Naturally, every company in the life settlement industry has been watching the news roll-in about Life Partners, the provider company in Texas that declared bankruptcy and has been accused of misleading investors among other misdeeds.
While it’s best to leave the ugly details to the pundits, the main lesson for the wealth management community is that Life Partners is not representative of the life settlement industry. The company had a renegade reputation for some time.
First some background:
Every life settlement provider is divided into two distinctive sides, which I sometimes like to refer to as the front of the house and the back of the house. The front refers to the side of the business that is responsible for acquiring and sourcing policies for possible sale while the back of the house matches investor funds to the policies that are acquired. Since our industry began, we have had to balance the need to source policies with the requirements for purchasing them. During my entire career, both sides of the house were rarely in perfect balance. Some years we had more funding than policies and in others more policies than funding. Such is business.
Yet, we have learned over time that both sides of the house should remain distinct. And as the industry transitioned to purchasing larger policies from more diverse clients, we realized that the funding side of the business was becoming much more complicated – and too complex for us to involve individual investors. For the past 10 years, most life settlement providers completely abandoned all but institutional investors and the most sophisticated accredited investors.
Much to the disbelief of many, Life Partners and its related entities went in the other direction and continued to take individual investor capital and sell fractionalized interests in individual policies.
The distinction is very important. The bulk of the life settlement industry chose to build large portfolios of policies, covering many lives and taking advantage of the tested reliability of such portfolios – and chose to fund these with Wall Street backing. By contrast, Life Partners continued to match Mom and Pop investors with individual policies.
Our CEO has been on the record, for more than a dozen years, saying that no individuals should invest in life settlements. This is an investment class best left to the big boys. Unfortunately, some less responsible organizations have continued to take on individual dollars, and these more shifty operators are usually the sources of the negative news that sometimes plagues our industry.