So, what is actionable here? You need not only an advisor who is willing and able to find you the best courses of action as to the planning aspect of your finances, but one—perhaps not the same person—who will find the best product in each category that you need. Let’s focus now on individual professionals and their services and relationship to you.

But first, consider this before we examine types of professionals: For complex constitutional law reasons, the new fiduciary rule can only cover IRAs and tax-qualified plan advice and product sales. Therefore, the rule that applies to a professional who advises or sells in connection with these products does not apply even when that same individual provides or advises on any other form of investment, referred to as “nonqualified or non-qual,” and that extends to credit products and disability or long-term care insurance. Does that mean you are “at risk” of bad advice or worse using a professional for everything other than IRAs and 401(k) advice? No. People are people, including advisors. They go to synagogue, care about your kids and you, love their spouses, and are kind to neighbors and animals. You can come to trust them using the usual mix of indicators. Use the advice that follows in the next section, but because of the high-stakes nature of this advice, keep the potential of complaint to authorities in your back pocket.

Many insurance agents have become quite sophisticated in their analytical abilities. Most fee-based financial planners are or were licensed insurance agents. It is an old and honorable profession, whether expanded to include other topics within financial planning or not. Historically, polls of public trust in professionals have usually placed insurance agents in the top two or three. Perhaps this is because of the very deep personal issues surrounding the financial losses they insure against: death, disability, loss of homes and businesses, costs of replacing deceased or disabled key employees, and certainly the costs of health care for human beings. As previously noted, agents are fiduciaries to the carriers for which they sell, whether they are statutory employees of the product issuer or not. More than half represent multiple carriers and do not hesitate to switch to representing another if the new carrier has better products for consumers. They have always known who triggered their compensation, even if the check has the carrier’s logo on it: You, their client. I use the word “client” even though agents owe fiduciary loyalty to the carrier. How can that be? Insurance agencies, at least non-captive brokerages, have evolved to focus on consumer value and appropriate sales.

An appropriate sale is one that can be documented to fill a need. The applications even ask questions about need, and they include forms used to document whether a “replacement” or product switch is truly in the client’s best interest. These can be falsified, so always read what you sign, and get a copy—at least after processing of the forms.

Many people see insurance agents as beneath them on the social ladder. Don’t view anyone this way, even if he or she paints your fence or digs your ditches. Humans all have infinite worth, and their work is service to their fellow human beings; a genuine service work has dignity, from art to plumbing to being a politician. For this reason, though, practical fee-advisors and other financial professionals who hold insurance licenses often try to de-emphasize the insurance aspect of their work. This shyness can cause you to think that insurance is some minor issue, a lower priority than seeking investment gain. In the risk management chapter, we will examine the fact that after cash reserves and budgeting-related issues, insurance is the prudent person’s first priority. But first, back to insurance agents.

Some people mistakenly believe that an insurance license makes the agent a competent generalist—some even believe that there is one type of license for all insurances. There are several, and you need specialists in each area unless you find one or two agents who have broad expertise and licensure. This is because the agent should have access to multiple carriers to shop the market for you in the product categories you need.

Distinct insurance licenses in most states are as follows:

FMOs make pure insurance and interest-only annuity products available to agents. Rarely do FMOs have the ability to broker securities (variable annuities, mutual funds, money manager access, and other loss-and-gain-capable products). Only broker-dealers can sell securities products, and their reps are referred to as “Registered Representatives.” You can tell these by the business card or ad: If securities are offered, the communication must name the broker-dealer. Money management can be offered through fee-only Investment Advisor Representatives (IARs) who work for investment advisor firms; this special type of securities account involves the rep, or a firm the rep selected, actively making decisions and trading securities, rather than calling you for permission to trade and rather than selling you shares in a management company such as a mutual fund. But many FMO reps have “boutique” investment advisory firms, or are reps for those firms, and also make the FMO’s insurance products available to clients. These firms are typically very sophisticated in their training and expertise, but you must evaluate that expertise. More on how to do that when we discuss IARs.

Here’s the drawback for most FMO reps, though, and this is a bit of an industry secret: FMOs have very limited training programs for technical expertise. Reps bring their own, having left major training firms, and maintain that expertise through continuing education (CE) at their own expense. Most available CE courses can be quickly zipped through—they are not deep-dives—and so unless an FMO rep is either from a major training firm or is part of an actual financial planning firm, odds are that the FMO representative has difficulty understanding even some product details, let alone broader financial planning issues. These FMOs have started to provide their reps software that analyzes when a client is likely to exhaust income, and so their value is stronger than in years past. But the software is far too simple to truly optimize finances and even lacks “Monte Carlo simulation” analysis which, as we will see in the retirement planning chapter, is essential to proper asset allocation decisions. In summary, reps of large FMOs have the most competitive interest-bearing annuities and pure insurance products but, with the noted exceptions, they also have limited analytical capabilities.

What about stockbrokers and financial planning firms that sell insurance products, like disability coverage or life insurance? These brokerages have thousands of representatives, but unless they can show you a list of carriers for each product category that is at least a dozen long, do not buy the policy from that brokerage or advisory firm (the rep may merit your securities business, though). Recall that these broker-dealers limit what they sell to low- or short-surrender charge products, which inevitably pay consumers lower income than longer-surrender charge products. These broker-dealers usually have big name carriers only for insurance products, because they need to potentially defend their reputations by asserting that they offer only A+ rated carriers.

Most agents have either very large brokerages that employ them or are independent contractors using FMOs. The roughly other half of agents are either captive (employees of one carrier and have limited choice of other carriers) or they are employees of stock brokerages or financial planning firms that usually have limited choices of carriers, as discussed previously. Even FMOs look at profit margin in selecting products and carriers they offer, but most are laser-focused on winning the case: finding the most competitive product. They have even automated this function, enabling agents who use FMOs to find, nearly always, the single most competitive product that exists, or something very close to it. But the largest FMOs have the biggest volume, which they need in order to make such a large selection of carriers and products available. Otherwise, the agent personally must gain an “appointment” (brokerage privileges) with each carrier and commit to selling a huge volume for each carrier that he or she wants to have available to clients. Here is where you are unlikely to find good value in products unless you go for “large,” really large: Ask the agent to show you whether their FMO has at least 5,000 agents or so (some hit 15,000), so that you can be confident that the rep has access to all or nearly all competitive carriers and products.

(To be continued…)

This excerpt is taken from “The Secrets of Successful Financial Planning: Inside Tips From an Expert,” by Dan Gallagher.
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