You know the type: he talks constantly about Bernie Madoff and Earl Jones. He regrets believing that fast financial freedom was possible. Or, he lost a boatload on a bad tip and mistrusts all financial professionals.
If you just bought a book of business and a client fits this description, don’t take it personally. Instead, invite him or her to talk to you so you can understand what really happened.
Are we talking about insurance?
A few years ago, a client called to find out why he was still paying monthly premiums for a universal life insurance policy. He had been told by his former advisor that his monthly premiums would be paid automatically with the income from funds he deposited 20 years ago – in other words, that his policy would pay for itself. That never happened: the return on investment was far too small, and his advisor never modified his portfolio to reflect market conditions. As a result, he still has several years left of paying premiums. The client felt he was being cheated.
We heard the same story with whole life insurance and its cash value. An advisor in the past told some of my clients that “the dividends will pay for the premiums.” When it doesn’t work that way, clients become suspicious.
At the root of most such problems is a lack of explanation by the advisor. My clients’ past advisors needed to tell them that the only way a policy can pay for itself is to include a 20-year payment option on the insurance contract.
Another area that’s ripe for confusion is with disability insurance contracts. They are complex and can often confuse clients, leading to dissatisfaction. Even if you explain things well the first time, within a few years, your client will forget the details. Make it a point to review the terms of active DI policies with clients every four years.
Also pay special attention to old insurance contracts. Some, especially those issued 15 or 20 years ago, might have clauses that activate when your client reaches age 65. If such clauses are included in the contract, the death benefit will drop unless the client pays a surplus to guarantee the amount before reaching 65, even if it is a whole life contract. You must always refer to the original insurance contract.
Loans backed by insurance policies can often turn into time bombs. A few years ago, one of my clients saw the death benefit of his insurance contract cut in half because of a loan he took seven years ago. Such a loan is based on the cash value, but this value can decline because of the official interest rate. To make things worse, the client hadn’t paid the annual interest on the loan for a few years. That meant the loan interest was deducted from the cash value. Bottom line: he had to come up with a few thousand dollars to cover the loss in value. Without the money to do this, he had to accept a drop in the death benefit of his contract, and naturally, he was outraged. If one of your clients has a loan backed by his insurance policy, make sure you fully explain the pros and cons.
Is it a question of investments?
Client distrust can stem from inferior investment returns, lack of follow up or hidden fees that are discovered many years after.
The overwhelming majority of investment portfolios I have analyzed kept exactly the same funds for 10 or 15 years. Such a portfolio is like a boat drifting unmanned on the ocean.
If your client is unhappy with a past advisor’s inaction, explain that you will personally review her investments at least twice a year, and either make updates or explain why staying the course is a good idea. Poor investment performance is less important than we think; it’s apathy that angers people more. If the stock market drops, do not wait — call clients right away to talk about it. Some clients will not need your phone call, but make sure you call those who could get nervous about the stock market.
Is this a blatant case of fraud?
As is to be expected, a client who has been defrauded will always be suspicious. When you meet one, let him talk about what happened, and find out how he feels about it. Give your sincere opinion, but then ask him if he’ll work with you despite what happened before. You’ll likely be pleasantly surprised with the result.
React and prevent
When you buy or are given a block of clients to manage, check all client records to find out potential problems and prevent them. When I check a block of clients, I watch for clients with outstanding loans on their insurance contracts, clients with disability insurance contracts, and clients older than 55 who only have term insurance. I also check for contracts with underage children as beneficiaries. When the book includes investments, I flag situations where the investment return is lower than the inflation rate or when investments haven’t been changed for at least a decade.
Buying a book of clients is an investment, but do not invest in it without paying close attention to details of all contracts to avoid meeting suspicious clients.
Bernard Viau, FCSI, is a retired financial advisor whose practice operated primarily in Quebec. He is now based in Ottawa.