Just as many clients expect advisors to go beyond basic investment management and provide help with complicated matters like taxes and trusts, many are now also demanding advice on insurance.
At Morgan Stanley, the person advisors can turn to for insurance-related questions is Joe Toledano, the head of insured solutions for the firm’s wealth management division and E-Trade. It’s a job that has him overseeing three distinct lines of business: annuities, life insurance, and property and casualty insurance for high net worth clients.
In practice, it means working with advisors to ensure their clients have coverage for everything from disability and long-term care to homes and cars to fine art and commercial property. Toledano said he has seen a distinct change in how financial planners approach the subject of insurance in his more than 25 years at Morgan Stanley.
Credit: Morgan Stanley
“The progression of our business has been one in which clients and financial advisors didn’t necessarily wake up in the morning eating, breathing and sleeping life insurance, to where today, it’s certainly recognized as an important or distinct asset class to which provide material benefit to a portfolio,” he said.
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Toledano joined Morgan Stanley after starting his career at Bankers Trust Company in the mid-90s. He shifted to the insurance side of the business in the 2000s, first becoming director of annuity and life development and then head of annuity product and internal sales distribution.
He recently sat down with Financial Planning to discuss advisors’ growing role in making sure clients have the right insurance coverage, the greater demand for annuities and similar products as baby boomers retire in droves and the particular insurance needs of athletes and entertainers.
This interview has been lightly edited for brevity and clarity.
Financial Planning: How would you say the insurance division you lead has changed over the years?
Joe Toledano: I think the biggest trend that certainly has underpinned the evolution of Morgan Stanley’s insurance solutions franchise has been related to the elevation of expectations of clients, specifically surrounding the need for holistic advice that focuses both on the asset side and the liability side of their portfolio.
And if you take a step back and you think about what underpins that evolution, it’s generally been predicated on the concentration of wealth that’s driven by the baby boomer generation as they shifted from the accumulation phase to the decumulation phase, and to the legacy-transfer phase, as well.
And what that has led to is an increasing of the benchmark for success on that advice, moving from gross returns to risk-adjusted returns. And then finally, where we’re at today, which is net-asset tax-risk adjusted return.
FP: What’s behind that change?
JT: When you’re in the accumulation phase, it doesn’t really matter what the order of those returns are, or what the volatility is. As long as you average an 8% or 10% or 12% return, it’s seen as a success.
But when you’re taking income out of your portfolio, you now have a dual mandate of providing healthy returns, but also ones that are volatility-managed. And as we move into a world where the focus is now on legacy transfers — estimates are that $60 trillion to $80 trillion will move from one generation to the next in the next 20 years — all of a sudden, that’s where the benchmark moves to healthy returns that are volatility-managed but that also reduce the impact of taxes.
FP: What specifically distinguishes Morgan Stanley’s insurance offerings?
JT: I think we’ve been able to create a fairly elegant four-step process that allows financial advisors to seamlessly integrate the solution within their practice. Those four phases include leveraging our Global Investment Office’s research to align the product to the key target demographic.
No. 2 is being able to integrate platform analytics to spotlight the next best opportunity or the next best action. Three is digitizing the transaction execution. And that leads to No. 4, where we provide tools that allow for transparency in terms of product design and performance.
It allows financial advisors and clients to optimize features and benefits through our policy management tool process. It’s also allowed us to invest in a broad array of opportunities, from both the E-Trade direct-to-consumer journeys all the way up to the family office and ultra high network clientele, as well.
We now allow for a complete, seamless, digitized process for the purchase of term insurance. And then as we moved up to the family office, being able to provide for custom and proprietary solutions around the property and casualty market has certainly differentiated our practice.
FP: Speaking of high net worth clients, what about athletes and entertainers? What special insurance have they got?
JT: When you think about athletes and entertainers in particular, the need or value proposition is even more acute, because they tend to make a relatively significant amount of money in a relatively short amount of time. It”s not uncommon that the portfolio of a 30-year-old athlete needs to be stretched out for upwards of 50 years. That certainly can be daunting and complicated.
So alongside my colleague, Sandra Richards, who heads up our global sports and entertainment franchise, we’ve dedicated resources to providing education, and we highlight them in our periodic podcast titled “Protecting Your Star Power.”
FP: Annuities are the subject of a lot of debate these days. What are your thoughts on their role in financial planning?
JT: It’s a challenge to say you can leverage a cookie-cutter approach to retirement. It really requires a financial advisor to do some detailed diligence in identifying what plans have taken place today.
It certainly can include various forms of permanent insurance. It can include annuities. And certainly one of the areas that are far overlooked are the needs around long-term care insurance.
If you take a step back and you think about the value proposition to insurance, and certainly to annuities as well, there is an incremental cost that’s associated with providing that safety net. That being said, you’re also getting the benefits of pooling risk.
Many experts and academics have suggested that annuities can be an important funding component to offset essential expenses within retirement. Think about food, shelter, health care. Once those expenses are taken care of, you can then take on additional liquidity and market risk in the remaining assets within the portfolio.
It’s suggested that by doing it that way, you’re getting additional liquidity premium on the remaining asset. You’re allowing the client to sleep better at night, knowing that there is that safety net around their portfolio. And what you also see from a behavioral finance perspective, there is less emotional buying and selling at the wrong time.
FP: With people living longer than ever before, how can insurance help people who retire at 65 enjoy 20, 30 or even 40 additional years?
JT: In fact, according to a recent study, it’s not uncommon for most retirees to live one-third of their lives in retirement. So when you think about annuities and life insurance products that can provide that protection against longevity risk — or said differently, to reduce the risk of outliving one’s savings and assets — it really bubbles to the surface in terms of meeting a client’s needs.
One of the things that research continues to indicate is that providing a guaranteed income stream leads to a happier retiree who spends at a higher rate than those who have just generally stayed with traditional investments — because they’re able to spend on experiential expenses like travel and leisure, or potentially a purchase of a second home.
Retirement is generally broken out into three phases: the go-go years, the slow-go year and the no-go years. So what we have found is as a goal, specifically for the baby boomer generation, is really to celebrate and spend time with their friends and loved ones. And it’s that guaranteed income stream that provides them that confidence to do that.
FP: What are the advantages to working with a financial advisor to obtain insurance?
JT: I think it’s important to circle back to how we started the conversation in terms of being able to provide holistic advice across the asset side and the liability side of the portfolio.
By providing a Morgan Stanley financial advisor that understands a client’s risks, it provides an important data point to how much liquidity needs to be maintained within their investment portfolio. It certainly should not go unnoticed that an uninsured house or fire or the settlement of a civil lawsuit can have even a more deleterious effect on one’s portfolio than the ups and downs of the market.
So allowing a financial advisor to really up their game, being able to have that broad purview surrounding what the comfort factor is to a client in terms of things that they are willing to offload to an insurance company’s balance versus maintaining on their own balance sheet, really informs them on whether or not they need to build a liquid emergency fund within their portfolios, or whether, again, they can take on more liquidity and market risk with the remaining assets.
