Call Joe in Florida
Courtesy of my professional career, in the past 40 years, I have been privileged to witness and be involved in some manner with two major financial revolutions. Today, I strongly believe we are in the process of experiencing yet another revelation or significant Third Financial Revolution.
Revolution I: The Life Insurance Revolution
Revolution I began in the late 1970s and into the ‘80s, with the alignment of a series of unique events. The existence of relatively high overall interest rates and increased access to accumulation accounts that exceeded the internal rate of return of traditional cash value life insurance contributed to the increasingly popular marketing concept of “buy term (life insurance) and invest the difference.”
In an effort to counteract such an approach, the traditional life insurance industry reacted by developing completely new products, such as interest sensitive universal life and other variations of this basic structure. These products essentially packaged term insurance or the cost of insurance (COI) with an accumulation account within the tax advantages of a life insurance program. As a result, due in large part to this Life Insurance Revolution, the majority of today’s most popular and viable life insurance policies are a variation of this basic universal life structure or some manner of an enhanced dividend paying policy.
Revolution II: The Mutual Fund Revolution
As the First Revolution was reaching a zenith in the late 1980s, a second Revolution began emerging. Other than the market correction of 1987, a growing sense of potential stock market opportunities and the virtual elimination of defined benefit retirement plans by defined contribution retirement plans (i.e., 401ks), fueled the flames of a Mutual Fund Revelation.
This revolution was further enhanced by the seemingly endless double-digit investment returns of the 1990s. All of this propelled the mutual fund industry to unprecedented levels of success and positioned mutual funds as the investment of choice for virtually every investor. The insurance industry quickly capitalized on this phenomenon by developing mutual fund type or separate account based products, such as Variable Universal Life and Variable Annuities. The popularity of mutual funds and variable products drove the explosive growth of both independent and insurance affiliated broker/dealers which prospered on these products’ commission based incentives.
The Third Revolution
I believe we are now in the midst of the Third, and likely most profound, Revolution. The foundation for this Third Revolution was laid with the major market correction of 2001/2002 and further reinforced with the Great Recession of 2008. The reality of these two financial earthquakes caused a major shift in the attitudes of clients, representatives, and regulators. Clients unfortunately understood the impact of risk, representatives realized the value of diversification and regulators began promoting financial advice in lieu of product promotion.
Thus led to the emergence of the recent Department of Labor fiduciary standard which will certainly be followed by some manner of SEC regulation. This Third Revolution will likely cause a paradigm shift toward a more holistic approach focused on long-term financial advice and not just the immediate selling of financial products.
What does this mean for you?
The financial services industry is changing, and the long-term success of individuals and organizations within the industry will depend on their choice to reluctantly accept or enthusiastically embrace and adapt to the inevitable changes. We are witnessing the emergence of an advice-driven industry where appropriate financial products, free of the conflicts of interest of the representative, will be properly utilized to achieve the long-term financial goals of the client. This includes the appropriate use of guaranteed insurance products for death protection and income as well as the proper balance of the right amount of unbiased and diversified investment solutions within the fiduciary environment of an investment advisory platform.
As with past revolutions, opportunity was available to those who realized and ceased the obvious realities of change. The Third Revolution provides a tremendous opportunity and long-term financial security to those individuals and organizations that realize the clear realities of what I believe will emerge as The Advice Revolution.
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