Like many people, I was at the local trade show this weekend. And, although I wasn't asking for it, I found myself drawn into a conversation with one of those Multi-Level Marketing life insurance companies. What can I say; I'm a sucker for free draws.
These guys don't know who I am. They flag me down and ask me if I know anything about their company. Buddy, I know EVERYTHING about your company. But I'm not there to bait them. I wasn't even planning on stopping at their booth, they just happened to be located beside a merchant that I did want to talk to. I try to disengage by saying, "No thanks, I'm actually in the industry."
Instead of taking the hint, this guy took that as a sign of encouragement. He actually gets even more animated. In his eyes my status has just gone from potential customer to potential recruit. Now he wants to talk to me about joining his empire.
"No, no, no" I say, finding significant humour in the situation. It's certainly true that his firm is well-known in the industry, but the reason that the company is notorious is because of the cultish conviction of its newbie recruits, filled with a missionary zeal to save the planet one family at a time.
What Buddy doesn't know is that I am being modest when I am saying that I am in the industry. I was recently appointed to the Insurance Council of British Columbia by Minister of Finance Colin Hansen. I'm one of the guys that The Insurance Journal calls when they are looking for perspective on a story. Statistically I am in the top one per cent of insurance agents worldwide.
I'm not saying I'm the smartest guy in the room, but I do know a thing or two about insurance. Buddy wanting to talk to me about insurance is like me trying to tell a journeyman mechanic how to do an oil change, and I'm the guy that needed three hours to figure out how check the air filter on my wife's motorcycle.
Up to now, it's all pretty innocent though; mostly just the hard-sell from a naïve and enthusiastic young man. He wants me to be in his pyramid, and failing that, to buy insurance from him. I just want to win his free draw for a garden set.
But then as I finally break free Buddy says something that starts to bother me. He says, 'We'll be talking to your clients." You see, these guys view themselves as financial crusaders, out to liberate the oppressed public from the clutches of greedy, unscrupulous financial authorities such as, well, me.
It's not that I don't think that my work can stand up to scrutiny. Okay, sure, I was keen on a stock that was trading at $9 in 2006 that right now is sitting around a buck. But I'm pretty sure that everyone concerned has already figured out that one didn't turn out. I work with some pretty smart people. I don't think they need Buddy to tell them that having part of their money go from $9 to $1 is kind of a drag.
No, the real problem is that although I know where Buddy is wrong, the average guy might not. But even worse and this is the point of this week's column Buddy himself doesn't know when he is wrong. And he is the guy selling this stuff!
This brought to mind a virtually identical exchange I had with someone else from Buddy's firm years ago. Buddy's firm is big on the idea of term insurance. Buying term and investing the difference is their view point.
It's a great slogan. Unfortunately, a catchy slogan doesn't justify blind allegiance to uncompetitive products.In a nutshell, there can be two main problems with the idea of buying term and investing the difference. One is when you need the insurance for longer than is practical to keep a term policy for. Two is when there isn't much difference to invest.
Our buying term and investing the difference Friend was going on and on about this and that. It was getting pretty outrageous and since, like Buddy, he didn't know what he didn't know, I decided to play Devil's Advocate.
I happened to have one of their policies on my desk at the time and, frankly, it just wasn't going to get the job done for the clients. The clients could have bought permanent insurance for a bit more money now, but the permanent policy would have been significantly cheaper in the long run. Alternatively, they could have bought term insurance at far better rates than what was offered by our Friend. However you cut the cards, Friend is trying to play a losing hand.
Comparing term insurance and permanent insurance, I challenged Friend to show me how it is cheaper the clients to buy Friend's policy and invest the difference. With Friend's term policy the clients could invest an extra $65 per month for the first 10 years. For the next five years they could invest an extra $39 per month. For the next five years they can invest an extra $14 per month. Since after year 20 Friend's policy was actually more expensive, they basically have just two decades to get to financial independence, whereby they would no longer need the insurance, for the buy term and invest the difference idea to work.
The cost difference for Friend's policy compared to a permanent policy over the first 20 years? Less than $11,000. Buy term and invest the difference sounds good, but the difference is a mere $11,000. Can Friend make the clients independently wealthy with just $11,000?
But that was just playing Devil's Advocate. These client's needs really are for term insurance, not permanent insurance. That doesn't mean that they should overpay for term insurance though.
I looked at term insurance that was cheaper over every time period. How much cheaper? Well, if these clients, who are in their twenties, keep their coverage for forty years then they will pay Friend's company $127,247. That is $51,237 more than they need to pay.
Competitors will sell the same product for $76,010 that Friend is pushing at $127,247. How is overcharging by $51,237 in keeping with the concept of liberating the oppressed public from the clutches of the greedy and unscrupulous?
One of the guys that was siding with me in this debate came up with this classic: "A 1/2" spanner does not fit every nut and bolt on a '72 Chevy. Not even most. But it's a pretty piss-poor mechanic who not only doesn't have a 1/2" wrench, but is morally opposed to them."
That's my message for the Multi-Level Marketing crew too. Term insurance is NOT always the answer. Even further, I haven't seen any instances that their products are particularly good in the first place. So don't get too cocky.
In his best-selling book "Outliers", Malcolm Gladwell claims that it takes 10,000 hours to master something; whether it is a musical instrument, a sport, a hobby, or a profession. Sure you can develop some skills along the way, but to really master something is going to take about 10,000 hours.
That's something to consider when you think that many of the Multi-Level Marketers work part-time hours. How long will it take them to master the concepts of insurance if they are working on it just 10 hours per week? Especially if part of those 10 hours aren't actually working on professional development, but instead working on building their pyramid?
Multi-Level Marketing might be just fine for distributing commodities that are more or less the same regardless of where you acquire them. But some things are just not suited for Multi-Level Marketing. Financial advice is one of them.
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Certified Financial Planner with Manulife Securities Incorporated, Member CIPF and with Manulife Securities Insurance Agency in Fort St John, BC. Brad Brain can be reached at firstname.lastname@example.org or www.bradbrainfinancial.com.