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

The lawsuit was filed October 15th, 2014 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 For Advisors

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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.

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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.]