Private placement life insurance (PPLI) has become a significant and well-used financial solution among the ultra-wealthy and leading single-family offices. The ability to select investment professionals to manage the assets in the policy, the institutional pricing of PPLI and the various ways to integrate PPLI into the wealth planning of these families are making PPLI so attractive. At the same time, there are problems with the way some PPLI advisors are doing business and this is going to produce a shakeout among these providers.
Homer Smith, director of the DK Family Office Practice, founder of Konvergent Wealth Partners and co-author of Optimizing the Financial Lives of Clients: Harness the Power of an Accounting Firm’s Elite Wealth Management Practice, “Because of the versatility and power of PPLI, many advisors are actively promoting these policies. The problem is that a large percentage of these advisors are not proficient in evaluating how to best use PPLI with the ultra-wealthy nor are they adept at putting the policies in place. This results in ultra-wealthy families often overpaying for subpar results. This is all going to change, but it’s going to take some time.”
As many of the ultra-wealthy and quite a large percentage of professionals are not knowledgeable when it comes to PPLI, some advisors are seriously overcharging for the policies. For example, many times these advisors are layering in unnecessary fees. The private wealth industry is in the process of slowly resetting. The advantage is shifting away from the professionals with the expertise and knowledge to the ultra-wealthy who are becoming proficient at asking appropriate questions. This is most clearly seen among high-performing single-family offices. As the reset expands to more of the ultra-wealthy, those advisors who are currently gouging the ultra-wealthy on PPLI—of which there are many—are going to have to dramatically change how they operate or they will be pushed out of the industry.
Further complicating the matter are professionals who are promoting PPLI to address taxes that are beyond the legitimate scope of the product. According to Smith, “By claiming and then using PPLI to eliminate all sorts of taxes, there are professionals who are attracting the attention of the taxing authorities who have started to scrutinize PPLI. The tax authorities will likely disallow many of the schemes that are currently being marketed. When they do the families that used these schemes incorporating PPLI are going to find themselves paying back taxes and likely sizable fees.”
To put it all in perspective…PPLI is a very powerful, versatile tool that can significantly benefit a large percentage of the ultra-wealthy. However, to get the best results from PPLI, ultra-wealthy individuals and families are wise to do their due diligence when it comes to the advisors they choose to work with. The integrity of the advisors, their experience in implementing PPLI, and their ability to integrate PPLI into the overall wealth planning of the ultra-wealthy all need to be evaluated and considered. By taking this approach, the ultra-wealthy become better consumers of wealth management expertise and are going to get the results they want cost-effectively. As the ultra-wealthy become better consumers, there is going to be a major shakeout of PPLI providers.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
