OPAQUE, INEFFECTIVE, EXPENSIVE.
Real financial and psychic implications to your clients.
FAR TOO OFTEN, THE RESULTS ARE SIMPLY "BETTER THAN NOTHING."
When brokers talk about "positioning a policy for negotiations," they are manufacturing complexity, and with it the appearance of value that would not have surfaced without them.
It is largely kabuki, meant to convince sellers and their advisors that complex negotiation has earned a commission far beyond what you would accept in any other financial transaction. The commission is often framed against face value, "the lesser of 8% of the face value and 33% of the gross bid," which obscures that it can run to a third of the value of the transaction.
As shown below, multi-round, open "negotiations" also prolong the process, often to absurd lengths, and put no cost on bargain hunting. They reward it. The winner only has to top the runner-up by a nudge, so the winning bid reflects the second-highest bidder's limit, not the winner's own.
10+
buyers reached
90/130+
days to actionable bids/funding
<80%
auctions produced acceptable net
30%+
commission
Smarter Planner Podcast
Hear in this episode of the "Smarter Planner Podcast" Belle Osvath, CFP, interview 1908's founder, Scott Sanders, about his company's innovative approach to helping financial planners work with their clients to sell life insurance policies that they and their advisors determine they no longer want or need.
THEY PERPETUATE A MYTH
They go to great lengths to create the perception that they have earned otherwise indefensible commissions
01
They negotiate your offers
There are no elements on which to negotiate a policy's value. The buyer is either compelled to pay their private max value or not and no amount of "negotiating" gets an institutional buyer to pay more for the policy than they have valued it.
02
They tell a compelling narrative
Buyers do not care what story anyone tells about the insureds or the policy. It is purely a financial, actuarial, contractual, and risk calculation, no more, no less, and no story written by an interested party changes it.
03
The compel higher offers
Open, multi-round bidding not only wastes time, it suppresses bids by rewarding bargain hunting and only rarely and by coincidence reveals the max value (see example next page) of the buyer that assesses the highest value
04
They access unique capital
There is no 'unique' capital in the market and certainly not tied to a broker. The universe of institutional buyers is finite, and the universe of Providers is well known – they do not have proprietary capital sources.
OF COURSE, IF PERMITTED, BUYERS WILL NOT BID TO THEIR MAX VALUE
Not only is the broker process opaque, protracted, and expensive, but also ineffective, perversely rewarding bargain hunting.
Is it possible that Fair Market Life’s private value was $815,000 and that it reached it just as Magna reached its private value of $795,000? Sure, it's possible. Is it likely? No, it is likely higher, unless it coincidentally happened to arrive at and disclose at its private value bid in the same round that Magna reached its slightly lower private value.
Importantly, Providers are incented by their capital sources to acquire the policy at as low a price as possible - and that the broker process of "negotiating" enables and rewards bargain-hunting behavior. Yes, while all other bidders have reached their true private value and dropped out, the likelihood that the winner arrives at its private value as the second highest bidder reaches its private value is very low.
