use it to establish, clarify, and empower the most productive working relationship possible.
Why has no one thought of (or used) an Exclusive Representation arrangement before?
Why this sort of contract has not been put to use in the life insurance industry is an interesting question for which there are many contributing factors. One thing is very clear – the people running the big insurance companies are not in favor of it. And for good reason. A true client-first brokerage engagement will invariably result in the replacement of expensive, high margin life insurance policies (predominantly sold by the large mutual companies with captive sales representatives) with more competitively priced coverage. This is true for both term life insurance where the premium arbitrage between the large mutual companies and other, more competitive companies is often significant. It is just as much if not more so true for cash value products where fully commissioned cash value contracts simply cannot compete with the “no load” and “low load” products that brokers operating as fiduciaries would be required to propose.
In my personal experience, I think the fact I haven’t used an ERR until so late in my career had a great deal to do with the sales training I initially received through New York Life. Right or wrong, that training was bathed in a different exchange of loyalties, one that excluded consumers from participation. The arrangement was thus: New York Life would invest considerable time, energy, and money into equipping me to sell. In exchange, I would sell its products exclusively.
An Exclusive Right to Represent provides you with written, legally-binding assurance that your insurance professional is working wholly on your side of the transaction, not any insurance company’s.
I wish I had thought that particular loyalty-exchange through much more carefully when I entered the business. I am a fierce “shopper” at heart. I like finding deals. I’m also a technician when it comes to product comparison and analysis. Aligning myself with any one carrier was just not a good idea, even one as strong and reputable as New York Life. So that particular arrangement – sales training in exchange for selling only New York Life’s products, was not a good deal. Not for me, at least. And in retrospect, it certainly was not a favorable arrangement for my clients.
But regardless of whether I should have started using an ERR sooner in my individual career, the larger question is “why has it not been put to use across the industry, more frequently? Or for that matter, at all?”
Consumers and their advisers don’t demand fiduciary representation from the life insurance industry because they simply don’t know how desperately they need it.I think the bottom line is pretty simple: consumers don’t demand it. Why don’t consumers demand it? Or their advisers? Because they don’t see the value of fiduciary representation in this particular area. Or perhaps because they don’t think it will matter if they do. There can be little doubt that the marketplace has been trained to settle for suitability.
The deepest reason, I think, is quite simple. Consumers and their advisers don’t demand fiduciary representation from the life insurance industry because they simply don’t know how desperately they need it.
That is something I plan to quantify in a future post.
© Michael C. Burton, 2016 and all years.