How can protection fit alongside wealth advice?

Paul Shearman, proposition director at The Openwork Partnership, says: “There is little doubt that the volatility of stock markets over the last 12 months has meant wealth advisers have prioritised focusing on supporting their clients’ investment and pensions needs. 

 “The fact that it has also been increasingly difficult to get larger, medically complex cases through underwriting has compounded the issue and led to a move away from protection. 

“Thankfully, the impact of Covid-19 is starting to recede, but awareness of the consequences of illness on the ability of clients to support their lifestyles and save for their retirement can surely never have been greater.”

All of this provides an opportune time for investment advisers to re-engage with protection.  

Shearman adds: “Protection is the bedrock of sound financial planning, so it is every adviser's responsibility - whether they are mortgage or wealth focused - to ensure protection is an integral part of their advice process.”

Ian McKenna, founder of FTRC and Protection Guru, says it is "essential" for all wealth advisers to recognise that most financial plans fail without an ongoing income. 

He says: “You can set up the best investment and retirement planning in the world for a client, but if their income ceases and they cannot afford the contributions, how will that impact their income in retirement?

“After setting up an emergency fund, [protection] should be the next priority but all too often it gets missed from the planning.”

Roadblocks

McKenna explains that the challenge of getting more IFAs to provide advice on protection has not been helped by the way many insurer systems are now structured, which directly conflicts with the way most financial planning firms work.

Protection is the bedrock of sound financial planning, so it is every adviser's responsibility - whether they are mortgage or wealth focused - to ensure protection is an integral part of their advice process.--Paul Shearman

He adds: “Invariably insurers' new business systems do not talk to the practice management systems which most advisers put at the heart of their business, or the cashflow planning systems that are a key part of many advice processes. 

“If an organisation expects the customer, in this case the adviser, to change the way they work to enable them to recommend their product, they should not be surprised if advisers ignore them.

“Equally, insurers fail to provide the information electronically that advisers increasingly want to put into their online client portals and other client reports; this makes it hard for wealth advisers to deliver the level of service on life insurance products that their clients have come to expect.” 

“There are many actions insurers could take to make it easier for wealth advisers to give protection advice, but there are few signs insurers are willing to change. Until they do, we are unlikely to see the protection gap addressed as well as it could be.”

Another big part of the problem is how insurers can account for the profit on life insurance: specifically they typically account for all the profit on their balance sheet in year one. 

This means life insurers have no incentive to provide an ongoing service to the customer. If the regulator really wants to see the protection gap addressed, this needs to change, McKenna says.

He adds: “Life insurers need to spend less time lecturing wealth advisers about why they don’t sell their products and more time understanding how financial planners and wealth managers work. 

“We are never going to see the protection gap properly addressed until such time as insurers start to understand how advisers work, rather than telling the advisers to work in ways that are convenient to the insurer.”

Complexities of the market

Another challenge that has made many IFAs reluctant to enter the protection market is the perception that it is a difficult sector to operate in, due to the long process of getting insurance underwritten, particularly with larger sums assured where medicals and GP reports are required.

According to Naomi Greatorex, managing director of Heath Protection Solutions, the changing nature of protection products has been seen as difficult to keep up with by advisers who do not regularly deal with protection clients.

However, more support is now available by way of CPD programmes. Tools like CI Expert also help advisers review the differences in critical illness contracts and help give IFAs more confidence.

Greatorex adds that, now many wealth managers use cashflow modelling, this can be used to highlight the protection gap for clients.

She adds: “I believe the conversation of protection and risk sits easily with wealth planning, as clients are planning for the future. Protection deals with the risk of not having the future you planned due to ill health, loss of a partner and so on.”

Kathryn Knowles, managing director of Cura Financial Services, works with a number of IFAs in arranging protection insurance for their clients. 

You can set up the best investment and retirement planning in the world for a client, but if their income ceases and they cannot afford the contributions, how will that impact their income in retirement?--Ian  McKenna

There are parts of the advice process into which protection conversations can be inserted. For example, where gifts are being made, the consideration of gift inter vivos policies can be considered. 

Where inheritance tax is going to be due, Knowles says a whole of life insurance policy can be invaluable. 

She adds: “Clients with large incomes should really be given options in regards to income protection. Yes they have a lot of income now, but if they fall ill, the shock of the loss of income to the household [...] would be highly felt.”

Signposting service

She adds that for advisers who do not want to offer full protection advice, she has seen some signpost their clients for advice elsewhere, as part of their financial planning package: “IFAs do not have the time to meet the compliance requirements of training to advise on protection, on top of all of the regulatory requirements that they already face. There can also sometimes be a lack of understanding on what the protection market has to offer. 

“This can be the types of policies that are available, or the way that specific risks are viewed by insurers. That’s not to say that IFAs cannot do protection themselves, but the amount of insurers and different product types that are available in the protection market is complex.”

Clients with large incomes should really be given options in regards to income protection.--Kathryn Knowles

Matthew Chapman adds: “I do think more and more wealth advisers are beginning to see protection as a key ingredient in their overall financial planning recommendations. The one area where I feel I am seeing improvements is in the number of advisers who are now more prepared to refer their protection business on to specialists. 

“If wealth advisers are not prepared to discuss protection with their clients, then they should definitely signpost to another adviser who is, or potentially face negative outcomes for all involved. At the end of the day, advisers should 'write it or refer it'.”