I believe there are some important points that should be addressed in response to the author's perspective of the life settlement industry ("Be your own life settlement broker," Accounting Today, Aug. 4-17, 2008, page 16).A provider's No. 1 objective is to have the least amount of competition possible on any policy that they're reviewing, so they can pay the least amount for that policy. The provider is representing the institutional buyer, and their responsibility is to protect that fund's rate of return on its portfolio.
On the other hand, when a life settlement broker is involved, the No. 1 responsibility is to promote competition, therefore maximizing the amount that the purchasing institution will actually pay for a policy. A life settlement broker sits on the same side of the table as the advisor and the policy owner. The duty of the broker is to the client, not to the purchasing institution.
In this article, Legacy Benefits, a life settlement provider, is suggesting that it's more advantageous for the advisor to work independently when approaching the life settlement market. However, the life settlement market is constantly changing, and its purchasing parameters are shifting on a daily basis. The concept that an advisor who does not focus exclusively on the life settlement market could navigate efficiently the complexities of the underwriting, negotiating, contracting and regulatory requirements, is very difficult to visualize.
In addition, we, as CPAs, are held to a higher standard and are required by our Code of Professional Ethics to only work in areas where we have a sophisticated level of knowledge. I doubt most CPAs, without years of experience in this area, could meet that requirement. Therefore, unless a CPA has the requisite experience, the only ethical option is to work with a competent broker.
Additionally, the majority of states require specific licensure, forms and due diligence to participate in the appraisal of a life insurance policy, much less its sale. In addition, I believe from experience that the lack of a broker or intermediary to help facilitate this ever-changing market would greatly impact the value of the offers. Even though fees will be paid for the intermediary or life settlement brokerage firm, the objective of maximizing the offer to the client is much more likely.
I have seen some providers' "gross" offers come in lower than brokers' "net" offers. Why?
I believe that the providers know that there is no intermediary to pay, so they will take that into consideration when making their offer.
Doesn't it seem reasonable to pay a fee to a professional that added value to the client by increasing the offer, often by double, if not more, than if there were only one or two buyers looking at the policy? Ten years ago, when this market began, there were only three to four legitimate institutional buyers. Now, with over 30 institutional buyers in the market, it's important to be able to access as many providers as possible, therefore increasing competition and offers to the client. Not to mention that this transaction has become extremely intricate, and that it's critical to be able to understand all the best practices, pitfalls to avoid, and opportunities available to benefit policy owners.
Furthermore, it is important to know which capital is aggressive at any given time. For instance, if the advisor is only approaching one or two providers, and their current capital is not among the more aggressive in the market, the advisor would have seriously limited the offer to the client.
Lastly, the closing process in the life settlement market has become much more complex, and requires specialists to provide and review legal documents, reps, warranties, financial underwriting requirements and contracts that can be as long as 60-80 pages. It's important to have a partner that understands these documents, and how to assist the advisor and policy owner in completing these closing documents. The closing and contracts process is critical to the successful completion of a life settlement transaction.
At the same point, building a file from the beginning, and generating the proper illustrations, medical records and underwriting reports is also a value-added service that the life settlement broker brings to the transaction.
For the same reason that affluent clients and business owners work with their professional CPA, it is important to work with a firm that specializes in life settlements, and is happy to partner with the CPA.
All in all, it is imperative to receive guidance from an experienced partner that is looking out for the consumer's best interests.
Life settlement brokers provide that service.
Susan J. Bruno, CPA/PFS
Beacon Wealth Consulting LLC
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