A great deal of the work we experience in our profession is about helping people manage risk, such as the hazards of life we all experience on a day-to-day basis. Whether crossing a street, being diagnosed with a catastrophic medical condition, or having an unexpected loss of income due to sickness or injury, there are all kinds of perils we face each day. These risks of life can also cause a great deal of anxiety for our clients when they impact or threaten their money and savings. For example, placing money in investments that are too risky or the fear of outliving one’s income can be quite unnerving. Then again, consider the word “life” itself; the two middle letters of this word illustrate the issue clearly.
So, unless they are forced to live 24 hours each day in a 8x10 foot cubicle, most of our clients face various perils if they live any type of active life at all. And dealing with these risks requires an understanding of the rules of the game, which we call risk mitigation. This term is nothing more than reducing one’s exposure to what is known as the risks of life.
But helping clients make good, informed financial decisions these days to guard against risk can be extremely difficult. I attribute a good deal of this to the pace of our lives today. People often have neither the time nor energy to make good, rational decisions. For many, the whole process can ultimately evolve into one big source of confusion.
With this in mind, I thought it might be interesting to look at varying forms of risk that our clients and prospects may experience with financial products today. Better understanding these items in a broader overall context could help improve the financial wellbeing of the people we are privileged to serve.
Market risk: This can be especially important with products classified as “variable” where downturns and reversals in the market can sometimes create stress based on the performance of the financial instruments the client is purchasing.
Interest rate risk: Today, increasingly, there are situations where the performance of a product is tied to the interest sensitivity of the product. Are we helping our clients understand this risk?
Pricing risk: Can today’s pricing of a product be supported for the next 10 to 20 years? Or longer? Years back, many insurers offered cancer policies and long-term care coverage that had pricing problems, which resulted in multiple rate increases. In recent years, some companies have chosen to sell these blocks of business to get out from under the pressure of unexpected rate increases. As the writing agent, you need to know on the front end if the financial product is priced to last for years to come.
Longevity risk: With people living longer than ever, is the product we recommend able to handle the increasing risk of longer life spans? If not, are we providing adequate answers regarding this type of risk?
Morbidity risk: Also tied to changing mortality statistics, there is a risk that more people will experience periods of disability as, statistically, these are more likely to occur during later stages of life.
Complexity risk: Financial products are increasingly complex today with complicated pages of fine print to sort through. Are we providing clear guidance to help our clients understand these types of products and the risks they might carry? Another question to ask: will we be around to service this product down the road for our clients? Better that we understand this on the front end.
Regulatory risk: Will our product “pass muster” regarding taxation and regulatory issues? The greatest product in the world is useless if you have to worry about adverse regulations down the road.
In working with our clients and prospects, it is critical we provide clarity with the financial challenges many face in the days ahead. Most importantly, particularly in our role as NAIFA professionals, is that we equip ourselves with the necessary knowledge and understanding to help our clients discern the risks involved and make good choices.
Ike S. Trotter, CLU, ChFC is a well-recognized career professional in the financial services industry and a 51-year NAIFA Volunteer/Member. He operates his own risk management firm in Greenville, MS.
Information provided for this article is general in nature and not intended as specific financial advice. Opinions expressed are those of the author.