״There is a simple rule here, a rule of legislation, a rule of business, a rule of life: beyond a certain point, complexity is fraud. ״
~ P.J. O'Rourke
Chaotic, Ineffective, Expensive
The incumbent channel has capitalized on a dearth of knowledge of life settlements - among even sophisticated wealth advisors and insurance professionals - subjecting your clients to an opaque, undignified process and extracting indefensible economics from what can be an efficiently-executed, high-value, and highly remunerative transaction for HNW policy sellers.
It's all too often a bewildering, confounding mess, even for the most sophisticated of advisors and policy owners.
Claims to the contrary notwithstanding, a licensed life settlement broker is not required for a policy owner to engage an individual or multiple potential buyers of their in-force life insurance; the broker licensing simply enables a sales commission to be paid by the buyer and, worse, forces a seller into a badly deficient price discovery process, borne of the requirement that the broker "negotiate" with buyers.
Opaque
A convoluted process to create a perception of complexity and value created; selective and deceptive disclosures, no meaningful audit trail.
Inefficient
Bidding takes 30 – 45 days, after a 30-day staging period (numerous, time-consuming and unnecessary steps) and a total time of >120 days.
Ineffective
Asymmetric, "common value" auction that takes far too long to complete and rarely, and only by coincidence, reveals the true max value bid.
Deceptive, High Fees
Often as much as a 30% fee often confusingly described as a function of the face value or the gross proceeds, not of the true value, gross bid less cash value.
Carefully Orchestrated Theater
It's all a Kabuki theater to focus you on one thing while a whole set of other things are going on - none of which are to you or your client's benefit. Brokers often go to great lengths to perpetuate the most important myth that they rely on to induce policy sellers and advisors of all types to use them - that they "create" value from the policy, in an inherently complex transaction, and that a broker is necessary for your clients to engage the market. And that the value they create or the supposed protections they offer justify their otherwise indefensible fees. There is a reason that they promote on their websites the gross OR the net proceeds of a transaction, not the gross proceeds AND the net to the client; it would expose an ugly truth that they'd prefer to obfuscate. If they were just expensive, that would be one thing, but they are also ineffective at identifying a policy's maximum value in the market and they are wildly inefficient, taking far too much of your client's time and energy to even get to a bid, let alone consummation of a sale. The blizzard of misrepresentations and selective disclosures is to convince you that their fees - often obscured and misleadingly described - are worth the indignities of the opaque, confusing, prolonged process. And they have substantial negative financial and psychic implications for your client.
Brokers cite winning bids that are higher than initial bids as evidence that their negotiations (proclaiming themselves "expert negotiators") produce outsized purchase prices as an implicit justification for their high fees. The obvious truth, though, is that initial bids are simply an ante, and that while all of the losing bidders have reached their maximum value, the winning bid is almost certainly not the true max ("private value") of that bidder, likely leaving significant money on the table for the seller.
This “common value” approach is not only inefficient and time-consuming, but it also virtually ensures that the winning bidder, while bidding enough to beat the second highest bid, will only bid their “private value” if another bidder has as high a private value. It will never reveal an outlier value and will only reveal the bidder with the highest private value by coincidence. Bidders are, of course, rational actors and seek a bargain, trying to get the policy at as low a price as the auction process permits. If the auction does not punish bargain-hunting bids (e.g., the risk of not winning a policy by submitting a bargain price bid below the true private value), bidders will participate in the process in a way that enables them to acquire it at as low a bid as possible. And broker auctions (negotiations) absolutely incent bargain-hunting behavior.
Below is an actual example from a large broker's website on a $1.5MM policy on an impaired 65 year old male.
Badly Flawed Price Discovery
The example here is taken verbatim from a large broker's website. Virtually all brokers' websites cite similar negotiation outcomes.
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 arrived at its private value bid in the same round that Magna reached its slightly lower private value.
Recall, 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" incents and enables bargain-hunting behavior. Yes, while all other bidders have reached their true private value and dropped out, the likelihood that the winner arrives at their private value as the second highest bidder reaches its private value is very low.
Ineffective
01
It takes far too long to initiate the process and far too long to execute the auction. After a 30-day staging period (numerous, time-consuming, and unnecessary steps, like securing LE reports), bidding takes 30 – 45 days, before knowing what the client proceeds will be and finally engaging the winning bidder.
How on earth does the above example take 28 rounds – each round likely being at least a couple of days - to reveal the winning bid? Are these "negotiations?" The opening bids are, obviously, antes, for each bidder to see who else is bidding and then to set in motion the weeks-long contrived interactions in which the broker goes back and forth with each bidder, describing the latest “high bid” and asking/cajoling others to up their bid. Again and again and again. In this case, 28 times.
Worse, in cases for which there might be thin demand, this process ensures that a bidder that might have a higher value for the policy will never have to bid to that amount, as it knows that there is no other interest.
Inefficient, Convoluted
02
The broker pretends its process created the value, to justify its 30% fee, telling you that they "negotiate" and that they have written up a compelling narrative about the policy. It's all nonsense. Your client is the reason there is value in the policy. Simply, having paid the premiums and lived beyond the policy’s relative utility is the reason there is value, NOT anything that the broker – or even we – do that creates value. We simply help you efficiently monetize the value.
So, in the above case, the broker on its website claims that it increased the value of the policy by 715% (from $100,000 to $815,000). Did the broker actually increase the value of the policy from $100,000 to $815,000? No, of course not and it’s ludicrous to claim otherwise. The value was never $100,000 – $250,000 of the opening round; that was an ante. Giving the impression, to the uninitiated or inexperienced, that it did “create” that value, though, is the basis of the broker’s claim that it earned an otherwise indefensible, egregious fee.
Taking Undue Credit
03
It’s not hard to understand why the broker in this case only references the otherwise impressive-looking increase in value and eventual winning bid, as if that figure matters in a scenario in which it is taking 30% of the proceeds.
And it's not surprising that they don't share the net proceeds or that fees are often deceptively described as a function of face value ("not more than 8%"), not proceeds, to appear much lower.
In this case, again, it's not disclosed for a reason - it is likely at least $270,000, reducing the payout to $545,000. You will see the same thing on every broker’s website – they will share either the gross bid or the net, but never both. It doesn’t take a rocket scientist to figure out why.
Imagine, as a fiduciary or anyone looking out for a client's best interest, having to describe and justify a 30% fee...
Indefensible Fees
04
