Advisor Perspectives
A New Platform that Offers Insurance Products to Fee-Only Advisors
David Lau is the founder and CEO of DPL Financial Partners, a firm focused on the distribution of commission-free insurance products geared toward the RIA and fee-based advisor channel. He is an executive with more than 25 years of professional experience directing strategy for innovative financial services companies. Mr. Lau has expertise in financial services sales, marketing, technology and operations.
Prior to founding DPL, Mr. Lau was chief operating officer of Jefferson National, a leading innovator of tax-advantaged investing strategies for Registered Investment Advisors and fee-based advisors at broker dealers.
I interviewed David last week.
What was the market opportunity that led you to start DPL? What was the problem you wanted to solve for advisors?
I identified the RIA market as an underserved insurance market in 2005. When you look at the world in which RIAs work, there is a major product category gap – insurance. RIAs, if they are fee-only, cannot use insurance products in their practice because insurance is almost exclusively a commission-driven industry. At the same time, the vast majority, better than 70% according to our research, of RIAs believe insurance is an important component to a holistic financial plan. This creates an obvious problem that disadvantages both RIAs and their clients.
Apart from the ethical issues commissions create for RIAs, they also create economic issues. The distribution expenses built into commissioned insurance products are significant, making RIAs question the value of the products from an economic perspective.
So, three years ago I set out on this quixotic mission to bring low-cost, commission-free insurance products to the RIA market. We work with carriers that offer best-in-breed products across life, health and annuity products. My grand goal is to bring transparency and price competition to insurance.
If you are eliminating commissions, how does DPL generate revenue?
Two ways. First, we are a membership organization for RIAs. Firms join DPL to get access to our insurance expertise as well as our commission-free product set. We operate like an outsourced insurance department for our member firms. Some members view it almost like a co-op for insurance.
The second way we generate revenue is from the multiple carriers with whom we work. DPL creates the infrastructure through which we can issue policies on behalf of these carriers for our RIA members. We provide the product education, the licensing capabilities and the broker/dealer (for variable products). For this infrastructure, we get an administrative fee. The fee, which is 80%-90% lower than carriers’ traditional distribution costs, enables the repricing of products to create greater benefit for the RIA’s client.
What kind of response are you getting from the RIA side and the insurance-carrier side?
As an entrepreneur, you create your business plan, you do your market research and you rely on your firsthand knowledge of the market, but there’s always that fear of “what if I build it and they don’t come”! We’re very fortunate in that the response from both RIAs and carriers has been amazing. RIAs are not just interested in what we’re doing but are true fans. They want to know how they can help! RIAs have had this problem with insurance for so long, they’ve just learned to cope. Then DPL comes along and RIAs are like “Yeah – why hasn’t there been commission-free insurance?! We need that as an industry.”
From the carriers’ point of view, RIAs are a multi-trillion dollar industry and represent over 25% of a market they have had little success penetrating. They watched the success I had in building Jefferson National and they want to be a part of DPL.
What exactly does an RIA get once they join the DPL network?
RIAs get access to our team of agnostic insurance consultants who will aid in analyzing their clients’ current insurance plans and evaluate alternatives with the goal of strengthening each client’s portfolio. We provide thought leadership for various uses of insurance within a practice – both our own content and from peers and experts across the industry. We bring a level of product expertise that RIAs don’t often have since they have not evaluated a lot of insurance products because they were historically commission-based. We are creating tools to evaluate and illustrate highly complex information in a direct, highly-customized fashion.
What type of insurance products are you offering now and in the future?
We currently offer a range of life products including term and permanent policies. We also have a large variety of annuities: variable, fixed, fixed indexed, immediate, deferred income, and buffer. Soon we’ll be launching a selection of health products to include long term care and disability.
How are you choosing your carriers?
Like mutual fund families, often carriers have product types that are specialties. We try to focus on bringing the best products from the best carriers based on their expertise. We turn away products that have no aspect of superiority – the product has to be the best in breed in some important regard.
How is your timing considering the DOL rule?
Our timing is tremendous with the DOL. The rule complements our ethics and has done us the favor of having more carriers focused on commission-free products. However, it is important to note that we focus on carriers that want to create products for the RIA industry, not just in defensive response to the DOL – there are definite differences.
One of the objections to certain types of annuities, especially VAs with complex riders and fixed-index annuities (FIAs), is that they require sophisticated modeling for advisors to understand and evaluate their expected performance. Has this been an issue for you and, if so, how do you overcome it?
This is an example of what I was referring to – we want to help create and bring to market simple, transparent, low-cost products. Not complex products that simply had the commission removed. For the products we work with, the modeling and forecasting is generally far more straightforward than traditional products. Additionally, DPL consultants help to model product performance as part of our service to members. We are also developing proprietary technology that will help further.
Single-premium immediate annuities (SPIAs) and deferred-income annuities (DIAs) have been recommended by academics as useful tools for retirement planning. Are you seeing greater interest in those products?
Yes, there has been a lot of research that supports having guaranteed lifetime income so we do receive many requests for those products. The issue with SPIAs and DIAs has historically been that while clients might be afraid of longevity risk, they are more afraid of giving up control of their assets! When a client annuitizes, they turn over their assets to the carrier in exchange for an income stream. For this reason, we have a number of different products that can provide guaranteed lifetime income, many of which keep client assets liquid if they need access to them. We believe when you reprice variable annuities, fixed indexed annuities and other products by taking out the commissions, you create attractive economic options for lifetime income.
What type of RIAs find your solution attractive?
Our members to date seem to be larger firms ($1B+ in AUM) and growth-oriented firms. Larger firms already do insurance planning for their clients, but generally have to refer clients to brokers to get the products. Using DPL, they no longer have to do that. Growth firms see the opportunity to further fuel their growth by having access to a significant product type they could never use before. The annuity smarket alone is the size of the RIA market and the life insurance market is several times larger than the annuity market!
Could you elaborate on how specifically you are changing the way RIAs see insurance?
It’s all about the commissions – or lack thereof. Removing the commission from insurance products makes the products ethically viable for RIAs, but it’s the repricing it enables that is the real game-changer. Removing commissions can reduce product costs by as much as 85%. RIAs acknowledge the benefits insurance can provide to a client – guaranteed lifetime income, principal protection, tax deferral, legacy planning – it’s always been the cost of those benefits that have been the problem. At DPL, we believe we solve the pricing problem and make insurance, finally, a viable and valuable asset for RIAs.