Putting Fees Into Perspective

Here’s an interesting bit of information.  $1,000,000 at 8% over 30 years grows to $10,000,000.  Now let’s assume an investment advisor manages your money and charges 100 basis points annually.  In 30 years your balance is not $10,000,000 but $7,600,000.  In other words, management cost you $2,400,000!

100 basis points may seem innocuous but a quarter of your money is not.  By and large people operate by this model because they don’t have to write checks; it’s not painful.  Life insurance is similar.  Writing a check for the commissions would be much more painful than letting them be taken out of premiums and cash values.  Out of sight, out of mind.

If I asked you to write checks for the commissions and expenses of a typical life insurance transaction you’d probably never sign on to that deal.  Again, it is less painful for the commission and expenses to be quietly taken out of the cash values.

What if I could convince you this format might actually cause additional long term detriment for a variety of reasons?  Would it cause you or your clients to think and act differently?  If it meant overtly writing checks for fees rather than letting them leak out the back unnoticed, even if the checks were substantively smaller and improved return, I’ll still insist most people wouldn’t do it.

Why?  Human nature.  Here’s where the professional advisor comes in to introduce a semblance of sanity.  If a policy owner was willing to pay a hundred basis points (or whatever it is he pays) year in and year out for investment advice and management some argue won’t outperform an index fund anyway, would he be willing to pay a five to ten basis point charge, one time, to thoroughly vet a proposed life insurance transaction?

What if this introduced advice to ensure a well designed contract which mitigated the chances of failure, ensured success and and maximized return on committed capital?  What if the modest one time fee improved the internal rate of return on the deal significantly, maybe a hundred to one or even better?  What if it prevented the loss of the entire investment?

This model is available.  Something so ridiculously inexpensive, so insignificant relative to return, it would be nothing short of foolish to not do so.  This may sound a bit over the top but if you saw what I see and understood, you’d understand.

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