Insuring the Future

When folks have to figure out their finances, many turn to an insurance agent.

This can make some sense. If a spouse passes away, there is often an insurance payout. Insurance companies help people managing risk; and the risk out not having enough money is a major concern. While one death isn’t predicable, the number of deaths in a population of a million is. So the law of large numbers makes insurance a natural place for people to look for financial advice.

Only the laws of finance—“let the buyer beware; those with the gold make the rules, where you stand depends on where you sit”—indicate that the advice you get will usually be in the agent’s interest. Back in the ‘30s and ‘40s the Pecora Commission uncovered egregious examples of financial fraud. They codified the rules that investment and trust companies work under—fiduciary rules. Stated simply, they require that a client’s interests come before the advisor’s.

But insurance agents are exempt from a fiduciary standard. Whether it’s because they weren’t part of the last scam or because they have good lobbyists, Congress has never seen fit to subject insurance products to SEC oversight. And if there is a legal dispute, only state law applies.

Which is a shame. Because when it comes to financial integrity, standards can’t be too high. Trust is a delicate plant: it grows slowly, and the least disturbance can kill it. The insurance industry should learn from Madoff and other scandals: trust is everything.

Douglas R. Tengdin, CFA
Chief Investment Officer
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