$3 Trillion in Neglected Wealth

With more than $3 Trillion in assets from which few know what they are being charged or what they are earning, life insurance is clearly the largest component of wealth which wealth managers have thus far left behind. Larger than Hedge Funds, Separately-Managed Accounts and Exchange-Traded Funds combined, and almost 1/3rd of the size of the massive $11 Trillion Mutual Fund industry^[i], and with many policy holdings in desperate need of management, life insurance portfolio management is the largest un-tapped wealth management opportunity the industry has seen in 3 decades.

However, as big as the investment management business is today, before ERISA was enacted in 1974, it was but a fraction of its current size and investments were generally not managed. Instead, investment products were generally sold by "manufacturer's reps" serving the needs of the product manufacturers and investment advice was generally "bundled" with and incidental to the sale of the product, after which there was little ongoing advice for the management of that investment.

For instance, while it now seems difficult to imagine the investment business without investment management, one of the industry's largest asset managers – Merrill Lynch Asset Management (MLAM) – was not even formed until 1976^[ii]. Investment sales were also often based on hypothetical projections of some future performance instead of empirical research as to costs and performance (e.g., tax shelters) and "Investment Contracts" paid commissions on deposits (in some cases as much as 50% and more) rather than assets-under-management (AUM) fees.

Before ERISA, investments were generally sold and not able to be purchased, mutual fund sales were generally flat and actually half that of life insurance sales, and the investment business operated much like the life insurance industry of today. Then ERISA provided a "rules-set" that a substantial portion of the investment industry (i.e., Qualified Retirement Plans) had to follow. These rules include 1) the duty to monitor holdings, 2) the duty to investigate the suitability of holdings, and 3) the duty to manage holdings as a "prudent man" would to minimize costs and maximize benefits relative to risk.

In the years following ERISA, third-party administrations (TPAs) developed record-keeping systems to support this duty to monitor and research providers began publishing pricing and performance data to support the duty to investigate. As information about both current and alternative holdings became increasingly available, the ability to use this information to manage investment holdings became possible, and more and more practitioners got into the investment management business, including those financial services businesses not previously in the investment business (e.g., banks).

Such ready access to information about current holdings and their suitability relative to peer-group products also lead to regulators and litigators enforcing this standard-of-care. For instance, where there was comparatively little litigation in the investment business before ERISA, Qualified Plan Trustees were the popular target of litigation involving breach of the duties prescribed by ERISA in the late 1980s and early 1990s. As such, ERISA set into motion three market forces:

1. Third-Party Administrators (TPAs) providing information about current holdings,
2. Research firms publishing suitability information relative to peer-group products, and
3. Regulators and litigators using #1 and #2 to enforce the rules prescribed by ERISA.

The combined effect of these three forces transformed the investment industry from a product-centered, "manufacturers' rep" business into a client-focused, assets-under-management business in which more and different types of advisors entered the investment business. At this same time, the Baby Boom Generation was moving into its peak earnings and savings years, substantially increasing the demand for investment products, management and advice.

Between the increased supply of investment information, the increased number of investment advisors and investment products, and the increasing demand for such products and services, sales of investment products exploded. Where mutual fund sales were flat before ERISA, they have since increased 800-fold and now total almost $11 Trillion and continue to grow^[iii].

In that the life insurance industry of today so closely resembles the pre-ERISA investment business, study of parallels between the life insurance business of today and the evolution of the investment business since ERISA offers insights as to the future of the life insurance business. For instance, just as ERISA provided a "rules-set" that a substantial portion of the investment industry had to follow, the Uniform Prudent Investor Act (UPIA) similarly provides a "rules-set" that a substantial portion of the life insurance industry (i.e., Irrevocable Life Insurance Trusts) also must follow.

These rules under UPIA have now been adopted by 46 States/Territories and similarly include 1) the duty to monitor holdings, 2) the duty to investigate the suitability of holdings, and 3) the duty to manage holdings as a "prudent man" would to minimize costs and maximize benefits relative to risk. And in a repeat of events following ERISA, third-party administrations (TPAs) arrived on the scene roughly coincident following the adoption of UPIA in 1994 (e.g., TrustBuilder in 1992, Resource Insurance Consultants in 2000 and Investment Scorecard originally founded as Advicon in 2003).

Then, again in parallel fashion, life insurance product research became available some years after TPAs were well established (e.g., THEInsuranceAdvsior.COM was granted a patent on its life insurance pricing algorithms and research database in 2002) and TPAs who initially targeted institutional trustees began expanding to serve other advisors (e.g., Investment Scorecard launched Insurance Trust Monitor to serve the needs of individual advisors and private trustees).

As such, at least these two of the above same three market forces that shaped the investment management business are now in play in the life insurance business. Recent lawsuits against irrevocable life insurance trust (ILIT) trustees (e.g., Micale v. Bank One N.A.) and involving breach of fiduciary duty in the management of life insurance assets (e.g., Vagelos v. Merrill Lynch and Larry King v. Meltzer Financial) also suggest that litigators are beginning to enforce the rules under UPIA.

In other words, we have been here before and certainly appear to be headed back to the future where UPIA has set into motion these same three market forces in the life insurance business as to:

1. Third-Party Administrators (TPAs) providing information about current holdings,
2. Research firms publishing suitability information relative to peer-group products, and
3. Regulators and litigators using #1 and #2 to enforce the rules prescribed by ERISA.

In another parallel, the Baby Boom Generation is now also on the verge of impacting the life insurance business the way it previously and profoundly influenced the investment business. As Boomers move out through the retirement years and into wealth-transfer years, the population over age 65 will likely double between 2010 and 2030 as a percentage of total population^[iv], and they are expected to transfer more wealth than ever before^[v].

Given the unique utility of life insurance for financing estate taxes, or for setting up an endowment for preservation and maintenance of family assets, or as a hedge against risks inherent in certain investments, or to balance an estate between family members, all signs point toward substantial growth in both the demand for and the supply of life insurance portfolio management services. While life insurance agents/brokers have been heard to say "life insurance cannot be purchased, it must be sold", this too seems to be changing.

According to Life Insurance Marketing and Research Association (LIMRA) and the latest IRS Statistics of Income Bulletin, 56% of married couples with children under 18 believe they need additional insurance and 43% say they are likely to buy life insurance in the next year" without having to be sold on the idea. In addition, these same statistics indicate that 80% of married parents are not getting but want "periodically to review the terms, provisions, and options of current life insurance policies."

The combined impact of these above three market forces and the Baby Boom Generation certainly suggests the life insurance business is evolving from its product-centered, "manufacturers' rep" roots towards a client-focused, assets-under-management business in which more and different types of advisors will enter. And while competition is fierce in the investment management business and there is constant pressure on margins, few advisors actually manage life insurance portfolio holdings to minimize costs, maximize benefits, and ensures they remain consistent with the intended planning objective.

Herein lays the opportunity.

^[i]Tiburon CEO Summit XII - Keynote Presentation Highlights 5/11/2007; 3/05 ICI web site; 7/19/04 Barron's; 4/04 Research (MMI); 12/15/06 Investment News (Ceruli); 7/03 Ticker; 5/27/02 Merrill Lynch Presentation (Ceruli) (Doe); 10/014 Investment Consulting News; 7/13/01 Ceruli Presentation (Strategic Insight) (Ceruli); 7/11/01 RunMoney Conversation (Jorgensen); 7/2/01.

^[ii]Merrill Lynch web site About Us > Company Overview > Our History: "1976 - Merrill Lynch Asset Management (MLAM) is created as an integral business unit in the Merrill Lynch family" and "1997 – Merrill Lynch becomes the first financial services company to surpass $1 trillion in client assets under management" as at October 1, 2007.

^[iii]Source: 2007 Investment Company Fact Book – 47th Edition by the Investment Company Institute www.icifactbook.org.

^[iv]Source: U.S. Census, 2000

^[v]Ken Dychtwald Ph.D., President & CEO, Age Wave in "Financial Wake-Up Call: The Future of Financial Services" Keynote Presentation at National Financial Partners 2007 Fall Sales & Strategy Summit.