The Two-Hour Second Opinion and the Lender Letter
Dana and Miguel, ages 54 and 51, bring a 42-page financial plan prepared by a commission-based advisor to a CPA/PFS. They ask for a two-hour second opinion for $600, saying they cannot afford a full engagement. The plan projects a 9% constant return, recommends a $1.5 million indexed universal life policy illustrated at 7.5%, and assumes Dana will work to 67. Their actual savings are $310,000 in a 401(k), $40,000 in a Roth IRA, $15,000 in a savings account, and a $1.2 million term policy expiring in six years. They have two children, ages 12 and 9, a $420,000 mortgage, and no disability coverage. Dana's employer is restructuring, and her bonus, 40% of pay, is not guaranteed. They also want a letter to a mortgage lender confirming their retirement plan is adequate. The planner cannot verify the insurance illustration assumptions within two hours.
1. Identify the scope and engagement-letter issues the planner must resolve before accepting the $600 second-opinion engagement.
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- Limited scope must be defined in writing. A two-hour review is not a comprehensive financial plan. The engagement letter should specify the services (for example, reviewing the plan's assumptions and identifying inconsistencies), the deliverable (a memo), the fee, and the client's responsibility to provide complete data.
- The lender letter must be addressed at the outset. A letter to a mortgage lender is a third-party reliance document. Issuing one based on an unverified 42-page plan would misrepresent the planner's work. The planner should decline the letter unless sufficient procedures are performed, which the proposed scope does not permit.
- Disclose reliance and limitations. State that the review is based solely on documents provided, that no audit or verification was performed, and that the planner is not responsible for the third-party advisor's projections.
- Identify the compensation conflict. The original advisor is commission-based. The planner should confirm in writing that he will receive no compensation from any insurance recommendation and disclose his own fee.
- Decide whether to accept at all. A two-hour review cannot support an opinion on a $1.5 million insurance policy. If the client will not expand the scope or authorize release of the policy illustration, the planner should decline or limit the opinion to cash-flow and goal issues.
2. Explain the professional-responsibility concerns raised by the plan's assumptions and the requested lender letter.
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- Objectivity and integrity. A 9% constant return is an unsupported assumption for a retirement projection, and a 7.5% illustrated rate on indexed universal life is not a guarantee. The planner must not repeat or endorse those assumptions without testing them.
- Due diligence. The planner should obtain the policy illustration, product materials, and underlying assumptions. If the client will not authorize release, the planner cannot render an opinion on the insurance.
- Compensation conflict. The original advisor's commission creates a conflict of interest. The planner must disclose his own fee and any conflict, and must not accept a referral fee or commission from the replacement recommendation.
- The lender letter. Signing a letter that the retirement plan is adequate could be a misleading act. The planner should decline unless he has performed sufficient procedures to support the statement. The limited scope does not permit that support.
- Communication. Explain in writing that the plan's conclusions are unreliable without stress-testing and that the term policy expiring in six years creates a liquidity and insurability risk, especially with Dana's employer restructuring.
3. Draft the specific next steps the planner should take in the first client meeting.
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- Confirm the clients' goals, concerns, and deadline, and explain the difference between a limited review and a full plan.
- Obtain signed authorization to release data from the prior advisor and the insurance carrier.
- Prepare a one-page engagement letter with scope, fee, deliverable, limitations, and a statement that no lender letter will be issued.
- Build a baseline net worth statement and cash-flow statement from verified documents.
- Stress-test retirement at 5%, 6%, and 7% returns, and model premature death or disability before age 67.
- Review the insurance illustration and the term conversion deadline.
- Refer the insurance analysis to an independent specialist or decline the insurance opinion.
- Offer a factual letter describing the scope of review only if the client still needs documentation for the lender.