retirement

thoughts on the CLU: underwriting the financial risks attached to a client’s “life"

Advocis — Fri, 04 Sep 2009 13:20:56 GMT

I had the occasion to revisit a December ’08 posting of Greg Pollock’s in the message board and came across a question about the CLU designation’s importance, relevance and name brand. A challenge was presented about the name and its apparent reference to insurance to the exclusion of other contemporary values and expertise that a professional financial services designation should stand for. The perception is that it’s one-dimensional, outdated, antiquated and irrelevant.

Some would argue that the term Chartered Life Underwriter is misleading. The term isn’t misleading. It is in fact quite accurate. The challenge is that the words within it are also ambiguous. And those whose agenda is to downplay the CLU for their own interests (i.e. competing designations) are intentionally exploiting this ambiguity to the uninformed. The uninformed, because they don’t know any better, are buying into it. We don’t need to change the name; we just need to explain the words beyond their current understanding.

Here’s my slant on it for consideration. What do the letters in the CLU designation stand for?

Chartered Life Underwriter is NOT the same as Chartered “Life Insurance” Underwriter. There is a perception that because Life Underwriter is part of the term, it automatically refers to the field level underwriting process behind life insurance. This perception is pervasive in the market and understandably so. Because of this ambiguity, inappropriate assumptions are made to the meaning of the words. Clear up the inappropriate assumptions by changing the slant and you change its perception. Change its perception and you change its value. There’s a reason why it’s called “Life” Underwriter and not “Life Insurance” Underwriter.

A CLU professional underwrites the financial risks attached to a person’s “life”, not the financial risks and obligations attached to that person’s life insurance. This includes the risks attached to an individual’s savings habits, investment strategies, pension programs, retirement income needs, human behaviour influenced through the emotions of greed and fear, investment risk profile, approaches to income protection, long-term care planning, challenges that come with a critical illness, estate wants & needs, lifestyle security, business dependencies, family obligations, wealth transfer, taxpayer responsibility, hopes & dreams.

A CLU professional’s value does not revolve around the sophisticated understanding of insurance products. A well constructed insurance program obviously plays an important role in a person’s security but it is not the whole meal deal. The professional CLU has the competency to handle the whole meal deal – which is a consumer’s entire financial “life” – hence the term Chartered Life Underwriter.

—Rick Johnson, CFP, CLU, CH.F.C., CSA, CFSB

What would Bozo do?

Advocis — Sun, 20 Jul 2008 14:20:24 GMT

Scientific insight into “know your client?

A recent post on the Psychology Today blog entitled “The Evolution of Economic Rationality: Do Monkeys Understand Money?” looks at how we, along with other primates, think about concepts like value, utility and money.

Now consider a problem advisors encounter: that of the client who refuses to act in his or her own self-interest. Call it weakness of the will, a refusal to face facts, or simply a desire to live for today, tomorrow be damned, we all know people mismanage their money even though they obviously know better. Here’s a perfect illustration of what I mean, in a comment posted by reader hank_j a couple of months ago, in response a post called Canadians failing to sock away extra cash:

my problem is that while many of my middle-aged clients have finally gotten the message that they should have started saving in their twenties, they now feel that being in their 40s means its TOO LATE to reap the power of compound interest so they figure they'll keep on spending and leave the rest to government pensions. And that's the roadblock I hit with them and have to work on getting through. Does anyone else have this problem?

Well, to answer hank_j’s question, yes, zoological research scientists have this problem!

As the Psychology Today blog reports:

…studies have shown that monkeys take any handout above zero that is offered to them in a version of what, in humans, is called the Ultimatum Game. In the Ultimatum Game, one person is designated the Proposer (who thus offers the ultimatum) and the other becomes the Responder (who decides whether to take it or leave it). The Proposer offers an amount of money to the Responder out of a total amount that the Proposer has been given by the experimenter - usually this is $10. The whole game involves the Proposer offering the Responder an amount, which the Responder has the option to accept or reject. Accept the split and both sides get what was offered; reject it and both sides get no money at all. This obviously not an evenly matched game. The Proposer has the power to make the ultimatum. All the Responder can do is either take whatever is offered or say no, which is costly to both players.

When humans play this game, the Responders will sometimes refuse offers that they deem too low. Depending on the person and the circumstances, people tend to refuse offers below 20% of the total. Monkeys, however, have no such scruples, and will take anything above zero.

The report then observes:

Yet another way of looking at it is to suggest that monkeys are actually pretty smart. Economists continue to scratch their heads at the results of studies with the Ultimatum game. They assume that people are basically oriented to maximize their own profits. If you and someone else worked equally to earn $100, and that person has the power to divide it and chooses to offer you only one dollar while keeping $99 for himself, well, you are still better off with one dollar than with nothing.

Which is in fact what one would expect to happen.

But now consider the report’s surprising conclusion:

Hence economic rationalists find it slightly scandalous that people ever refuse any offer. Economists think that if people were true to financial logic, they would act more like monkeys….Thus, when monkeys play, they behave as economists would have humans do - they accept any offer above zero (emphasis added).

But what about saving for retirement? Most scientists say there’s not much evidence that animals plan far into the future, but then again, how many Canadians plan ahead for their futures? Recall hank_j’s words:

many of my middle-aged clients … now feel that… its TOO LATE to reap the power of compound interest so they figure they'll keep on spending and leave the rest to government pensions.

Isn’t this behaviour scandalous too? Isn’t the idea that it is now “TOO LATE” to start saving of a piece of the thinking that concludes —as illustrated in the Ultimatum Game—with the refusal to accept anything lower than 20% of the possible total?

Obviously people have a more complicated understanding of utility and value than a monkey: people refuse to take 20% or less because of reasons of self-image and equity, in addition to the money’s use value.

But when we’re talking about retirement, we’re talking about the biggest Ultimatum Game most of us will ever play: after all, for most of us, once we stop working, that’s it—there’s no more new income coming into our retirement account. So regardless of where we are now on our life’s journey, isn’t the only sensible thing to start saving before it really is “TOO LATE”? Or is this just all monkey business? Share your thoughts, please!

Get ready to offer TFSAs in 2009

Advocis — Sun, 20 Jul 2008 14:18:46 GMT

Potential value-add to client relationships

A recent article by Mark Noble on www.advisor.ca, “Client relationships the big win in TFSA planning,” reviews the results of a recent research study on the tax-free savings account (TFSA), which becomes available next year. Noble concludes that while advisors shouldn't anticipate a significant amount of revenue generation from TFSAs, the new product should made available to an advisor’s clients as a value-added service.

The recently-released TFSA Market Assessment, from Harris/Decima research, contains the results of Canada-wide polling (sample = 2,500) which reveal the possible short-term reaction of Canadians to TFSAs. Noteworthy among the results are the following items:

Canadians appear eager to open TFSAs, with more than 50% stating that they “will likely open one next year”
however, only 3% of respondents said they knew a "great deal" about TFSAs, with 95% of them averring that they "know only a little" about or have "absolutely no awareness" of TFSAs
87% of those planning to invest in a TFSA will leave the money in cash or a cash equivalent, like a high-interest savings account or a GIC
just 39% of those intending to open a TFSA will use it for equity products
fully 28% of Canadians with an RRSP reported that next year they will invest less in their RRSPs to free up money to place inside TFSAs

That last statistic indicates quite clearly that advisors will have work to do by way of explaining to clients that the RRSP and the TFSA are best used in a complimentary—and not a competitive—manner.

Indeed, this is the area that Noble sees as the chance to add some cement to the advisor-client relationships: TFSAs represent for advisors a chance to show clients the usefulness of their advice, since advisor guidance can prove to be the main driver in bridging the tremendous gap between the public’s interest in TFSAs—recall that the majority of those pooled said they wanted to open a TFSA—and their knowledge of them.

However, the initial $5,000 cap on a TFSA means that the advisor’s profit from opening a TFSA will be quite modest. That’s why the advisor should see that his or her real return on opening a TFSA lies in augmenting the advisor/client relationship.

In addition, a major surprise of the report, according to Bob Murphy of Harris/Decima, lies in how the older population thought of TFSAs:

One of the things we found sort of surprising is that, in part, seniors didn't see this as applicable to their own needs. When we looked at verbatim comments, we saw many say this is great for young people. They were projecting its value on others as opposed to seeing its value for them… When you look at the opportunity for seniors, who are required to draw money from RRIFs and LIFFs, they may not need to spend all of that money. This allows them to park it in a more tax-efficient space. Although the return is negligible in the immediate term, any of those earnings in a TFSA will not affect their OAS. Many of them don't understand that.

Again, the role for the advisor in terms of providing counsel and education on this issue is apparent.

Finally, it's worth asking how the general population will react to TFSAs, given the current economic situation. "It's fairly clear that in the short term, the easy spot to put… money is going to be high-interest savings accounts that are TFSA-structured, given people's strong cash orientation right now," Murphy says.

For Mark Noble’s entire story on TFSAs and the Harris/Decima study, please click here.

The multi-generational advisor

Advocis — Fri, 27 Jun 2008 17:29:11 GMT

Legacy planning helps transfer values and wealth

Our last post raised the topic of advisor specialization. Following up on that topic, a recent piece in Investment Executive caught our eye, when Neil Acharya reported the comments of Michael Babikian, Vice-President of Transamerica Insurance and Investments Group, at this month’s Million Dollar Round Table annual meeting in Toronto.

Babikian’s subject was on ways financial planners can turn themselves into multi-generational advisors by successfully transferring the wealth of their high net worth clients from one generation to another. While most advisors are quite familiar with the methods employed by traditional estate planning, legacy planning is also a useful tool which more advisors should be comfortable using.

Of course, Babikian noted that a significant difference exists between legacy planning and good old-fashioned estate planning: “Estate planning is transferring wealth in the most tax efficient manner, legacy planning incorporates family values… as planners we make sure wealth transfers efficiently and effectively from generation one to two, but we don’t prepare the family for the money,” according to Babikian. As a result, legacy planning is driven by something more a concern about tax avoidance: “Tax is not the major cause of money loss. A planner for a high-net worth client is in risk mitigation.”

All of which suggests to us that, from the point of view of this blog, legacy planning nicely illustrates the point Rick McKenster made several posts ago about the true value of the CLU designation residing in what it enables the advisor to do for the client, especially on a level that goes deeper than just assets and planning, and that provides answers to the plethora of “what if” questions that major life events always bring with them.

As an example, consider the something that all seasoned advisors are familiar with—the delicate issue of estate planning, which is all too often shot through with sibling rivalries and resentments. Most clients are reluctant to raise the matter at all, at least until it is almost too late. But legacy planning gives advisors a way to transform estate planning into a process that is as much about the family’s own values and history—and how to preserve those intangibles—as it is about preserving the family’s tangible wealth. As Babikian asked, “how many people out there know their great-grandparents names? Not many. How many people out there would, if they got a cheque every month from them?”

Babikian further observed that many high net worth clients often express a two-fold anxiety about their inheritors: “Clients fear their children are not going to live as well as they do, but they also fear that they will spoil them.”

One remedy for this problem that advisors can offer to their clients is the “incentive trust,” which can function as a means to keep alive the client’s own sense of family values and vision, to extend their own personal philosophy of life well beyond their own life. Babikian’s example was a client who placed great value on education. The legacy plan ensured that any benefactors who pursued an academic career would have their salaries matched dollar for dollar. One can be sure the children of those academics will grow up infused with the grandparent’s veneration of higher learning.

On a more prosaic level, the incentive trust can provide a useful means to breaking the cycle of one of estate planning’s most dire problems, that of assets disappearing before they can be transferred from “generation one” to “generation three.” Babikian offered the eye-opening U.S. statistic that only 6% of wealth is transferred from grandparents to their grandchildren. The rest? Gone in a generation.

What are your thoughts about legacy planning? Are there any readers out there who have been doing it?

To read Neil Acharya’s article in its entirety, please click here.

Differentiating yourself with the CLU

Advocis — Fri, 20 Jun 2008 16:55:51 GMT

For the CLU, the proof is in the process

Have you ever been face to face with a client or prospective client and realized that the solution was about more than product or transaction, more than an event? That the need or solution would be found in the process?

If you have, then you need the CLU. It is so much more than a life insurance designation.

It is a designation which enables the advisor to recognize the value that’s locked into the overall planning process—in the various planning for security, business success and retirement that all tie together into an integrated process. In short, the CLU takes the advisor a step beyond, by building a holistic, principle-based fiduciary relationship with the client on a foundation of consistency and trust.

A previous blogger put it very well: "We underwrite the what if of the client's income." The what if?—what should we do upon death, disability, diagnosis and or retirement—that’s the great question of CLU-driven planning.

The CLU underwriter's professional goal is to create financial security. And the CLU designation is a set of competencies like no other. Which leads us to another fundamental question:

Do you want to differentiate yourself?

Rick McKenster

Trustee, The CLU Institute

Canadians failing to sock away extra cash

Advocis — Wed, 28 May 2008 18:30:37 GMT

Too many of us living paycheque to paycheque and hoping there’s no rainy day…

In a recent survey commissioned by RBC, 83% of respondents reported worrying that they don't save enough, and 86% stated feeling that can't save as much as they'd like. The online poll of 2,020 Canadian adult bank accountholders was conducted by Ipsos Reid in March.

According to the poll, 34% of respondents claimed that after paying for food, housing, and household expenses, there was nothing left from their paycheque to earmark for savings.

Just 22% reported having increased this year the amount they’re saving, and 20% admitted that they were now spending more than last year.

Moreover, less than half of Canadians said they had a "rainy day account”, and 55% of those who did have one admitted that their account only held enough cash for roughly one month's worth of expenses. Little wonder, then, that 65% of respondents said they plan to rely on credit sources for support in emergencies.

Perhaps most revealing is the fact that only one million Canadians maintain a minimum $1,000 bank account balance—and 60% of these consider this amount to be their safety net in the event of trouble.

For more news coverage on this poll, click here, here, and here.

Ontario Superior Court rejects client’s claim for compensation over losses

Advocis — Thu, 22 May 2008 13:15:36 GMT

Court pronounces on duty advisors owe clients, tells client he is “author of own misfortunes”

Yesterday’s Financial Post has an article by Ellen Bessner summarizing the judgment of Superior Court Justice Thomas Lederer in a recent case sure to be of interest to anyone who provides financial advice. The case involved a claim brought by a client against his financial advisors (Mr. Leach and his successor Cary) and his investment dealer, Merrill Lynch.

The claim was brought by the client, Ron Parent, who wanted compensation from his advisors and Merrill Lynch for losses suffered after he pursued a high-risk, high- return investment strategy. Broadly speaking, the Court found as fact that Parent choose not to follow the investment plan supplied by his financial advisors and instead adopted a much riskier approach of his own making. Ultimately, the Court found on that facts that it was Parent’s sole decision to opt for the risk-intense investment strategy, thereby making Parent "the cause and only cause of his losses.”

Central to the Court’s ruling is that while an advisor “may have a duty to warn the client… this does not extend to the responsibility to see that the client stops what the broker may assess as imprudent trading."

The upshot of the ruling for advisors? In part it is that a duty to warn a client of investment risks depends on that client’s investment experience and acumen—particularly with regard to previous investment risks he or she have experienced— and more broadly on the nature and history of the client’s relationship with the advisor. As Judge Lederer stated: "the duty to warn is not absolute but flexible, depending upon the particular situation."

Or as Ellen Bessner succinctly puts it: “the advisor did not have any obligation to save the client from himself.”

Click here to read Ellen Bessner’s column in its entirety at the Financial Post.

Retirement income sources not up to task, report says

Advocis — Thu, 22 May 2008 13:07:46 GMT

Current defined contribution and group RRSP plans will provide inadequate retirement income

Earlier this month the Association of Canadian Pension Management (ACPM) released a report asserting that the retirement savings plans typically offered to Canadians will not provide us with a sufficient amount of retirement income.

The report, Delivering the Potential of DC Retirement Savings Plans, reveals the need for a comprehensive and balanced plan of action regarding retirement saving plans in Canada. The problems the ACPM says we as a country must deal with in very short order are:

a lack of comprehensive coverage among the working population,
the inadequacy of most of our traditional retirement income sources, and
a limited range of alternative retirement income sources.

As the report notes on its first page, “It is becoming apparent that member-directed retirement savings plans will play a larger role in the Canadian retirement income system in the future.” Yet today just 25% or so of employees working for the private sector are in registered pension plans (Statistics Canada, CANSIM tables 280-0008 to 280-0026; ACMP Report, p 3).

Moreover, with our overall population aging and the baby boomers starting to retire, some observers of the Canadian pension scene are wondering if our public and private employment pension plans are now rapidly approaching a critical event horizon—one beyond which meaningful and timely government and private sector action could prove exceedingly difficult.

Meanwhile, the ACPM is calling for co-ordinated efforts by government and plan providers to help level the playing field among retirement options, so that employers and employees can choose the pension model that best meets their needs.

Have any of you flipped through the ACPM’s report, or followed its release in the news? Is it alarmist thinking to assert that much of the retirement population will be underfunded—or plain old-fashioned honest advocacy in the public’s best interests?

And finally, what are your observations about the state of retirement preparation among your peers and your clientele?

Click here to download the report at the ACPM’s Web site.

Only 15% of retirees living their dreams

Advocis — Tue, 13 May 2008 16:18:37 GMT

Too much faith in the future or too little forethought?

Most of us are do it-your-selfers when it comes to retirement.

In a recent cross-Canada survey conducted for TD Waterhouse, 43% of retirees responded that they had planned properly and saved sufficiently, yet just 15% reported that they were realizing their retirement dreams. Moreover, the survey found that fully 62% of current retirees had not done their retirement planning with the help of a professional advisor, and roughly a third of them did not plan for their retirement at all.

So if a third of retirees can decide by an act of omission or commission to avoid even minimal retirement planning, does this survey not suggest a larger issue – namely, that today’s advisor can and should work harder to persuade people now entering the workforce to begin planning and saving for their retirement today?

Or is it simply a sad fact of human nature that some people will always put off planning for the future until it is too late?

Surely a survey that suggests that 85% of retirees are not living their retirement dream points to a larger issue…. perhaps it is not a lack of available, helpful advice but simply an absence of realistic expectations regarding what retirement is about. What do you think?

And finally, for those of you beginning your advisor careers, you understand all too well the difficulties of choosing between spending today versus saving for tomorrow: so, the payoff question for you is – are you saving enough?

Click here and scroll down to read the entire article “Save early, plan your lifestyle, retirees say” at Advisor.ca.

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Survey says CFPs now planning less

Advocis — Mon, 12 May 2008 18:11:37 GMT

From Investment Executive, May 5, 2008:

Financial planners caught in a Catch-22

Consumers prefer commission-based fees, but this reinforces the “sales” reputation of planners

By Regan Ray

From 2004 to 2006, the survey showed CFPs have, in fact, been doing less financial planning. Only 59% said they provided the service to over 50% of their clients in 2006, compared with 71% in 2004.

The survey results prompted Cary List, president and CEO of the FPSC, to ask “Can we do something to reverse this trend or do we want to? Do we care?”

In light of the survey results and Mr. List’s questions, what do you think the future has in store for CFPs?

Beyond comprehensive financial planning, what services can or should CFPs offer their clients?

Click here for the full story from Investment Executive.

To comment on this article, or see others' comments, click on "Feedback" above, or on the title of the posting.