All too often, people will take a perfunctory glance or skim a headline and snap to judgement which leads to the dissemination of misinformation based on incorrect assumptions…generally. We all know the quip about what it means to “Assume.”
Additionally, the internet is our primary source of information because if it’s on the web, it has to be true…right? Due diligence, for many, is to read the first headline below the paid ads in a search and if that happens to be a negative article, judgement has been passed without any real effort to see all the way to the bottom. Any down-tick on an idea renders it useless.
Also, over the course of time, our own personal experiences, actual or borrowed, shape our perceptions. It is a natural human response to be quick to either accept or dismiss an idea when one associates a past experience, real, perceived or borrowed, to a stimulus. Been there…done that…or know someone who has…next.
The problem with being too quick to judge, particularly in the financial services field, is that sometimes, great ideas are discarded based on misleading our outdated information. Products and services evolve. The ticker tape eventually became CNBC in the palm of your hand. The now ubiquitous Exchange Traded Fund (ETF) was met with heated opposition from the financial advice world when it first hit the streets. Innovation in financial engineering takes time to be developed, tested, improved, re-tested, re-engineered and implemented but innovation and continuous improvement never sleep. Add technology and now, what started with the Ticker Tape and a good old fashioned face-to-face conversation, has become Artificial Intelligence, High-Speed Algorithmic Trading and Robo-Planning Platforms adding to the challenges faced by today’s Registered Investment Advisor (RIA).
This particular point was made by a close friend just today about the resistance he’s getting from the old guard clinging to their norms that the only way to deliver advice is the way they have always done it. Do you realize that the largest segment of the population right now is the Millennials…The children of the Baby-Boomers. Same DNA…different belief systems. And the funny thing is, they both need and want the same information but the culture clash refuses to recognize the manner in which these two diverse generations prefer to receive and process information. What to do?
Are these developments good or bad? Without objectively doing your homework, there is no real way to know. In our world and most certainly, our children’s, information is flying at us at light speed and sometimes, speed kills. It is still as impossible as it ever was to dig a hole without putting your hands on the shovel. For the boomers, it’s still a shovel…wooden handle, steel bucket…you know…a shovel. For the Millennials, it’s binary. They can dig a hole as effectively without ever having moved any dirt. A boomer calls that the lost art of communication and the millennial says it’s our way of communicating. Adapt or see ya. But at the core of the argument, is process and procedure. Apparently, there’s more ways than one to dig a hole, metaphorically speaking, but one has to open their mind that their way is not necessarily the only way.
I have often been asked, “Are Senior Life Settlements good or bad?” To which, I consistently answer that question with a question to make a point. “If I were to offer you the rights to be sole McDonald’s franchisee for an entire country with zero investment, would you accept?” In virtually every instance, boomer or millennial, people respond immediately in the affirmative. That’s when I tell them, “Ok…Your country is India (Cows are considered sacred in the Hindu religion).” It only takes a second or two to watch the look on their face tell me, “I didn’t have enough information to make an informed decision.” As it pertains to Senior Life Settlements, when you understand the correct execution and delivery system, the answer becomes crystal clear, regardless of your particular method of processing information.
What remains constant between good and bad business, is the Delivery Model. In virtually any instance which one could imagine, good or bad, right or wrong, black or white…The quality and correctness of any product or service comes down to execution. Outcomes are always a coefficient of inputs, processes, procedures and people that ultimately delineate good, bad and all points in between.
“Great intellects have always been met with violent opposition from mediocre minds." - Albert Einstein
Old man Einstein’s boy was trying to make a very salient point. Because we are all products of our environments and experiences, there is often a natural resistance to innovation because of a lack of understanding based on an unwillingness to change. Change is painful. It requires work and effort to challenge yourself to change your own paradigms and it is typically only at the point of a cataclysmic event that we accept a new reality. One of my favorites quotes appears at the beginning of the movie The Big Short…
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain
I have often said, if I were the beneficiary of the proverbial “Genie in a Bottle” found on the beach and she emerged to grant me one wish…I would wish for tomorrow’s Wall Street Journal today. There is nothing so valuable as information. Lack thereof is the basis of all fears and certainly the bedrock of market volatility…uncertainty.
The value proposition of a Senior Life Settlement, although not without its risks, does one thing better than any investment I have ever seen. The outcome is known in advance. The Senior Life Settlement industry has become a significant source of liquidity for seniors that no longer need, want or can afford the premiums associated with their life insurance coverage and they wish to monetize their asset in a better way than an insured has ever been allowed to before. A Senior Life Settlement is acquired from an insured at an amount greater than the surrender value offered by the carrier but less than the face amount payable as a death benefit. The new owner assumes responsibility for servicing the policy premiums and is entitled to receive the death benefit at the selling insured’s contract maturity. The spread that remains between the contract acquisition cost and the face amount of the contract is the store of value. The ultimate outcome is mathematically reliable.
It is the business model that determines the extraction of the value. It doesn’t take very long when you do even a drive-by search of the Senior Life Settlement Asset Class to find examples of bad actors, poorly executed or absent due diligence procedures, an utter lack of safety controls and consumer protections in place to assure proper execution and delivery and the irreversible decision has been made. To say that Senior Life Settlements are inherently bad has as much credibility as saying, “Spoons are to blame for people being fat.”
As a matter of fact, I strongly recommend, in this instance, that you do some homework on the internet about Senior Life Settlements because it only strengthens the value of the correct business model when you see it. One must first seek to understand what was and now what is to gain from the benefit of objectivity. If boomers believe human interaction is a lost art, I say the speed and abundance of unqualifiable information in real time is the bane of the millennial's existence. Sometimes you just have to stop and do the work. Senior Life Settlements, at this point in time, are emblematic of two thought processes at opposite ends of the spectrum and a failure to understand, regardless of your research methodology, has a significant pain-point attached.
If any of the following elements are missing from the Senior Life Settlement business model, one should have cause for concern:
- Qualified escrow agents, trusts/trustees and financial institutions should be the receivers of an investor’s capital investment – Be wary of any life settlement company that asks you to send your money to them or a non-qualified agent directly. A Senior Life Settlement transaction is executed much like a real estate transaction. Qualified attorneys, escrow functions and financial institutions with validated licensure and charters are acceptable stewards of your investment capital.
- Fractional Investment in a Portfolio of Senior Life Settlements Should Always Be Accompanied by a Fully Disclosed Private Placement Memorandum (PPM) – All risks, large or small, are material to the investment opportunity and should be spelled out clearly in the PPM. The principal risks associated with the life settlement asset class are that they are a buy and hold investment offering little to no liquidity during the holding period and there are no guarantees suggested in terms of a maximum or minimum time to contract/portfolio maturity. Human mortality cannot be precisely calculated.
- Transparency of due diligence procedures should be fully disclosed – You should never buy anything that you do not fully understand. There is no substitute for understanding. The only dumb question there is the one you fail to ask. Do your homework.
- Quality of counter parties – Be aware of castles built in the sand. Major financial institutions, medical underwriting firms, escrow agents/banks, trusts/trustees, Providers (the licensed public facing entities to the sellers regulated in all fifty states and Puerto Rico) and of course, the issuers should all have flawless track records. Their credentials should be closely scrutinized.
- Policy Aggregators – The secondary level of due diligence and policy selection should display exceptional skills in portfolio construction with attention paid to laddering life expectancies, life insurance company credit quality and male/female parity.
- Risk Mitigation – As time to contract/portfolio maturation and the reinvestment risk that manifests itself with the inability to place your capital elsewhere, the life settlement company you choose should offer the investor an Extended Longevity Risk Transfer to preserve the yield from your investment that can erode or evaporate if the investor is subjected to Premium or Capital Calls to keep a contract in force. If exceptional due diligence contract selection criteria and premium optimization best practices are not exercised, all of the risk of the investment is born singularly by the investor and there is no incentive for the policy aggregator to align their subscribers’ best interests with their own. To accept these risks, the investor deserves an above-market illiquidity premium for waiting.
- Consumer Protections – Generally, every measure should be taken that no one institution, individual or entity should have any undue influence to affect the nature of the investment or the chain of custody of the investors capital. A life insurance contract owner has the power to change any number of elements to a contract when they become the owner. Structures, like trusts, qualified Self-Directed IRA custodians, banking institutions, attorneys, auditors and the domiciles in which the aforementioned reside should provide the maximum regulatory, statutory, fiduciary and investor asset protections available.
As previously mentioned, the business model and executional elements of the delivery system of the Senior Life Settlement Asset Class are crucial to know and understand. Sure, it will take some time and effort but it’s long since been said that a lack of understanding of the past is a surefire way of a repeat performance.
The first thing one should understand is that Senior Life Settlements are not stocks, bonds or mutual funds. Try as you might to make them fit in a familiar box is, at the very onset, an exercise in futility. As an entrepreneur, decision maker and master of your own universe in the RIA space, don’t expect this to be easy. Provide your clients with a formidable advantage over your competitors. Deliver real quantifiable value, results and risk mitigation utility to your clients’ capital creation and protection objectives and the endeavor will pay multiples on your efforts to tell a story your clients aren’t hearing from anybody else. Anything worth doing, is worth doing right and the dividends of sincere, hard work are eternal.
Capstone Alternative Strategies is a company that has been built by advisors, for advisors to provide a unique solution that is unmatched in its structure, investor protections and imperviousness to fraud and manipulation.
The Capstone Platform is the embodiment of the collective efforts of a thoughtful, exhaustive effort to bring a solution to the perils of market investing that is permanent, predictable and timely.
We know you are committed to a fiduciary standard that is beyond reproach and the distinctive characteristics of the Senior Life Settlement Asset Class are emblematic of the standard you have set for yourself to promote and protect your clients’ best interests toward the attainment of financial independence.
You have set yourself apart from the also-rans by choosing the independent route. Your loyal clients are in your camp because they expect flawless execution and an innovative thought process to see them through. Capstone’s hallmark is making hard, easy. Let us show you how integrating The Capstone Platform into your RIA firm can help you grow and prosper with the thought leadership for which you were hired and will continue to be trusted to achieve your clients’ security and personal financial aspirations.
For more information, please contact Jason Bokina at (404) 504-7006 or email us at contact@capaltstrategies.com.
Michael J. Bradburn Michael Bradburn started his career as President and General Manager of a small automotive sales conglomerate, where he oversaw and managed several domestic and Asian manufactured retail dealerships. After selling the dealerships, Michael then worked with Prudential Preferred Financial Services in life insurance and annuity sales. He later advanced his career in private wealth management at Morgan Stanley-Dean Whitter and subsequently Merrill Lynch. Following that, Michael served as Chief Financial Officer of a metals manufacturing and distribution startup, where he was instrumental in securing patents and developing a completely virtual, vertically integrated, manufacturing and distribution technology serving the global powder metallurgy industry. At Capstone Alternative Strategies, he oversees marketing and advisor development. Michael attended Indiana University where he became a member of the Sigma Chi fraternity and later earned his BS from Ball State University.