Financial advising with a

S3 EP07 Building a Product-Agnostic Insurance Platform with David Lau

04.13.20 | 0 Transform Uncategorized

My guest today is David Lau.

David is the Founder and Chief Executive Officer of DPL Financial Partners, a network that connects Registered Investment Advisors and fee-based advisory channels with insurance solutions from the nation’s top carriers. 

Prior to founding DPL, David was a Chief Operating Officer at Jefferson National before they were acquired by Nationwide. 

David started DPL with an idea to distribute variable annuities through RIAs and fee-only advisors. That seemed like a gamble at the time. After all, everyone knew that RIAs hated annuities. But David firmly believed that it wasn’t annuities RIAs mistrusted. It was the fact that annuities had turned into complex, opaque, and expensive products that benefited the people who sold them more than the buyers. 

David’s hunch proved accurate. In just two years, DPL membership achieved an RIA footprint that approached some of the largest, well-established platforms in the industry. 

In this conversation, we discuss how DPL has built a turnkey, product-agnostic insurance platform for RIAs. Insurance is an important part of a holistic financial plan. David argues that advisors can — and should — use insurance products when that’s the best and most appropriate solution for their clients. However, fee-only advisors have historically had to refer their clients to outside insurance professionals because of commissions. DPL eliminated the need to do that. 

Today, DPL connects fee-only advisors with low-cost, commission-free insurance solutions that align perfectly with their business model. 

In addition to offering a virtual marketplace for commission-free insurance solutions, the DPL platform has advanced analytics and tools that enable advisors to make the best product recommendations for their clients. In one of our favorite moments during this episode, David breaks down two ways an advisor can use the analytics and academic research available through the DPL system to build a portfolio for clients, eliminate extra costs, and ensure optimal cash flow.  

As you think about this conversation, consider David’s statement, “We are here to help you grow.” How would growing your insurance knowledge help you better serve clients?

Looking for more ideas about growing your practice? Join the Model FA Facebook Community, where you will find expert advice on how to launch, grow, scale, and transform your firm with an incredible client experience. Or, check out our Model FA Accelerator, a premier coaching and practice management program for entrepreneurial financial advisors.

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FULL TRANSCRIPT

David Lau:

We find that because advisors really haven't looked at annuities, there's a lot of misperceptions about annuities. One is that they're complex. Some are complex, but some aren't. Some are really straightforward. Obviously like a SPIA is incredibly straightforward.

Patrick Brewer:

Yep. Welcome to The Model FA podcast, my name is Patrick Brewer, I will be your host. Today, I am joined by David Lau. He is the CEO of DPL Financial Partners and he is here to talk to us about fee-only insurance and how advisors can fulfill their fiduciary obligations, even if they don't want to become an expert in all things insurance. David, it's great to have you on the show today.

David Lau:

I appreciate you having me, Pat. Good to see you.

Patrick Brewer:

Absolutely. Absolutely. David actually made it down to Austin. He's here in person, which I really appreciate because we get to look each other in the eye and just have a more human dialogue-

David Lau:

That's right.

Patrick Brewer:

... which makes for a better discussion generally. So very, very pleased to have you here in the studio.

David Lau:

Cool. I appreciate being here, great studio.

Patrick Brewer:

Thanks. Yeah, we've got like 200 square feet. We've got a number of people in here, so hopefully it doesn't get too claustrophobic. But let's get started, man. I'm excited about what you guys are doing at DPL. It's a new direction, I think for how advisors can interact with insurance and products and provide better outcomes for their clients. I'll disclose this up front, we are a client and a wealth management firm of DPL Financial Partners. David did not pay me to be on this show.

David Lau:

That's right, but we appreciate the membership.

Patrick Brewer:

Yeah, let's go ahead and dive in. What led you to start DPL? There's a lot of FMOs, IMOs, insurance agencies and things in the industry, they've been around forever. What was the need in the market that you felt for launching DPL? Why did the advisors need this? Why now?

David Lau:

Because nobody else does it commission-free, which is what we do. So I spent a decade building Jefferson National, which a lot of people are familiar with, a lot of RIAs familiar and we used Jefferson National for our investment only variable annuity. It got acquired by Nationwide, but prior to that, after working in the RIA space for a decade, I came to understand that the insurance problem for RIAs was one, growing rapidly. So the problem was becoming bigger and two, it wasn't going to be solved by one carrier.

David Lau:

So you really needed a lot of carriers participating in a marketplace and bringing commission-free products to the market so that RIAs could use them in a fashion that lent itself to their business model. You're not using an IMO or an FMO where it's commission-based products and you really have to be a hybrid or they set up at an IMO where you become an IAR of their RIA and they'll give you a fee based on their commissions. So there really hadn't been a model that allowed RIAs to truly offer insurance and do it in a way that worked within their model of being a fiduciary, being fee-only, insurance just didn't exist that way.

Patrick Brewer:

So talk me through this idea of commission-free. So is there actually no commission paid to anyone or is the commission just paid to... How does that work exactly?

David Lau:

Yep. So it's truly commissioned free. There is no commission paid to anyone, which is part of the work we do. So we work on both sides of the equation, as I've put it. So we work with RIA firms and we're a Turnkey platform for the RIA firm to offer insurance. But then we're also working with carriers to bring more and more carriers and products to the market. And in doing that, we're working with them to reprice the products.

David Lau:

So you're taking the commission out, you're repricing the product. And in a product like an annuity, the commission is roughly 80% of the cost. So when you take the commission out, it's a massive price improvement for the end client and also creates a structure now that takes away a lot of the problems that advisors have historically had with products like annuities, costly, complex, questioning the consumer value. When you reprice the product, you eliminate all of those things. And some of the other problems like surrender fees and things like that, that advisors have always had trouble with.

David Lau:

And when you look at permanent life insurance, you look at even bigger advantages where permanent life, oftentimes it's 60, 80, 100% of the first year premium, gets paid out in a commission, which puts very little premium to work for the client and their policy when you don't take that commission out, all of a sudden you've got a really powerful product.

Patrick Brewer:

Yeah, no, for sure. With the commission, they're like negative cash value for a number of years.

David Lau:

Right.

Patrick Brewer:

It's brutal. They've got to work themselves out of that hole for about-

David Lau:

Right it's-

Patrick Brewer:

... two to three years.

David Lau:

It's great. You can get the money out tax free. But the problem is you don't have any money.

Patrick Brewer:

Any money, yeah. Your money is gone. Well, somebody has money, it's just not you, right now.

David Lau:

Exactly.

Patrick Brewer:

You've got to wait for it [crosstalk 00:05:07].

David Lau:

So great product structure. Problem is, it doesn't work when you're taking so much commission out of it.

Patrick Brewer:

Well, from the insurance carrier's perspective, I guess they don't really care if there's a commission paid or not because they're still getting paid for the creation of the product and the management. So how does it work on the carrier side? What's the incentive for them to work with you guys to build these products?

David Lau:

The incentive is really good for the carrier. So the carrier, they're agnostic. I mean, their economics are the same. So our proposition to them is, "Not only can you eliminate the commission, you can eliminate the wholesaling." Which is also what we did at Jefferson National. Because those are the two major cost components to an insurance product. You're paying whatever on an annuity, maybe an 8% commission, you're allocating maybe 2% internal marketing costs, to include paying wholesalers and steak dinners and sales contests. So you can eliminate all of that.

David Lau:

So it's a better cash flow proposition for the carrier because they're not outlaying a lot of capital upfront, which they are of course recouping over time. But the capital outlay is less, they don't have to lay out that commission and expense. And then the other part, which is really attractive to them is from the legal and compliance point of view. So when a client has a problem with the product that they've purchased, the carrier who's paid a commission salesperson to sell that product-

Patrick Brewer:

Is not liable.

David Lau:

... they're on the hook.

Patrick Brewer:

Yep. So who ultimately holds the liability then, in the model that you're discussing. And let me just chart it through in my own mind to make sure that I have it clear. So the advisor, fee-only, fiduciary recommends a product for an end client.

David Lau:

Actually, we do the recommendation.

Patrick Brewer:

Okay. So you do the recommendation, the-

David Lau:

Correct.

Patrick Brewer:

... advisor facilitates the request through you. You do the recommendation. So I would assume then you're fiduciarily liable. That's a hard word to say. Say that five times best.

David Lau:

But yes, we're that fiduciarily liable, yes, we are that. So yeah, the way it typically works is an advisor's going to talk to us, talk to one of our consultants. Say, "I've got a client with this need. Here's their situation, they're whatever, 50 years old, 60 years old, we're looking to generate some income in retirement tell me what the best product is." So we'll give them a couple of different product options and they'll say, "Okay, I like A over B," and then we'll put forth the recommendation that the advisor can then give to their client. That's where the line is on not being licensed. If you're insurance licensed you can make the recommendation, but many RIAs are not.

Patrick Brewer:

Not.

David Lau:

That's why the recommendation comes from us. They can have input between our conversations. But they really shouldn't be making that recommendation to a client. They should make sure that the client understands it's coming from their insurance consultant, DPL.

Patrick Brewer:

Got it. So does the advisor generally charge a fee to manage the, let's say it's an annuity recommendation, does the advisor just put them in the annuity and it's over and they don't get compensation for that? Or is there a fee attached to the recommendation? What has been your experience working with the advisors that are affiliated with DPL?

David Lau:

Yeah, that's one of the huge attractions of working with us because we can help you as an advisor, build your practice, bringing in AUM, offer products and services that you couldn't before. So the annuity market is an enormous marketplace. The annuity market is a $4 trillion marketplace. It's bigger than the entire RIA market. So it's highly likely that your clients own annuities. And it's also highly likely that they're very expensive and a core value. So we can bring a much better value product allowing the RIA to roll those products under their management.

David Lau:

So with pretty much every product that we offer, RIAs are charging AUM fees. Even for a fixed annuity. Because a fixed annuity is really just like a bond allocation. So it doesn't matter whether it... It doesn't have to be a variable annuity where you're actually managing sub accounts within it, it's just part of a portfolio allocation. And for the advisor, you're getting paid by your client to create the best-

Patrick Brewer:

Allocation possible.

David Lau:

... portfolio and the best outcomes that you can generate. And an annuity product could be part of that.

Patrick Brewer:

Yeah. It's interesting. Have you run into any, I guess general mindset or preference issues with advisors that are fee-only fiduciaries and just their, I guess how they view annuities? Have you had to reframe that expectation given the fact that there's new products now available that are not commissioned driven? What has been your experience having those discussions?

David Lau:

Yeah, it's easy. RIAs are huge fans of annuities. I'm kidding. So RIAs historically, everybody makes the joke, "Annuity's a four-letter word." And we do do more than annuities. And we do life and things like that. But relative to the annuities, it's definitely... There's so much historical institutionalized bias against annuities because they did present a conflict. You've got all this academic research on one side, which is universally supportive of using annuities for retirement income. And then you have the problem that they're commission-based.

David Lau:

So for a fee-only advisor, recommending an annuity could be a significant loss of revenue. It's even potentially more of a loss of revenue than it would be a gain for a commissioned insurance agent. So annuities are really divisive in terms of, there's huge incentives for commissioned people to sell them and they're big financial incentives for fee-only advisors not to use them. And that's really what we're trying to solve for-

Patrick Brewer:

Level the playing field.

David Lau:

... on the annuity side. One, you enable the, exactly what you're saying, Pat, you'll level the playing field. So you can now provide annuities. But two, you eliminate the conflict and it doesn't have to be lost revenue to recommend something that's going to benefit your client.

Patrick Brewer:

Yep. I feel like a lot of the... Let's say you're a fee-only advisor, you've never really recommended annuities before. Even if you have a better product, there still might be that whisper in your mind that you're selling an annuity and the client, or a prospect rather on the other end of the table might, when you say, "Well, we're going to recommend an annuity for 20, 30% of your investment allocation," they might clam up. What has been your experience with advisors' direct feedback around that discussion if they're not used to having it?

David Lau:

And that's a great point, because they aren't used to having it. So that's one of the things we help talk them through is, "How do I talk about this?" Because a lot of times they've even told their clients in the past, "You shouldn't use annuities." But we give them the way to pivot on that, which is, "There weren't commission-free products available before. Now, there are products available that work within my business model and they're great values." So we'll do a number of things. Everything that we do is driven by analytics and academics. So we'll help an advisor model the annuity within their planning software so you can see improvements in Monte Carlo scores and outcomes and retirement. We'll show analytics against fixed income and everything will be driven by data. So the advisor will be able to show and quantify a benefit to their client.

Patrick Brewer:

Yeah. On the analytics side, are you helping them run those calculations inside of preexisting software packages like a RightCapital or eMoney or do you have proprietary software that you use and help model it out-

David Lau:

Both.

Patrick Brewer:

... on your side? Okay.

David Lau:

We do both. So we'll help you work within your existing planning software. There are a lot of planning softwares out there as you know.

Patrick Brewer:

So many. Yep, too many.

David Lau:

But the typical MoneyGuide, eMoney, the market leaders, the RightCapitals, we can help you model that within those softwares. We also have our own tools because insurance carriers have historically not done themselves a lot of favors. Their illustration tools can often-

Patrick Brewer:

Overly complex.

David Lau:

... be a little overly complex and have remarkably good sequence of returns. They illustrate the benefits of their products. So-

Patrick Brewer:

The sale side of it. "Look at this you can zero downside or upside," all the time.

David Lau:

Yes. And if you get this sequence of return, this benefit is going to kick in just perfectly and-

Patrick Brewer:

Oh, every time.

David Lau:

... etc. So we create our own modeling for the products. And we Monte Carlo rather than have a preset sequence of returns. So we'll generate our own comparisons that advisors can run on our site or we'll run them for them.

Patrick Brewer:

Nice. One of the neat things that you guys do, and I'd love to talk a little bit more about it, is that annuity, kind of x-ray or evaluation where the advisor comes in and they say, "Hey, I have a case. Somebody has a, whatever, a Lincoln annuity," or whatever company it comes from, "can you guys analyze this and give us a recommendation of what you would use?" How are you doing that right now? Is that available to all the firms that you work with? What's the process for that?

David Lau:

Yes. And that's a major attraction for a lot of reasons for advisors. One, it's like, "Great, I don't have to look at this and try to figure out this annuity. I can turn it over to somebody who looks at them every day." So it's a great service just from the point of view that, you don't actually have to try to make sense of the client's existing annuity. Then the other reason it's really attractive for advisors because it's highly likely that we can roll that product into a better one for the client, and again, illustrate clearly the economic value.

David Lau:

So that gives the advisor the chance to bring in AUM. We do that for firms within the DPL network all day, every day. And it's a great service, because again, it takes work off their desk, potentially brings in AUM and if we can't roll it into a better product we can tell them what the product is and what it does and how best to use it.

Patrick Brewer:

So to model that in the asset allocation, so at least they have a sense of how it all fits.

David Lau:

Correct. Because it may be an annuity that's got a benefit that's built up so much, it doesn't make... Even if we've got a cheaper, better product it doesn't make sense to move the client out of it.

Patrick Brewer:

They've been in it so long, it's grandfathered in.

David Lau:

Exactly. So we can at least recommend, "Turn on income in three years," or something like that. How to leverage the product for the best use for the client. Because with annuities, one of the problems, even when people sign up and are paying for an income benefit, a lot of times they never turn it on. And typically you should.

Patrick Brewer:

Because the advisor doesn't necessarily know when to turn it on. So it's like, "Let's let this thing hang out for a little while."

David Lau:

Yeah. And typical general rule of thumb I'll give you right now, 65. That's the way the carriers are typically modeling it. And if you're wondering when to turn on income, turn it on at 65, unless there's some kicker in the how-

Patrick Brewer:

Policy. Generally 65 is the best time.

David Lau:

Look at 65.

Patrick Brewer:

Okay. That's good advice. Yeah, I mean, I came from the industry side, so DFA, Vanguard background annuities. They'll chop your head off if you are using them after leaving those two companies. But we definitely found uses for annuities. And then obviously we found you guys. The only reason I knew anything about annuities is because I teamed up with another advisor on my team, one of my partners now, his name's Tim, and he had that New York life background and he knew how all the ins and outs of different writers, and things. But I could just imagine, just if anyone's listening on the show and you're a fee-only advisor, you're not the only one who doesn't fully understand exactly how annuities work. They're fairly complex products.

David Lau:

Yeah. Well, I mean, we find that because advisors really haven't looked at annuities, there's a lot of misperceptions about annuities. One is that they're complex. Some are complex, but some aren't. Some are really straightforward. Obviously like a SPIA is incredibly straightforward.

Patrick Brewer:

Yep.

David Lau:

But even some other products, we've got some really simple variable annuities. We've got some really simple, fixed index annuities. And when you have somebody who can just explain it to you rather than try to sell it to you, it can make a lot of sense. And the other thing with annuities that advisors, we hear lots of these traditional knots, you lose control of the assets. And it's just not true. That's true with a SPIA. But hardly anyone uses a SPIA, even for income. Most people still use a variable annuity or fixed index annuity to generate income-

Patrick Brewer:

Yep. A little bit of upside.

David Lau:

Yeah. And you're just using a writer and you still have access to the cash value-

Patrick Brewer:

Whenever you want.

David Lau:

... until it's been depleted. So there's a lot of the traditional objections or misperceptions that advisors have, we've either addressed through the re-engineering of the product or just weren't true to begin with.

Patrick Brewer:

Are you seeing any data around what percentage an annuity tends to fill in let's say retiree's portfolio? I mean, any heuristics or general recommendations around what you're seeing the data there?

David Lau:

Yes. Again, we will go back to and base our recommendations off the academics. Like we just had Wade Pfau, in the office for the day-

Patrick Brewer:

He's a smart guy.

David Lau:

... on Monday.

Patrick Brewer:

You guys have something in common with the A-U last names.

David Lau:

That's right.

Patrick Brewer:

Pfau.

David Lau:

That's right. There ends the similarities. But Wade's a fantastic guy and super bright.

Patrick Brewer:

Yeah, very smart.

David Lau:

David Blanchett as well, Michael Finke, we leveraged the academic research to say, "What should the allocation be? How should you think about an annuity?" And you can look at it two ways. Number one, you can look, if you've created a financial plan and you're defining, "What's the essential income my client needs in retirement?" Let's fund that with guaranteed income. Let's start with, take that income need, look at what they're getting from social security or what they will get from social security, if they happen to be lucky enough to have a pension. Look at that and then-

Patrick Brewer:

Figure out the delta.

David Lau:

Figure out the gap. And then look at an annuity to fill the gap. That's one way of going about it, and some advisors look at it that way. Others look at... And they ask us just, "What percentage should I allocate? Because I'm 60-40, I'm 50-50 with my clients. What percentage should I allocate?" And typically what we're saying is, let's look to the bond portfolio. Because the annuities, particularly income annuities, whether it's SPIAs or we really like FIAs, fixed index annuities for generating income, those really look like bonds. They've got the risk characteristics of bonds. They're based on bonds. The underlying portfolio behind them is-

Patrick Brewer:

Bonds.

David Lau:

... a giant bond ladder. So let's fund it from bonds, not to mention everybody knows the challenge with generating any yield in fixed income today. Let's allocate out of the bonds, create a really nice lifetime income stream that is going to outperform that bond portfolio. And that's really where the academic research comes down, right? You can fund income and retirement cheaper using an annuity than you can with fixed income.

David Lau:

So that's where Blanchett and Pfau come down on that, which basically says for $1 invested into an annuity, versus $1 in fixed income, you're going to get more retirement dollars for that dollar invested in the-

Patrick Brewer:

In the annuity.

David Lau:

... annuity-

Patrick Brewer:

Interesting.

David Lau:

... which is the other benefit of that is one, you're perfectly matching duration which you can't otherwise do for income in retirement because you don't know how long someone's going to live, but it leaves you with more assets to invest in the-

Patrick Brewer:

More aggressively.

David Lau:

... rest of the portfolio.

Patrick Brewer:

Yeah. And you have the income need of at least covered if you've defined it and as far as you've defined it.

David Lau:

Exactly.

Patrick Brewer:

Okay. Yeah. So at this point, I mean, it sounds like insurance companies are in a better position because they're just building product, right? And they're saving money because they don't have a wholesaler floor flying around taking people to Ruth Chris and building relationships.

David Lau:

Right.

Patrick Brewer:

They're just, build a good product-

David Lau:

That's right.

Patrick Brewer:

... and the product works for the consumer. And then you've got DPL in the middle who says, "Hey, our advisors are needing these products to fill this need. Can you build them?" And you guys are helping educate advisors and help them understand how annuities fit into their client's portfolios. And then you have the advisor who's out on the front lines meeting with the client or prospects and they're explaining the benefits and the drawbacks associated, because everything has a drawback, right?

David Lau:

Sure.

Patrick Brewer:

Depending on the context, of the product. Does that adequately...

David Lau:

That's exactly it.

Patrick Brewer:

Okay.

David Lau:

It sounds like you're a member.

Patrick Brewer:

I might be a member. I'm just trying. So I know this but-

David Lau:

So you've got a little sense for what we do.

Patrick Brewer:

... I also want everyone to understand... Yeah. So-

David Lau:

Yes. But that's exactly it. So we make it for the advisor, we really make it Turnkey. So we're doing the work, which is invisible to the advisors with the carriers. But it's important work with the carriers because I knew in starting DPL, that it's more than just about having commission-free, no load product. It's making sure the carriers can support the RIA model. Meaning you can bill a fee from the product, not just have them pay a commission out of it. So there's-

Patrick Brewer:

Infrastructure, they need.

David Lau:

There's infrastructure work that they've got to do. They've got to be able to add the advisor to the policy to have authority over it, which is the way we structure it. So we'll be the agent of record, but we make sure that the advisor gets added to the policy so they can have oversight and discretion over it. Very similar to the way it works for the custodian. When you're custodying assets [crosstalk 00:23:02].

Patrick Brewer:

Like a LPOA basically.

David Lau:

... or whatever. Right, exactly.

Patrick Brewer:

So obviously you guys are in the middle, between the insurance company and the advisor, I mean what's in it for you? You obviously have to make money in order to grow your team, in order to do the things that you're doing. What is the compensation mechanism for you guys to actually want to do this and continue to grow it?

David Lau:

Yep. We have two primary revenue streams. One is on the advisor side, we've got a membership model. So firms-

Patrick Brewer:

Like yours.

David Lau:

... like mine, join DPL with a membership fee, the membership fee ranges from one to $5,000 per year for the entire firm, based on your AUM. And that's basically for all the services we're providing, which is going to be serving as that agent of record, bringing the policies to you, but importantly, providing lots of education and infrastructure support with getting these built into your practice like we were talking about earlier. Making sure you can model them in your financial planning software, making sure you can get data feeds into your portfolio management systems. So you can do billing centrally, if you choose to. So for those services, that's what we charge. We think it's really minimal fee relative to what we-

Patrick Brewer:

Pretty nominal.

David Lau:

Yes. So it was one of those things that there really wasn't a model for that before. And we wanted participation from the RIA community because it helps us on the other side. So when we go to carriers and we're talking about repricing a product or features or technology changes, we need, when we can say, "We've got 320 RIA firms who work with us," it gives us a lot more clout.

Patrick Brewer:

Critical mass. Yep.

David Lau:

Exactly. I could trade on my name for having built Jefferson National for a little while, but that won't last forever.

Patrick Brewer:

Exactly. Eventually you spend that currency.

David Lau:

Exactly. And then the other compensation we get is from the carrier. So the carrier pays us an administrative platform fee.

Patrick Brewer:

It's what I thought, okay.

David Lau:

So for some carriers, like now Nationwide or Lincoln or there's TIA, there's a few that have their own insurance desk, that if you're an unlicensed advisor, you can go to them and they'll do what we do. But most carriers don't support that. So we build that infrastructure. I mean we have a broker dealer for variable products. We have all the insurance licensing, etc. They pay us an admin fee for building that infrastructure and that's typically about 10% of what normal distribution expense would be for them.

Patrick Brewer:

Wow. Okay, so-

David Lau:

And that's where the pricing advantage comes in.

Speaker 3:

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Patrick Brewer:

So does that, since it's 10%, does that still scale well for you guys? Are you going to be in a point where you'll start to scale this out and you're like, "Oh crap, I need to go to the advisor for more money or to the insurance company for more money." Is it fully a scaled model where you're able to turn a solid profit margin and deliver on this longer term?

David Lau:

Yeah. So those margins work. I mean, we're not profitable now. We don't plan on being, because we're heavily investing in growth. It's just the mode we're in right now. I mean, we launched 20 months ago, we launched with 16 employees and eight carriers and-

Patrick Brewer:

Wow.

David Lau:

... maybe 15 products. Today we've got 35 employees and 17 carriers we work with and about 40 products. So we're investing a lot into the infrastructure and distribution. So we don't look to be profitable, but it's a model that works. Right now, it's a heavy education burden, as we were talking about earlier. So we spend a lot of time educating advisors on how and why they want to use the product. And because it's so new there's-

Patrick Brewer:

Yeah, educating the market can take time, and can be expensive. But as long as it's the right solution, then it's worth it.

David Lau:

Correct. And then it should get easier for all involved. Integrating into technologies will continue to become easier, advisor education becomes easier. They get more familiar with products. It just becomes smoother and easier for everybody as it gets more established.

Patrick Brewer:

So what is the profile of the advisory firm or advisor that you're attracting right now? Is it tend to be pretty... Is it all across the board like small or really large firms? Does it huddle in the middle somewhere? What's that profile look like?

David Lau:

We skew larger. So we've got 320 firms. There's approximately 11% of our firms are above a billion. I think industry-wide, it's more like 4%. Almost a third of our firms are above 500 million. So we definitely skew larger in terms of our membership, but we also deal and have members who are very small and getting started. I mean the attraction is, and the commonality of the membership is that they're attracted to growth. So we can basically help you grow. And that's really where we position ourselves. We're a strategic partner that can help you grow and it's incumbent upon the firm also to want to embrace that.

David Lau:

We can't help you grow all by ourselves, but if you want to incorporate insurance, we can be a growth engine for you. So even if you're a smaller, solo-practitioner, we can be an attractive option. For $1,000 basically, you're getting insurance capabilities and a whole team that can help you differentiate your firm and help grow. I mean, one of the things you hear at conferences all the time, which I go to way too many, advisors struggle with differentiation-

Patrick Brewer:

Oh yeah.

David Lau:

... and it's so important.

Patrick Brewer:

I know this all too well.

David Lau:

Yes. And we can give you a way of doing that, right? So you can now provide insurance but do it in a differentiated way. So when you're talking to new clients you can use what we do as the differentiation.

Patrick Brewer:

Yeah. We call it a gift to get offer. So we'll do educational retirement workshops. I built this whole nonprofit, it's called America's Retirement Forum. We run it for advisors independently that are not affiliated with our RIA. And we also obviously eat our own cookie and run these workshops ourselves. So we do them on a number of different topics. But essentially, folks show up... You've seen this model before they show up to a college or a university or a library, we give them an hour and a half presentation, sometimes over two days. They come into the office for a free evaluation. And one of the things that we position is a give to get offers. So if somebody has an annuity and they don't really know how it fits in the grand scheme of things, I'm not going to try and solve their problem in that first meeting.

David Lau:

Right.

Patrick Brewer:

But I'm going to ask them really good questions to get to the point at the end of the meeting where I can then say, "Hey we do these analysis, we don't do them for everyone, but part of your plan is going to be making sure that this fits that you've got seven years ago, to make sure that you're going to have enough money to do all the other stuff that you mentioned in the earlier part of this meeting."

David Lau:

Right.

Patrick Brewer:

"Would it make sense for us to schedule another time? We'll do this for free and we'll put together this analysis," and generally about 95% of people end up moving forward and engaging us in a full financial plan after that and end up becoming a client. Does that feel appropriate to you? But you guys have given us the opportunity to lead with something that doesn't cost us anything. Right?

David Lau:

Yeah.

Patrick Brewer:

That provides value to the client, that gets us to the next stage in the meeting, gets us that much closer to building trust because we're showing up to that next meeting, we're credible, we're reliable, we're present and we're delivering value. And then what do you know? The assets come over. So I think that is a key component of your service offering, is just having that expertise in-house so that the advisor doesn't have to recruit in. And as you said, I think, maybe the most important thing you said in the interview so far, is you have somebody who's consultative talking to you, and not someone who's driven to sell you something. That was always my biggest issue. We would talk to FMOs all over the country and they're great. Everyone's a very nice person, they're good humans.

David Lau:

Right.

Patrick Brewer:

But it always felt like there was an incentive on, to sell a specific carrier.

David Lau:

Right.

Patrick Brewer:

And it's like, "Well, we're an Allianz shop. It's like, "Okay, well I'm not. So how do I rate this relative to other things that are not Allianz?"

David Lau:

Right.

Patrick Brewer:

And not to say Allianz is bad in any way, it's just that was my experience when I first got started in thinking about insurance as a component of the plan. And I think a lot of advisors have probably walked through a similar experience before maybe they became fee-only and they're just throwing their hands up in the air, and they're like, "All right, I'm over this. I'm not going to burn my clients-

David Lau:

Right.

Patrick Brewer:

... I'd rather just provide the outcomes that I can provide and have confidence in." But essentially what you're doing, it sounds like, is improving outcomes and increasing confidence for the advisor so they can feel more confident making that recommendation.

David Lau:

Exactly. And advisers can be more holistic, as you're talking about. I mean, we've all seen the way the world's moving in a number of different directions, which is important to understand like when you're like me launching a business, you don't want to be the most innovative candle manufacturer when the light bulb's coming out. So if you look at the advisory world, number one, just being an asset manager isn't enough anymore, right?

Patrick Brewer:

Yeah.

David Lau:

I mean, that's almost old news at this point. I mean, you can't simply manage assets. You've got to provide more holistic services. Asset management's becoming commoditized. The other thing is that the RIA business model, the fee-based asset management model is so good that basically everybody does it now. So RIAs, used to think, that used to be a great point of differentiation, "I manage money on fees, you pay me, I don't get paid from product companies and I'm a fiduciary." Those two points of differentiation don't exist anymore.

Patrick Brewer:

Nope.

David Lau:

Every wirehouse guy is managing money on fees. Every broker-dealer rep is managing money on fees and they all claim to act in your best interest. Now, it's become codified through Reg BI. We all know there's a difference between those things but the-

Patrick Brewer:

Yeah, but the consumer is not generally-

David Lau:

... consumer-

Patrick Brewer:

... going to peel back the onion enough to really get to it.

David Lau:

Yeah. Or understand the nuance between acting in your best interest and being a fiduciary.

Patrick Brewer:

And there's not someone sitting there recording every single conversation that people that are, let's say, not a fiduciary have, with those prospects where they say, "Yeah, no, we're a fiduciary. We're a fiduciary."

David Lau:

That's right. That's right. So in that sense, it's also, it becomes, if you don't, as an RIA offer insurance, you've got now a negative differentiation. You're used to be positively differentiated because you did fee-only and fiduciary. But everybody does that now. But those people all do insurance. So they've got insurance resources within the wirehouse, they're probably insurance-licensed if they're a BD rep, they all provide annuities, they all provide life insurance. They all provide those solutions. So when you're talking to prospective clients and they're comparing you to a Raymond James rep, you can't not be able to provide that holistic solution to include insurance.

David Lau:

And also to go with that, is the historic RIA solution is to let clients find their own insurance or provide a referral to an outside source. But I don't know if anyone's paying attention, all those sources, guess what? They're now CFPs, they're not insurance agents anymore. They're CFPs and they want to manage the whole-

Patrick Brewer:

Well, everything is converging on the trusted advisor, right? So everyone's racing to be the trusted advisor. The CPA is trying to get there. Even the attorneys are starting to launch different types of services, whether they're even selling info products, which they can do compliantly to help people with finances.

David Lau:

Right.

Patrick Brewer:

And you've got insurance agents, like you said, that are getting their CFP license. They're transitioning out of the captive broker-dealer world into advisory. You've got financial advisors obviously. So everybody is racing for this title of, "How do we get the clients to call me first?"

David Lau:

That's right.

Patrick Brewer:

And I think the model is, and we've adopted this in our wealth management firm, it's you've got to bring most things in-house. Like we've a CPA that we work with directly in our office, business tax attorney, we do insurance, we do all of it because not only does it create more revenue which is good, because obviously we can continue to operate, we can continue to serve more people, but it also improves the outcome for the client. Right?

David Lau:

Yes.

Patrick Brewer:

You're actually delivering what you said you were going to deliver. Instead of saying, "Well, we don't do that." It's like, "Why? Why don't you do that?"

David Lau:

Correct. Yeah. "Why have a negative differentiation? We don't do that." Because like you said, you're adding more and more services and that's one of the things people continue to observe. Everybody's worried about fee compression.

Patrick Brewer:

Yep.

David Lau:

Will the 1% traditional AUM fee be going down and it's not, it's held relatively steady, but it's got eroded in another way, in that you've got to provide more services now. You can't be asset manger for-

Patrick Brewer:

Yep. You can't just sit around and press rebal, no.

David Lau:

That's right. Yeah. "Let's put it on automatic rebal. Let's go-

Patrick Brewer:

Yeah. Two times a year, so, "My client newsletter, that don't give a right."

David Lau:

That's right. So yes, "My value proposition. I'm going to put you in index funds. We're going to rebalance it a few times a year. And guess what?"

Patrick Brewer:

See you out there.

David Lau:

There's robos that do that too, for 10 basis points.

Patrick Brewer:

For sure. No, I mean, I totally agree. So another thing that I wanted to cover while I have you here is a product that you're going to be launching, I think Q1 of 2020 in the long-term care space. So I know a lot of advisors, this probably makes them even more uncomfortable than they already are talking about annuities, but the idea of long-term care with the environment we had a number of years ago with claims and just how they mispriced the risk in some of those products. But you guys are coming out with a product, sounds like commission-free, fee-only product for long-term care. So talk me through that. How should advisors be thinking about the long-term care space?

David Lau:

Ooh. It's a tricky one, right? So long-term care, an for everybody. If you look at, this has been on my radar for years. So if you look at some of the research data that's out there, across all advisory channels, the number one client-requested product that they inquire about is long-term care, across all advisor types. And it's something like 80% of clients will be bringing up long-term care when they get to 50, 60 years old. But the problem is, insurance carriers haven't built great products for that.

Patrick Brewer:

No.

David Lau:

So there's a few flavors of long-term care insurance. One is, the traditional insurance, you're paying a premium for a benefit that is going to get covered if and when you need long-term care. That market is a mess. That's the one that's blowing up. That's the one where Genworth is in big financial trouble. That's the one where the premiums continue to rise because the carriers can't price it properly. It's one of those things they've priced it, and modeled it in a particular way, assuming X amount of adoption. Well, they were getting X plus adoption and usage in the-

Patrick Brewer:

People are just living longer, they're getting sicker.

David Lau:

They're living longer and when you have the insurance, you're going to use it. Right?

Patrick Brewer:

Yeah.

David Lau:

So you are paying for it for more-

Patrick Brewer:

Forever.

David Lau:

... "Well, let's use it." So that's a space that I would love to look at, but we've talked to a couple of carriers there, but I just can't get behind losing control of the product like it has been.

Patrick Brewer:

Yep.

David Lau:

So the other is life insurance and using life insurance as a hybrid where you can access the death benefit early effectively, in a hybrid life policy. And those are good products, we've been looking at those, working on a couple of versions of that, but they're a little complex. But what I thought was a great way of attacking the long-term care solution was actually using annuity as the chassis for the product. So we're going to launch a product with an annuity as a chassis and that's got a lot of benefits. What long-term care really presents is a problem apart from the actual need for the care, the financial problem presented by long-term care is cashflow, right?

Patrick Brewer:

Yeah.

David Lau:

And so it's going to eat into a portfolio. It's going to deplete more rapidly, costs go up. It's going to deplete a client's savings more rapidly. So what we're looking at is an annuity which can generate income, so you've got a product which is going to be a good product for the client anyhow, and then should they need long-term care, it will double their payout. So it'll just increase the payout. So you wind up with a good product, at its core-

Patrick Brewer:

And then you can just change the equity allocation if you need to in the event. You can mess around with the asset allocation in the event that the long-term care, let's say event happens and you've doubled the income or something like that.

David Lau:

Yeah, the product automatically will-

Patrick Brewer:

Or it automatically will just kick up?

David Lau:

If you're getting $1,000 a month, it'll kick to two.

Patrick Brewer:

Wow, okay.

David Lau:

Yeah.

Patrick Brewer:

That's pretty neat.

David Lau:

And it'll do that for five years, which is going to cover most long-term care stays. I think it's a super cool product. It basically just really simplifies it down to, "Let's address the problem."

Patrick Brewer:

[crosstalk 00:41:53]. People to spend more money if this event occurs.

David Lau:

Yes.

Patrick Brewer:

And you don't know when it's going to occur. So how does the annuity work in the... Because obviously, like let's say you bought an annuity, you're 55, and you had a long-term care event in two scenarios, one at 65 and then one at 85. So how does the annuity work in relation to the age of the person?

David Lau:

Yeah, it doesn't change.

Patrick Brewer:

Okay.

David Lau:

So if you had a long-term care event at 65, that would be problematic. Most people-

Patrick Brewer:

Later on in life.

David Lau:

... it'll be in their 80s-

Patrick Brewer:

They're 80s, 70s.

David Lau:

... will need the long-term care. A 65 year old, that will be problematic. Because you're potentially... That's probably a situation where-

Patrick Brewer:

For life.

David Lau:

... it's mental impairment. Where it's going to be, you're physically healthy and that's where the long-term care issue really gets to be financially devastating. So for the 65 year old this is going to, again have the income and it'll multiply the income for that five year period. So if you're in that situation, this wouldn't necessarily be the greatest product.

Patrick Brewer:

There isn't really a good situation for that at all though, unfortunately. Just-

David Lau:

No. Which is ultimately the problem. If you want a long-term care product that is going to cover for a really catastrophic event like that, you've got the options of traditional long-term care or a very expensive life policy or annuity policy. You could theoretically put [crosstalk 00:43:27] into it.

Patrick Brewer:

But most, people from... I mean, it's been a little while since I've researched long-term care, but most people have an event and that lasts a couple of years, call it two to five years and then they usually wake up on a cloud.

David Lau:

Correct. Yes, for a male, it's just over two years. For a female, it's just over three. So the five-year coverage will cover most people for that long-term care. And again, if you're really looking for catastrophic coverage, that's mostly going to be covered by your traditional long-term care policy. But then you've got the trouble of one, you don't know whether costs get increased within the policy. If you never need the policy, you've paid for something you get no benefit from. So traditional long-term care can be a little... Insurance can be a little tricky to get the right coverage and like I said, the industry's been pretty dicey. So it's a tough problem. We think this is going to be... It's not a miracle product-

Patrick Brewer:

Yeah. But it's a great sensible solution for the average case scenario.

David Lau:

Absolutely. So we think it's... And that's what we designed it to be.

Patrick Brewer:

Yeah, great. Is there anything else on the horizon for DPL or just the industry in general that you're seeing that the advisors who listen to the show should know about? What words of wisdom or things that you have going on at DPL would you like to share before we wrap up?

David Lau:

For us, it's just continued growth. So it's continue to bring out more products. In addition to the long-term care, we're going to have a couple of more permanent life products coming out. We're always working on some additional annuities. We've been looking into disability for a long time. Because we want to check all the boxes that you check in doing a financial plan. And disability, after we get the long-term care product out, disability will be the last category that we need to address. But for us, it's continuing working on that side. And then we're spending, right now, heavily on technology. So as we're getting more adoption, we want it to be technically easier-

Patrick Brewer:

End-to-end.

David Lau:

End-to-end. So right now we've put most of our technology build in tools that can illustrate the benefit to the client. Now we're spending a lot of money on tech, integrating into platforms, things like that, so that you can process applications quite easily, get them prepopulated out of your CRM, that kind of thing. So we've got a lot of tech development going on there that we're excited about. And continuing to add more and more firms. We've added, in the 20 months we've been in market, we've got 320 plus RIA firms that we're working with. So it's been great.

Patrick Brewer:

Awesome. Well, I wish you continued growth in 2020 and beyond. It sounds like you've got a... I love the product. I think you guys are doing great stuff for the industry. I think the fee-only fiduciary advisor community is one of those things that... I feel like even if they didn't know it, they're probably waiting for. So just excited to see where you guys go with the-

David Lau:

That's right.

Patrick Brewer:

... new year.

David Lau:

We hear that all the time. So like from-

Patrick Brewer:

Where have you been?

David Lau:

Not quite in those words. Sometimes it's like, "Oh, great idea." And then other times it's like, "I never thought I'd recommend an annuity."

Patrick Brewer:

Yeah. Probably more often than not, that.

David Lau:

Exactly. Clients, it's what we try to explain too. Clients like annuities. I mean, who doesn't like guaranteed income?

Patrick Brewer:

True.

David Lau:

The problem has always just been, it's been too expensive and complex and-

Patrick Brewer:

Yeah. I always tell advisors, I mean, selling a painkiller is a lot easier than selling a vitamin.

David Lau:

That's right.

Patrick Brewer:

In a 60-40 total return strategy where you're clipping income in 20, 30% bear markets, it's a vitamin. And you've got to educate them on why taking your vitamins is good and you get your vitamin C. But if you've got a painkiller and you take it and the pain is gone-

David Lau:

That's right.

Patrick Brewer:

... that helps. And that allows you to actually sell things and more effectively.

David Lau:

I use that same analogy.

Patrick Brewer:

There we go. Sometimes great minds think alike.

David Lau:

That's right.

Patrick Brewer:

All right, man. Well, thank you so much for coming into the studio, for being in Austin. Looking forward to our continuing the relationship with you and hopefully have you on at some point, maybe later on in a later season. But thanks again, David. I really enjoyed our discussion.

David Lau:

Great. No, thank you, Pat. Appreciate being here, it's been fun.

Patrick Brewer:

Awesome, man.