For several years, a debate has been raging among those who make their living selling investments and providing investment advice as to who among them, if not everyone, should be held to a fiduciary standard. With discussions of sweeping new Federal regulations, this internal squable is now producing major headlines.

“Fiduciary,” according to Webster’s, means “founded on faith or trust.” In the investment world, it means a willingness and ability to put the client first, without conflicting allegiances or obligations. It goes beyond the legal strictures of full disclosure. It requires serving the client with undivided loyalty.

Such a standard would seem commonplace, but it is the exception rather than the rule in the investment world. Only fee-only advisors, such as the members of the National Association of Personal Financial Advisors (NAPFA), can meet it. Their numbers have grown in recent years, but they remain a distinct minority.

Investment salespersons are held only to a looser “suitability” standard. The question is simply whether an investment is appropriate for a particular investor. Given this vague and ill-defined test, proving unsuitability is a daunting challenge.

The life insurance industry lacks even such minimal consumer protection rules. Neither a fiduciary standard, nor a broadly applied suitability requirement pertains. The latter only applies to “variable” life and annuities because they are funded with equities and are therefore subject to securities regulations. Otherwise, no effective and enforceable regulations of this kind safeguard consumers.

With rare exceptions, life insurance is sold by commission-paid salespersons. They can only sell the policies of companies with which they happen to be licensed, whether or not the products are likely to provide the best, or even good, value. There is no disclosure of policy costs except for the most straightforward products. In contrast to the purchase of securities, no rule mandates that sales commissions be revealed. Where policies can be structured to reduce commissions, lower costs, and increase returns, consumers are left in the dark about these money-saving possibilities.

Given the “Wild West” context in which life insurance sales take place, it’s too much to expect that fiduciary standards will soon rule the day. But a wider, if not universal application, of such guidelines should be the goal of consumers and those charged with protecting them. Here are my suggestions of what they should entail, with more detail on our website.

Full Disclosure: Commissions and other compensation should be disclosed along with any potential conflicts of interest.

Independence and Objectivity: The advisor should be free from obligations to anyone other than the client, such as to life insurance companies with which the advisor is licensed.

Maximizing Value and Reducing Expenses: Advice should aim to maximize returns from an investment in a life insurance policy with the least cost to the client, consistent with an acceptable level of risk. Reducing the cost impact of commissions and other compensation should be a major objective wherever possible.

Access to all Companies and Products: Clients should have access to all of the best product and company options that might be appropriate, which, in some cases, are no-commission products. They should not be limited to companies with which the agent or broker is licensed.
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Unbiased Reviews of Existing Insurance Policies: Independent reviews of the performance of, and potential problems with, existing insurance policies should be performed free from inevitable agent bias in favor of a policy replacement or other action (e.g., selling the policy) that will produce a commission.

While a fiduciary approach to life insurance advice is almost unique, I am not the only one offering it. To my knowledge, there are no more than half a dozen of us across the country advising individuals in this manner. How many of us represent clients who aren’t all very affluent is less clear. In any case, fiduciary life insurance advice is readily available and affordable. If consumers show they want it and know where to find it, a portion of the life insurance industry may, just may, begin to change.