I'm not very excited to write this post, but it is a post I promised to readers a couple of years ago. The story involves several physician clients suing a well-known physician-centric financial advisory firm that has been a paid advertiser on this site and whose principals I know personally. In exchange for not permitting comments about the lawsuit in the comments section on blog posts mentioning the firm, I promised readers that when the lawsuit was all said and done that I would write a post about it.
The story didn't turn out the way I expected it to. I expected to be able to share all the proceedings from court, see who was at fault, and either clear the name of the firm or condemn them for their behavior. Instead, like with most lawsuits, it was settled for a confidential amount and both plaintiff and defendant just want it to go away. I think both would rather I didn't even write this post. The main physician plaintiff would not return my phone calls about it and her attorney would not give me any additional information beyond the fact that it was settled. But I felt like a promise made should be a promise kept.
However, instead of trying the defendant (and the plaintiff too really) in the court of public opinion, I thought it would be far more useful to readers to use the lawsuit (which like most lawsuits nobody wins but the attorneys) to illustrate some lessons learned for both financial advisors and their clients.
The Allegations Against the Financial Advisor
The lawsuit was filed by Drs. Liza Capiendo, Oscar Zagala, and Hussam Antoine against Larson Financial along with insurance companies John Hancock and Nationwide. The doctors basically felt they were sold a Variable Universal Life (VUL) policy that they should not have been sold. There were 2 or 3 articles on the internet about it, including this one which roped me in with Larson for taking them as an advertiser, and then things went pretty quiet for a couple of years. Like with most lawsuits, it made all kinds of allegations, and since it was settled and I have no means of substantiating between the “he said, she said,” it is impossible to know which, if any, were true. But they included:
# 1 Breach of Fiduciary Duty: Larson Financial failed to act as a reasonably prudent financial advisor in the following ways:
- a. Advising that multi-million dollar life insurance policies were suitable for plaintiffs who were single and had no children;
- b. Leading plaintiffs to believe that at some point there would be no premium;
- c. Misleading plaintiffs or omitting information with regard to material facts about the policies;
- d. Committing other acts and omissions that are presently unknown to plaintiffs but will be proven at the time of trial.
(Gotta love that last one huh? Only a lawyer can write this stuff with a straight face.)
# 2 Fraud: Larson Financial represented to plaintiffs that purchasing millions of dollars in life insurance as an “investment” would provide them with tax-free income, with eventually no more premium payments. It also represented that these insurance policies were suitable for plaintiffs. These representations were false. Larson Financial knew the representations were false at the time they made them, and/or made the representations recklessly and without regard for the truth.
# 3 Professional Negligence: Larson Financial breached these duties by making unsound financial decisions on behalf of plaintiffs, by placing its financial interests before those of plaintiffs and by advising plaintiffs to purchase insurance they did not need, spending hundreds of thousands of dollars on premiums in the process. As a proximate result of the negligent conduct of Larson Financial, plaintiffs lost hundreds of thousands of dollars in premium payments.
# 4 Unjust Enrichment: John Hancock and Nationwide were unjustly enriched in that they received plaintiff’s premium payments on policies that were purchased as an investment. The enrichment of John Hancock and Nationwide came at the expense of plaintiffs in that the promised financial outcome was never realized. The circumstances of John Hancock’s and Nationwide’s enrichment are such that equity and good conscience restitution should be made.
The doctors asked for $550,000 in premiums paid plus “general and special damages.”
My understanding of the outcome was that three of the four allegations were thrown out in the pre-trial proceedings and then the parties settled, with Larson Financial basically just making the doctors whole for the difference between premiums paid and policy surrender value (i.e. they got their money back,) but presumably due to non-disclosure agreements, nobody was really willing and able to tell me exactly what happened or how much the settlement was for. At the end of the day, both parties lost tons of time, went through lots of hassle, lost money in legal fees, had their reputations damaged, and walked away wanting it all behind them.
In my opinion, the best thing that came out of it was that Larson Financial revamped their process for using VULs such that they do a much better job disclosing how they work, documenting their disclosure process, and ensuring their clients are really committed to holding it for their entire life before purchasing it. As a result, they sell far fewer of them, instead placing client assets into more traditional qualified and non-qualified investing accounts, for better or for worse. I think that's probably a good thing as I've had a polite disagreement with them for years about the percentage of doctors for whom a VUL is a good idea. But I think it's highly unlikely that anyone who buys a VUL from Larson from 2016 on is going to feel they were sold a pig in a poke.
Lessons Learned From This Lawsuit For Financial Advisors
There were lots of lessons learned from this experience. I'm going to split them up into lessons learned for advisors and lessons learned for clients.
# 1 Life Changes
I've run into a few docs over the years who were unhappy with VUL policies they bought through Larson. Most of the time it is a result of changes that took place in their life that lowered their income such that the amount of income required to comfortably pay life insurance premiums was no longer there. The problem with any type of permanent life insurance policy is that, well, it's permanent. For it to work out reasonably well, you've got to hold even a good policy that is appropriate for you until your death. But life happens. People get divorced. They change jobs. They become eligible for much larger retirement account contributions. Their income drops. They retire early. Whatever. And then they're stuck with an albatross around their neck that requires significant ongoing premiums. If you aren't investing significant amounts in taxable in addition to making permanent life insurance premiums, you probably shouldn't be in the policy. Otherwise you're likely to find yourself choosing between 401(k) contributions, a vacation, a new car, and making premium payments for a policy that no longer makes sense for you.
Advisors need to bear in mind that flexibility is often more important than optimizing other aspects of a financial plan such as tax reduction.
# 2 Simpler Plans Are Better Plans
VULs are not particularly easy to understand. There are a lot of moving parts. There are very few investors (among those who want or need a financial advisor) who are going to take the time to really understand how they work. Doctors who use advisors tend to be like patients who say, “You're the doc, whatever you recommend I'll do.” But not understanding what the advisor (or doctor) is really doing can lead to unpleasant feelings when expectations aren't met. It's like a bariatric surgery patient who is now upset that he can't eat as large of meals as he used to. Anybody who had read even a little about bariatric surgery would have realized that. Same with a VUL. Being upset that you're under water 2 or 3 years into it is silly. That's an EXPECTED outcome. At any rate, avoiding complexity with financial plans might make clients not feel like they're getting their money's worth, but it's usually the best thing to do for all involved. If the product is designed to be held for decades, and the client doesn't understand exactly how it works, chances are good the client is going to be unhappy with the outcome. Imagine if the VUL policies purchased by the plaintiffs were purchased just before a bear market instead during a bull market? Results would have been even worse.
# 3 Ongoing Education Matters
If you are going to use a complex plan of some kind (whole life, VUL, defined benefit/cash balance plan etc) you'll need to have a method in place to ensure that the client can be reminded/reeducated why he bought it in the first place. That's also a good time to point out the benefits he has seen so far. Larson has strengthened their ongoing education process since the lawsuit.
# 4 Be Careful with Unique Strategies
The concept of the standard of care is a legal one, but it basically means don't stray too far from the crowd. If your firm is the only firm out there using a tool, you're on much shakier legal ground as a fiduciary than if you're using a tool that everyone is using. This applies to all kinds of strategies. If you're using technical analysis to time the market, picking stocks, using a 401(h), or using a VUL, realize that there are a lot of investment authorities and advisors out there that are going to disagree with your methods. That doesn't mean your methods are wrong, but there is a whole lot more legal risk there when you have a fiduciary duty to a client. If you're using a 401(k) and index funds and recommending student loan payoff, that risk is a whole lot lower. Even if you're a true believer in your unique strategy, unless your client is also (and remains so) it's going to lead to a poor outcome.
# 5 Disclosure is Key
Everyone agrees that disclosure is good and appropriate. But disclosure is the ultimate 50 shades of gray. There's disclosure and then there's DISCLOSURE. With a product like VUL there should be so much disclosure that most people are talked out of doing it. The client should really have to beg the advisor to implement that sort of a plan. Obviously, that doesn't work well with a product that has to be sold. But it's still the right thing to do. Documenting that disclosure process, of course, will also help in the event of a lawsuit.
# 6 Consider Offering a Guarantee
Another thing that might have helped in this case would have been for Larson to offer a guarantee. Perhaps something like “if at any time in the first five years you feel like this isn't right for you, we'll make up the difference between your surrender value and your premiums paid.” Then instead of filing a lawsuit, all the client would have had to do was call up their advisor and tell them they want to do the guarantee. Larson generally wants to do the right thing for their clients (both morally and for PR reasons) so why not just make it formal up front? [Update prior to publication: I'm told that, like health care, there is no way in the financial services industry to do this.]
# 7 Be Careful with Scaling and Incentives
Larson Financial is a big firm, with advisors all over the country. Obviously, some advisors are going to be more knowledgeable than others. The larger your firm, the more difficult quality control becomes.
People also respond to incentives. Larson would argue that they actually make more money in the long run from AUM fees than from VUL commissions, but the incentive of getting money up front from a commission is hardly insignificant, especially for an advisor who may not plan to remain with the firm or in the industry long-term. With bad incentive structures, even good people don't always do the right thing. As you grow your firm, be extremely careful with who you hire and how you choose to incentivize them.
# 8 VULs Are Wrong For Most Docs
Finally, a strategy like this is simply wrong for most docs. If they're not maxing out their 401(k)/Profit-sharing plan, don't know what a Backdoor Roth IRA is, don't have their kids' college accounts adequately funded, still have student loans, and haven't even started a taxable investing account, you're not doing them any favors selling them a VUL.
Lessons Learned For Clients
Let's continue with some lessons that clients (i.e. doctors) ought to walk away from this incident with.
# 1 Life Changes
Just like an advisor needs to remember your life is highly likely to change in significant ways, you need to keep it in mind as well. Don't lock yourself into something for more than just a few years without a very, very good reason to do so.
# 2 Permanent Life Insurance Policies Are Like Marriage
A permanent life insurance policy isn't something you buy willy-nilly. Like marriage, it will be very painful and expensive if you choose to dissolve it prior to death. There ought to be a great deal of time and energy put in before making the commitment. A long courting period and a second and third opinion isn't a bad idea either. I'm not saying they're not right for anybody, but they're not right for most and you'd better be very convinced you are an exception before purchasing.
# 3 Permanent Life Insurance Policies Don't Break Even For a Long Time
Even the best designed policies in the most favorable situations aren't going to break even for 5 years, and more like 10. That's one of the main reasons I generally recommend against them as investments.
# 4 You Can't Just Trust Your “Money Guy”
Financial planning and investing cannot be completely outsourced. I'm sorry. You need to become financially literate. Understand what you're investing in and why. Claims that your advisor “misled you” also make you look stupid for allowing yourself to be misled. If you're uncomfortable with something, put it off, read up on it, and get a second opinion. Think of your financial advisor as a consultant, not the CEO of your financial life.
# 5 You Have To Tell Your Advisor Everything
Another theme I see in people who are unhappy with a policy they were sold is that it turns out they didn't reveal some key detail to the advisor that would have caused the advisor to not sell the policy in the first place. “Oh yea, I have to pay alimony” or “I'm planning to go part-time when the baby is born” or “I was just diagnosed with cancer” are rather important factors to consider when designing a financial plan. Obviously it takes time to build trust with a new advisor, but the process can be garbage-in, garbage-out too.
Nobody wins in a lawsuit situation, but hopefully the entire physician financial community can apply these lessons and make some lemonade out of lemons in this case. I asked for a response to this post from Larson prior to publication (and would offer this opportunity to the plaintiffs as well, but they don't return my phone calls.) This was a response from Larson:
“Dr. Dahle, you are a man of your word and we not only respect this, but we are grateful that you look out for the financial interests of all doctors. This particular situation was certainly a learning experience for all involved and while the primary advisor who worked with these three doctors is no longer with our firm, it has caused us to take a deeper look at how to better serve our physicians in the future. While we cannot share any of the details of this case, what we can share is that given the complexity of this investment tool and the ever-changing financial lives of our doctors, we have implemented many more protocols to ensure that our clients understand all the pros and cons of each investment product and strategy they implement. Although our firm has been in existence for over eleven years with offices all over the country and thousands of doctors under our care; this has been our only lawsuit to date. We care deeply about the doctors that we serve and appreciate you taking the time to lay out some of your helpful perspectives in this blog that will further educate doctors about their options. Our firm has continued to grow these past few years and this experience has taught us more about the things we need to enhance as we seek to “Empower Doctors to Flourish” in the years ahead. Thanks again for being an advocate for doctors!”
What do you think? What lessons can be taken away from this? Have you as an advisor ever been sued? What was it like? Have you ever sued an advisor? Comment below!
[If you are going to leave comments critical of Larson Financial or the plaintiffs be very aware that libel laws can get you and me into trouble. Stick to the facts, clearly identify opinions, and don't write anything you wouldn't be comfortable signing your name to in court. Frankly, I'd rather you just stick to general comments about lessons learned so I don't have to spend the next few years policing this particular comments section. Plus, it's not like a financial firm can defend itself on a public forum given client confidentiality rules.]
If you look around the web, it appears they also have a less than scrupulous IRS debt help service.
Completely different company. No relation to, no relationship or affiliation with Larson Financial Group. Zero.
Just curious: what’s the name of this “less than scrupulous IRS debt help service”?
I work with an employer who has capital accumulation program. They do 50% matching contribution. “Participant after-tax contributions will be made via payroll deductions and will be invested in an institutionally-priced
variable universal life (“VUL”) insurance policy with a minimum contribution period of seven years. ” It is a good idea to invest in this plan as I am going to get free money from my employer. I have already maxed out on 402, 457 and I already have a college account for children.
Nothing wrong with a VUL if you don’t have to pay the premiums. I mean, if someone wants to give me a whole life policy that I’ll never have to pay on, I’ll take that too.
Anil & WCI
Two points:
1. What are the income tax consequences of your (Anil’s) employer paying a portion of the premiums on a life insurance policy that you will (I assume) own?
2. It sounds like all your (Amil’s) employer is doing is matching 50 cents for every $1.00 of premium you pay. That doesn’t sound like “someone wants to give me a whole life policy that I’ll never have to pay on, I’ll take that too.” It’s sounds like Anil is paying 2/3s of the premium to me
Yes the more you pay yourself, the less of a great deal it is. Still, if someone were willing to pay 1/3 of all the premiums, I’d certainly run the numbers on it. But if I had the choice, I’d rather just have a higher salary.
so should I go for it? If I put 20 K then I will get 10 K from the employer. I have committed that for 7 years. After 7 years, the trust gets dissolved, then I think I have to pay taxes on the gain.
I’d have a hard time turning down $10K a year. That’s really part of your salary. Read all the details, then make a decision.
I’d get the policy evaluated. It easily could be set to implode over time if it’s not overfunded.
I’d also google unmet promises life insurance or something like that. There is an article written by insurance folks about likely outcomes.
I think the key is a PLAN to decrease the insurance amount as you borrow against the cash value in retirement. That way the insurance costs don’t skyrocket. But there’s a lot of moving parts there, and chances of you having the same advisor that helped you with this when you’re 30 being there to help you manage it when you’re 80 are pretty low.
WCI – Would you also agree that this “deal” is less advantageous if some or most of the employer’s matching premium payment is included as taxable income? Google “PS 58 cost”.
It’s all about the alternative. If I can have the cash instead, I’ll take the cash. But if the employer says “It’s 1/3 of a WL premium or nothing” I’d probably take 1/3 of a WL premium. Yes, it’s better to buy it some how without owing tax on the money, but just because the money is taxable to you doesn’t necessarily make it a bad deal. Run the numbers with some reasonable assumptions and make a decision. For example, if the employer were only going to pay 10% of the premium for just 3 years, I’d probably pass. If they agree to pay 90% of the premium until the policy is paid up, I’d probably take it, even if I had to pay taxes on it.
I think your last sentence is key. They really can’t defend themselves due to nondisclosure. It’s very much like when you get a bad review on healthgrades.com but you can’t post a rebuttal or even acknowledge that you know the patient, due to HIPAA.
I’m surprised the WCI didn’t get dragged into this. Your readers trust that your imprimatur (as an advertiser) is important in their selection of investment options. They trust, for better or worse, that if you’ve accepted them, they must be honest and and acting as a fiduciary. Have you made any changes in the vetting your advertisers? And maybe you should indicate whether the advertiser’s acting as a fiduciary when dealing w/ your readers. Maybe you should have known that this company was foisting on your trusting readers a product you particularly don’t like. Thanks for baring your sole. (I still trust you)
It was a meeting with, uh, an advisor that led me to this website. The advisor asked my wife and I about our goals, and then, not satisfied with our material desires (house, kids etc.); asked how I was going to get a vacation home, or a boat? It was then I realized that I looked at his office (way nicer than mine… academics!), and I realized I heard his goals; and our money was important for those. WCI has so many good posts about the difference between roles/responsibilities of physicians versus the same for advisors; and I echo David’s comments about WCI advertisement vetting.
I definitely took some heat, as noted in the article. The services I have referred readers to Larson for (primarily hourly rate financial planning) all involve “acting as a fiduciary.” This was done by email only and every one of those referred knew about the in-process lawsuit. Some never engaged Larson, some just did the financial planning, and others hired them for ongoing asset management (and have been happy with the value and services received.)
I have not had a complaint from anyone that I have referred to Larson, but have heard from other doctors who weren’t very happy with a VUL sold to them by a Larson advisor.
If you want to hear the details of this case from the perspective of insurance agents (who sell whole life) in podcast form go here: http://theinsuranceproblog.com/variable-universal-life-lawsuit/
It’s entertaining and even these guys thought Larson was WAY at fault.
If their podcast was like the article (where they blasted me) their only information source was the complaint filed by the plaintiff’s attorney. Who wouldn’t think the defendant is guilty when all you have to read is what the plaintiff alleges?
No they did a decent job (im talking about the Larson podcast). They pointed out that pretty much the policy was NOT setup for maximum CSV accumulation/overfunding as it should have been and they seem pretty knowledgeable about that and might be two of the most knowledgeable agents out there in this regard. There isnt really any excuse why Larson didnt do that except for their own commissions. They might try to pretend otherwise but it wont fly with me.
Only time will tell if Larson has learned from its mistakes. If we keep hearing about them selling VULs to doctors especially residents or those with debt well……
Id be very careful for people who are even currently happy with a VUL (a minority of purchasers in my view to begin with), the insurance industry has shown in the last few years that they can just increase the cost of insurance (beyond normal scheduled increases) if they feel the other guarantees or returns are just too generous. I believe, but cant remember for sure, that Larson uses one of the companies that has already done that practice on in force ULs. Those increases make any other guarantees pretty much worthless.
Not sure how the agents would know it wasn’t set up properly based only on the plaintiffs’ attorney’s allegations.
Ummm, they read the policies?
I believe but don’t know it was based on information regarding the death benefit, CSV, and years policy in force but I didn’t look further into it.
As a financial advisor for 33 years, I never understood nor do I understand why anyone would seek financial advice from an insurance agent. I have never seen a happy ending.
People get financial advice from insurance agents because they don’t call themselves insurance agents, they call themselves financial advisors. I’m guilty of this mistake. Fortunately, WCI launched early on in my career and I was able to realize I should sever ties sooner rather than later.
I agree that insurance agents (and stock brokers, and mutual fund sales people) call themselves “advisors” or “advisers” or “wealth managers” or “financial planners” there by obfuscating the reality that they are selling investment products and are NOT providing “advice” that is in the buyer’s “best interest”.
WCI mentions several times in this post that “Larson” had a fiduciary duty during the VUL sales process. How is that possible? How is a person who is “life licensed” by a state and a Registered Rep with the SEC able to function as a fiduciary under the law?
See, this is where things get complicated. An advisor who sells advice and products sometimes has a fiduciary hat on and sometimes has a suitability hat on. Makes it tricky for the client to know which hat the advisor is wearing at any given time.
But you must realize that Larson and its agents honestly believe they are/were doing the right thing selling these VULs to clients and that in the long run if the client stays with them, they’ll actually make less on the one-time upfront commission than they would on ongoing AUM fees on those same dollars. (they don’t charge AUM fees on the money in the VUL.)
Now I don’t disagree that there are some people out there for whom, over decades, the costs of the insurance product are lower than the costs of the taxes that would be paid in a taxable account. I just disagree on the percentage of doctors to whom that statement applies. I think it’s a relatively low percentage of docs. Larson thinks it’s a majority.
I honestly don’t think it’s possible to switch hats. There is a reason that, if you are working for a company that has part-time “fiduciaries”, you are prohibited from referring to yourself as fee-only. You are “fee-based”, which is a sneaky way of admitting you are not fee-only. If we have even part ownership in a SEPARATE business that sells products, even if we’re not directly involved, Certified Financial Planners are prohibited from describing themselves as “fee only”. Those of us who take the meaning of fiduciary as the decisive differentiator don’t operate in gray areas. Either you are or you aren’t – it’s really not that complicated.
Time to get off the high horse. What firm do you recommend your clients go to for tax planning/prep? Or for your tax prep clients, what firm do you recommend they go to for financial advice. I rest my case. Lots of conflicts out there.
So imagine a case with a financial advisor. They help docs with their financial planning and investment management using a static allocation of low-cost, passive funds charging an AUM fee for it. They discover, “Hey, a whole bunch of our clients don’t have enough disability insurance.” So they tell the client “this is what you need in a policy and these are some people I recommend that can sell it to you.” The client replies, “What? I thought you were a full service firm. Can’t you take care of this for me?” So the advisor asks himself, “Why the heck am I sending this commission out the door when I have to do all the work anyway?” So he decides, I’m just going to tell the client that he can either go to this other guy to buy it or he can just buy it from me and I’ll get a commission from it. Not only does he make more money, but, at least in his mind, he offers higher quality since he can offer more services under a single roof. And he doesn’t have to worry about that insurance agent selling his client something inappropriate.
It’s pretty hard for me to blame a full-service financial advisor for also picking up the disability and life insurance for their clients. The insurance agents (including many of those on my recommended list) are certainly working hard to go the other direction.
Which is why I would not consider for a moment buying insurance from the advisor. If they offer financial advice, for an hourly fee, I would pay for the amount of advice I consumed. If they recommended disability insurance it would be critical to me that they did NOT stand to get any profit from that recommendation. I would go to an EA or CPA for tax preparation, an attorney for legal advice. If I thought those people were profiting from recommendations, beyond the fee they charged for their services, I would drop them instantly and never go back.
I don’t WANT a full service firm for exactly the same reason I don’t want to invest through a high price broker. The field is awash in conflicts.
If a financial advisor recommended life insurance, I would want the next statement to be “We do not sell life insurance but the policy you choose should have the following features and costs… Once you have illustrations, if you like, you can send them to us and we will evaluate them for you at our standard hourly rates.”
If they said “We can sell you the insurance.” I would say “No thanks. And I am not paying for the part of this so called advice that was really a sales pitch.”
I don’t doubt YOU don’t want a full-service firm. I don’t want one either. But I assure you, there are plenty of docs out there who do.
Some of you guys need to talk finances with a few dozen of your colleagues to understand what I’m talking about here. They’re not interested. Period. Full-stop. They’re not interested. Even if it costs them 1% a year. Even if it costs $20K a year. They’re not interested. They want a “money guy.” The best you can do is find them someone who will treat them reasonably well while also getting rich off them. There’s nowhere to send them to get everything they need that will not cost at least thousands per year.
Unfortunately most of them are under the impression the money guy will make them more money and has special tricks up his or her sleeve to juice returns. Once one understands this is false they feel differently. It just some a while to get there. It’s like coding. Nobody wants to talk or think about it until you realize it’s importance and what it costs you to have a coding guy.
I don’t know. I know exactly how important coding is and I still pay someone else to do it. It costs me about 4% and they do a good enough job at it that they more than make up for their costs. So I question that analogy. I would also point out that some docs feel the same way about their advisors, even when they know they could get the same returns cheaper by DIY.
Some people “get there” and some people don’t.
As a recently retired fee-only, fiduciary (all the time) advisor, I heartily agree.
I still find it interesting that a group of doctor’s sued the company. I would have never thought to do that and would have blamed my own lack of knowledge on my decision to purchase VUL.
It seems as it has worked out to some extent for both groups. I once used this group. I was happy with the group and never was sold or offered VUL…so maybe it is the advisor and not the company (though the company has to have oversight of it’s advisors).
The problem I see with these permanent life insurance policies is its complexity. Even with good disclosure it takes some knowledge to understand exactly what you are getting into as well as understand how to compare it to alternatives. I found WCI because my now former accountant tried to sell me a permanent insurance policy. At the time I found the product to be extremely complex and thought that if I was going to pay $50k or more every year I best understand what will happen to it. I decided that I will not accept this product until I can explain it to my wife where she can understand it as well.
I ran the numbers in excel and just could not understand how this policy was as good as the salesperson claimed it was. Luckily trying to do research I came across this site as well as bogleheads. So in reality permanent life insurance has changed my life for the better. Ohh, and I fired the tax guy who then drove a 7 series BMW and had a very nice office in a fancy part of town.
Thanks WCI.
I think this is a teachable moment for us. We should be wary of the financial advice we receive and think of the products that are sold to us and their log term effects. In this day and age, not being educated by big financial decisions is no longer a viable excuse.
This is a difficult situation for all concerned. You did a great job extracting the “lemonade,” Jim, and I think Larson’s response was honorable. Everyone makes mistakes. The smartest are those who can learn from others’ and avoid the same pitfalls!
I don’t look at it as Larson admitting to mistakes; I think they got caught w/ their pants down and are trying to weasel out cheaply while maintaining a reasonably good image generally and with WCI readers specifically. Along w/ the new fiduciary rule, the shenanigans that the insurance industry has gotten away with these oh so many years is finally rising up to bite them in the rear. Maybe like loaded mutual funds (and other ill-advised “investments”), they’ll slink away only to maintain a small niche market, taking the silver-tongued agents with them.
When I was finishing my fellowship at the University of Iowa in the mid-90’s a prominent insurance company treated us to dinner on the U of Iowa campus, lending a lot of legitimacy to the VUL product. I was financially naive at that point and never considered alternatives and of course the salesmen never suggested alternatives. Ten years later, the premiums continued to go up and trying to cancel the policy was next to impossible. Fortunately my cousin was the president of an insurance company at the time and she spent HOURS extricating me from the policy. I was able to recoup about two thirds of what I put in. My cousin told me that the VUL product might be good for very wealthy people (net worth much higher than most doctors will ever achieve). My net worth coming out of fellowship was about zero. Stick with term life insurance.
FWIW, I live in the Chicago area where Larson Financial Group is based. I often get invitations to attend financial seminars for doctors hosted by them, at some pretty fancy restaurants. I wondered how they could afford these. Now I know.
We have rescued a few clients from Larson Financial over the past few years. Plan to rescue a few more. Jim I am glad you wrote this post. They needed to be exposed.
We purchased a hybrid policy that has Long Term Care and/or death benefits, with the ability to withdraw the money we put in. It seems like a win-win with the exception that those are funds we aren’t investing and we are in our late 40s (and could self insure). In my mind, I am treating this more like a LTC plan where they money isn’t lost if if isn’t used towards that (vs. insurance). Anyone seeing any red flags I am blind to? I am assuming the insurance company benefits from having this money to invest for a higher yield.
Red flags? You mean other than you’re purchasing insurance against a risk you can self-insure against?
Although, with this policy, we can withdraw the funds, so it seems we are risking future returns in market vs. chance of early death or need to use LTC
Its more like a lose-lose. You very likely could have purchased a straight LTCi policy and a straight permanent policy for less. Certainly you could until a few years ago. I havent priced it in a while.
You do realize that if you need ltc, they use “your money” first before “their money”?
On fatwallet, an agent a while back wrote up a good explanation of the “money guard” type products. might want to search it.
Thanks. I will check this out.
The one and only financial “advisor” I ever entrusted with my money is now in prison after the SEC prosecuted him for a whole slew of misdeeds related to ripping off clients. Fortunately I escaped with minimal damage prior to him going out of business and didn’t buy any insurance products.
To add some historical context:
In 1987, we bought a VUL policy on our first child’s life. Tax laws, then, allowed front-loading the premium, which was a no-brainer at $2000. 22 years later she liquidated the policy; the cash value was $5500.
We understood that, prior to tax law changes, the wealthy used these to stash millions.
We bought a VUL for ourselves in 1987, as well, under the guidance of my mother-in-law (bless her heart).
20 years later we were in for $200k in premiums and $200k in interest payments. We cashed out into a high tax bracket. The alternative in the 80s and 90s would have been a run up in the super bull market.
This product was birthed in the 80s due to high interest rates, high investment returns for the insurance companies, and initially, favorable tax treatment.
By the time of our 3rd child’s birth, we bought NO life insurance.
“I often get invitations to attend financial seminars for doctors hosted by them, at some pretty fancy restaurants. I wondered how they could afford these. Now I know.”
“Ohh, and I fired the tax guy who then drove a 7 series BMW and had a very nice office in a fancy part of town.”
These comments are irrelevant, unnecessary, and immature. Amazing that some highly educated folks here can still have the mentality of “if he is wealthy then he must be ripping everyone off.” I have heard patients make the same comments about us doctors. I tell these patients “I’m sure I can find you a doctor that is UNsuccessful if you prefer.”
it wouldnt be an issue except in this situation the product is rarely if ever appropriate. That sort of changes things.
I agree that just because an advisor is wealthy/successful it doesn’t mean that they are ripping people off. However, my industry is ripe with advisors that have ridiculous profit margins that have no basis when you relate it to the services they are providing. When I previously worked at a traditional 1% assets under management fee company, I had a retired client tell me one time that his asset management fee (of $36k/yr) was his biggest expense during retirement. I thought, are we really providing him $36k worth of service each and every year, and why was he paying $36k and another client was paying $10k and getting the same service?. Terrible model for the client, but great for the advisor.
I would agree with you if the accountant/salesman had his client’s best interest in mind. Instead it appears he needed to finance his expensive lifestyle. This accountant had one of my partners skip the 401k or SEPP IRA and instead purchase a permanent life insurance policy trough him. This guy is a parasite who feeds of his clients.
I would have no issue with his success if it was justly earned.
I don’t see how *promotional seminars* for potential clients at fancy restaurants are irrelevant. These must come out of the firm’s overhead budget, which ultimately is funded by the income from services provided or products sold. If they used low cost index funds, would they have funds to buy $60 meals for potential clients?
They use primarily DFA funds. The money to “buy $60 meals” comes from AUM fees, not mutual fund expense ratios or 12b-1 fees.
I’ve posted my concerns regarding Larson in the past on this forum and to WCI privately, and it had nothing to do with VUL.
I worked with Jeff Larson, younger brother of Paul Larson, for about awhile near the end of my fellowship/early attending life. I did receive some good advice, and initially I thought they provided a very good service, though I felt their AUM fees were way too high.
I interacted briefly with Paul and felt he was always good. While Jeff’s TEAM provided good service, I never was very happy with my interaction w/Jeff.
We ultimately separated for a variety of reasons, including a concern from my end that Jeff violated our contract.
I’ll give the big disclaimer here so WCI doesn’t feel a need to mark this as spam or worry about libel — Jeff/Paul obviously disagreed with that perspective, but we settled our advisor/client separation without lawyers or arbitration, and ultimately in a fair way (thanks to Paul), though it does not change my perspective on what happened leading up to it. The full story would take too long and doesn’t belong here…
Interestingly, I am still on their email and snail mail lists (not sure why), and I just received notice that Jeff is no longer part of the company. I have no insight as to whether it’s related to the lawsuit though, as I was unaware of it.
So, I’m not sure, is Larson Financial allowed to advertise on WCI now? It would seem to me that if they push, or have pushed in the past, a product that WCI does not believe is generally good for docs, they should not be advertising here. I understand they are a large company and may have a few bad apples, but this sounds like a more systemic issue (pushing VUL products). I think David S is right when he says readers trust WCI and therefore the advertisers on the site. Surely there must be other firms, more in line with WCI principles, looking to advertise on a great website like this.
Larson is a large, comprehensive, full-service firm with many different divisions. I’ve allowed some divisions to advertise here while not allowing others for several years.
If you know of other firms, “more in line with WCI principles,” that want to advertise, please send them my way. I take as many as apply, are willing to pay the fees, and show they are mostly in line with my principles. There are precious few (probably none) that I would say align with all my principles. Yet I have multiple readers a week asking me for a referral to an advisor because they don’t want to do it yourself. It’s quite a dilemma, that I’ve discussed in detail here:
https://www.whitecoatinvestor.com/the-perfect-financial-advisor/
If you can think of a better way of resolving this dilemma, I’m all ears. Or if you wish to volunteer to be the vetter of the firms, I’d love to outsource it.
Buy term and invest the difference is what I did through out my career and eventually reached the point where I didn’t need life insurance anymore due to limited debt and plenty of assets. I’ve always used the assumption that if an advisor had a product to sell that would fix your problem, he was in actuality a salesman; A salesman in advisor’s clothing. If you don’t understand what you are being sold, you shouldn’t buy it. The advisor/salesman will use the tactic that you’re really dumb if you don’t understand the product he is selling to you and very few people like to admit that they don’t understand something.
This post and the fact that Larson continues to be an advertiser on this site concerns me. I was under the impression that as a whole, non-term life insurance policies were a bad deal for most people. In the long post above, I see very little emphasis on that, but much more of an emphasis on defusing the situation/defending Larson. I thought I remembered reading a post several years ago that the advertisers on WCI were vetted and could generally be trusted. Clearly I’m wrong and will have to re-evaluate that assumption.
I think GENERALLY the recommended advisors can, but WCI says do it yourself because no one is as vested as you are. I’m still responsible to verify anything someone recommends. Don’t have to follow blindly.
Guess why I stopped writing posts like this one?
https://www.whitecoatinvestor.com/larson-financial-review-friday-qa-series/
This explains it well:
https://www.whitecoatinvestor.com/the-perfect-financial-advisor/
Unfortunately, the issue is slightly more complicated than “cash value life insurance bad,” as discussed here:
https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/
If you’d like to work (not even just volunteer) as the vetter of financial firms that advertise on the site, I would more than welcome the help. Or even suggestions about how to do it more effectively.
Does seem a little fishy that Larson is still a significant advertiser on this site, not to mention another blog post released the same day right after this one was written. Seems like you felt obligated to write something from past promises but wanted it generate as little publicity as possible. Larson will say anything they can to save face with WCI and readers…this is their largest referral source!
Post go out Monday, Wednesday, Friday and Saturday. Same schedule he has had for a while.
I’m not sure “significant” is the right word. I don’t know that I’ve made $500 off the firm this year. I can count the number of people I referred to them this year on one hand.
I would suggest you ask before stating false facts. I believe their largest referral source is their current clients.
And if I didn’t want to generate bad publicity for Larson, why would I publish this post at all? I’ll bet the only person who remembered I was supposed to write this post was Rex.
I can’t actually confirm others don’t remember ????
Whether they remember or not, I’m sure you do and here’s the post.
At any rate, every single person I’ve referred to Larson has known about the lawsuit and given my take on VULs. Some decided not to engage with the firm for financial planning for that reason, and it didn’t bother others who are now happy Larson clients.
At any rate, I can’t believe how much crap I’m getting. I know dozens of other financial bloggers and I don’t know a single one who vets their advertisers with anything other than a wallet biopsy. The vetting of advisors might be the most painful and least profitable thing I do with WCI. If readers don’t want me to do it at all, I’d be happy not to. If someone wants to take over for me, I’ll gladly pass the task off. Heck, I’ll even pay you to do it. But I need somewhere to refer all the casual WCI readers (the vast majority) who want/need a financial advisor.
How DO you vet them? I vaguely recall a form being mentioned at somebody point, but I could be confusing that with something else you do. I
The application is at the bottom of the financial advisor page. Anyone added to the page in the last couple of years or so a link to their application with their listing. I read that, their website, and their ADV2 and decide if the things I don’t like about it are a big enough deal to not refer readers to them. About half the time we exchange a few emails, mostly for clarification. I’m surprised how many people answer the questions “wrong” and then are surprised when I tell them I won’t sell them an ad. It’s not like I’m hiding the right answers from them.
Ah, that is the form I recall seeing at some point. Great that you have a vetting process in place. If someone fails an open book test with no time limit then that’s on them…
That’s the way I feel about it. I’m always surprised that I have to actually have tell someone selling whole life to all their clients and market timing actively managed funds that I can’t recommend them. You’d think they’d quit filling out the application halfway through when they got half the questions obviously wrong.
This seems inadequate. What about broker check at the SEC website.? And I would suggest checking state insurance databases if they’re selling insurance.
What seems inadequate?
I’ve been pretty underwhelmed with the amount of info I can get from brokercheck. What link do you use to check state insurance databases?
I have been waiting for this article as well. Whether we are in the dialysis industry or financial industry, it is important to learn about adverse outcomes for quality control in one’s own operation. My experience with VUL is that they are extremely difficult to understand. Only the person who wrote the policy probably understands the nuance of a particular policy. A key question would be “does the person selling me the policy have one for her own money? Can you show me your policy?” The fine print on these policies is about as clear as studying what renal tubular acidosis is. A good way to vet an adviser is to ask them if they would recommend putting a large chunk of money in the Vanguard Total U.S. stock Index Fund with an expense ratio of .04%. The answer should be yes for all of the reasons described in the WCI post about “My Favorite Mutual Fund.” It has been my experience that the vast majority of advisers give a reason not to choose this fund. Jim, I would vet your advertisers for my typical hourly fee, with the caveat that I would donate 25 percent of my charges to the WCI scholarship. I like out of the ordinary esoteric projects like that. The trick would be to find a counter example of poor choices like a load mutual fund, etc…Additionally, when you ask for references, ask for the client that left because they were not happy. An adviser should be willing to provide the email of a disgruntled client so that a prospect can get a balanced viewpoint. Regarding, disability, it is difficult to become an expert in that field and be a financial adviser. I don’t mind referring my clients to an expert in that field, as Adam Smith says division of labor is the optimal life strategy.
So what’s your hourly fee and how many hours do you expect to spend vetting a given applicant? And are you willing to come off the list since it wouldn’t make a bit of sense to have you vetting your competitors for referrals?
Here’s why I fear it wouldn’t work well. If you charged $300 an hour and spent 3 hours vetting an advisor and you had to vet 4 to find one that passed and only one of out every 2 that passed was willing to pay me, it would cost me $7200 per new advertiser. I charge a small fraction of that to be listed on the “recommended” page for a year.
I’d like to actually make a profit on the page and I’m certainly not willing to lose tens of thousands on it every year.
I would argue that you will make money, not lose money. Think about the opportunity cost of your time. If you could get your second book out 6 months earlier, that means about $84,000 now hits your bank account 6 months sooner that it would have otherwise. 55k (=84k post tax) in your Vanguard Total Stock Market Index Fund 6 months earlier makes you a small fortune 10 years down the road. You very willingly gave up some ED shifts to make more money, right? Additionally, one of the benefits of being FI is that you can pay people to do things you do not enjoy. I am not convinced it will take me 3 hours. For example, how long would it take to send you an email saying “My recommendation is decline adviser A because they charge a 1 percent AUM fee, and choose mutual funds with an expense ratio of .95 in their program?” My standard fee is $400 per hour. I find that to be the sweet spot, as I do not want too many customers because I have a lot of other hobbies and ventures. Regarding the advertising, I do not view the other advertisers on the website as competitors. I view them as esteemed colleagues, similar to the way you view fellow bloggers. With that said, I would take my advertisement down if you were more comfortable with that. In other news, I have not forgotten about the cash balance plan. I know you don’t like to lose, and I like that philosophy. I like your competitive spirit. So, why lose against the IRS by not doing a cash balance plan. Your fiscal year is probably good enough to justify one in a major way. Lastly, let me know if you have any speakers back out of the conference for an emergency. I would love to serve as a back up speaker, with a talk entitled “What Your Financial Adviser Does Not Want You To Know.” Keep up the good work! —PCM, LLC
Ha ha, no. I gave up the ED shifts to go on more trips and to be able to take on more household responsibilities.
But at any rate, my point is financial advisors have one of the highest hourly rates of any profession. I may very well be better off hiring someone for $20 an hour to vet advisors if I want to go to the point interviewing a bunch of their former clients. But what I’ll probably do is continue the application style vetting I’m doing now. Anyone willing to click on the application can see exactly what I have and haven’t. In the end, it’s their money and their responsibility. I’m just trying to get them with someone I won’t later be embarrassed to have recommended. So far, of the 40 or 50 financial advisors I’ve had on the site at one time or another, this is the only one I’ve ever had any blowback over, and 99% of it is all VUL inspired. So I simply required anyone who wanted to be referred to have email contact with me first, and I told them what they need to think about before buying VULs (and about the suit). Problem solved.
Just got an email from Harry Sit volunteering to do it. I’ll bet he works for less than $400 an hour. I’ll have to think about that.
The main problem I have with another cash value plan at this point is I’m trying to round out my real estate investment allocation, which will be mostly in taxable, and if I put it in a cash value plan, I can’t very well invest it in real estate the way I’d like to. Plus, it would be really hard to make any sort of multi-year commitment to funding it at this point.
You’re about the 15th financial advisor to volunteer to speak at the conference, most for free. In fact, I had one willing to pay to speak. I could have a conference where I paid the speakers nothing, didn’t pay their expenses, and just had advisors come pitch to them. Be tough to get CME for it though, and it would be hard to get anyone to come back for a second one. And my reputation would be shot. And it wouldn’t be as fun. But I think you’d do a good job, and the MD would be worth something to the CME folks. But I can guarantee your suggested talk won’t qualify for CME.
PCM, LLC: “For example, how long would it take to send you an email saying “My recommendation is decline adviser A because they charge a 1 percent AUM fee, and choose mutual funds with an expense ratio of .95 in their program?” My standard fee is $400 per hour. I find that to be the sweet spot, as I do not want too many customers because I have a lot of other hobbies and ventures.”
So, let me get this straight…you think the main difference between a great FA and a poor FA is AUM fees and the expense ratios of the mutual funds they use? With all due respect, the physicians reading this blog are well qualified to do the math on their own. Comparing the financial planning activities of one advisor to another, their philosophies, and the personal effort devoted to each client is quite a different story.
I did not say that. What I am saying is that when vetting an advisor, one can find an example that is contrary to the client having a good long term result, and quickly eliminate that advisor to be permitted on the advertising list. For example, if Jim is vetting an advisor for his site, and and the model portfolio shows an actively managed fund with an ER of .85, and an AUM fee of 1 percent, that advisor can quickly be screened as someone that should not be on the list. In other words, the due diligence might be stopped there as it would not fit the general philosophy of this website. The story should fit your philosophy, like holding equities for the long term (more than 5 years) with minimal turnover, etc…
If you only need one example of something I don’t like, I wouldn’t have a single advisor on the list. I’ve thought about starting my own firm to address that, but frankly, I’m really not interested in going into that business. I prefer medicine and writing to financial advising.
PCM, LLC: My philosophy is that a true financial advisor is a certified and experienced financial planner who uses investments merely as a tool to accomplish the goals in an appropriate, well thought-out and developed plan. Investments are only a small piece of the plan. Iow, a portfolio is not a plan, not even close. Investing and management is the easy part. It’s the rest of the process that very few FAs are willing to put forth the effort to accomplish. (Fee only, of course.)
Once again, I agree completely.
Forgot to mention, in the analysis above it would really be 84k minus your expense of hiring people to do jobs you don’t enjoy—even if it came to 10k, you would still wind up ahead, right?
I think you underestimate the amount of work required to write, publish, and market a book. Vetting FAs isn’t terribly time consuming, it’s just unpleasant dealing with their emails for years afterward when you don’t take their money.