Fiduciary duty is the responsibility placed on certain professionals to act in the best interests of their stakeholders. It is a legal requirement for lawyers and certain advisors, and it’s intended to protect clients from being harmed financially by conflicts of interest. Essentially, fiduciaries must settle all conflicts by choosing the client’s needs over their own. Fiduciary advisors cannot use a client’s information for self-gain. Nor can they make or withhold recommendations that benefit themselves over the client.
A 2014 California lawsuit demonstrates the concept. Larry Grill and his wife sued Lincoln National Insurance for not informing them they could sell their policy for cash in a life settlement. The lawsuit claimed it was Lincoln National’s policy not to discuss life settlements, because the insurer made more money when policies were surrendered vs. sold. As the lawsuit detailed, the couple had asked their broker for recommendations on managing their rising premiums. The broker gave them two options: Pay the premiums out-of-pocket or surrender some of their insurance. The Grills chose to surrender, but later learned they could have raised far more cash in a life settlement. They subsequently filed suit against Lincoln National on the basis that the insurer violated fiduciary duty.
Whether you’re a policyholder, an agent, or an advisor, it’s important to understand the concept of fiduciary duty and how it applies to life settlements. We’ve developed this in-depth guide to help. Read on to learn about fiduciary standards, what constitutes a breach of fiduciary duty, and the complexities of fiduciary duty as they relate to life settlements.
What is fiduciary duty?
Lawyers and financial advisors manage their clients’ most sensitive information, and conflicts of interest naturally arise. A lawyer, for example, might take legal ownership of the client’s property to manage a transaction. Selling that property for the lawyer’s personal gain would be a clear violation of fiduciary duty.
Another common situation is the fiduciary advisor who recommends a commission-earning product like life insurance. The client may need life insurance, but the advisor may also benefit from selling a certain policy type or size. You’d think that life insurance agents would have a fiduciary duty to recommend a policy that best aligns with the client’s goals, but the agent’s true fiduciary duty is to the insurance company, not the client. This means that life insurance agents may not necessarily be required to recommend the policy best suited to the client’s needs. While life insurance agents do have a level of fiduciary duty to clients, in the case of a lawsuit the liability would likely fall to the insurance company because the agent was representing them.
Fiduciaries are held to two standards, the duty of care and duty of loyalty. These are explained below.
Duty of Care
The fiduciary duty of care requires the advisor to be engaged and proactive in the client relationship. It’s not enough for the advisor to provide guidance at an initial meeting and then sit back and wait for the client’s call. Duty of care means the advisor will remain involved and watchful over the client’s situation. If circumstances change and the client needs a new strategy, the fiduciary advisor proactively contacts the client to discuss next steps. The advisor must also remain current on regulatory changes or other external factors that could influence the work being done on the client’s behalf.
Duty of Loyalty
Fiduciaries also have a duty of loyalty to their clients. This means they cannot use their role as advisors for personal gain. There are some gray areas here, such as with commission-earning products. In those cases, where the advisor could benefit personally or financially from a client transaction, disclosure is required. The client should always be aware of which transactions potentially create conflicts of interest.
What constitutes a breach of fiduciary duty?
Financial and legal advisors do make professional mistakes that could result in problems for their clients. But a mistake doesn’t necessarily constitute a breach of fiduciary duty. Legally speaking, a client suing an advisor on a fiduciary breach claim must establish three things: the advisor had fiduciary duty, a breach occurred, and that the breach directly resulted in financial damages.
1. Duty
It’s not a given that any legal or financial advisor is a fiduciary. The SEC requires Registered Investment Advisors to act as fiduciaries, but that same standard does not apply to brokers employed by broker-dealers. As well, state courts, which regulate the insurance industry, have been inconsistent in establishing which professions must adhere to the fiduciary standard.
Clients can protect themselves proactively by asking their service providers to describe their standard of care in writing. Some advisors will market themselves as fiduciaries, while others follow a lesser standard known as “suitability.” The suitability standard requires advisors to make recommendations that will benefit the client. But it doesn’t prohibit a recommendation that would benefit the client and also result in personal gain for the advisor.
2. Breach
The client must also prove that a breach occurred. This can be subjective. Consider the investment advisor who executes a buy order incorrectly, resulting in the client overpaying for an unwanted security. The advisor may have breached fiduciary duty. But what if the client’s instructions were unclear? In that scenario, a breach is less obvious.
3. Damages and causation
Finally, the client must show that the breach resulted in financial damages. Using the above example, damages would arise if the security’s share price falls and the client must sell it at a loss. If the security’s share price doesn’t change and the client sells it quickly, no damages would occur. Without damages, there is no basis for a lawsuit.
Does fiduciary duty apply to life settlements?
Yes, fiduciary duty does apply to life insurance and life settlements. Financial advisors, trustees of irrevocable life insurance trusts (ILITs), and any advisors who label themselves as fiduciaries may be required to educate their clients about life settlements in certain scenarios. For example, a client who’s already expressed interest in surrendering or lapsing the insurance should know that a life settlement raises more cash than a surrender. The same is true for clients who need to raise cash for unexpected expenses. In that scenario, a life settlement could be far less disruptive financially than selling investment or real estate assets.
Contact Harbor Life Settlements for a free policy estimate
Life insurance is a valuable asset. Policyholders and their advisors can’t make fully informed planning decisions without knowing just how much that life insurance policy is worth. Harbor Life Settlements can help by quickly estimating a policy’s value, for free and without obligation. If the policyholder decides to move forward with a sale, we will have a licensed life settlement provider identify the best match between your policy and a network of institutional investors so we can provide you a fast, fair settlement. Contact us today to learn more.
