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Fee-Based Annuity Models Versus Commission-Based

It’s no secret that a lot of annuity organizations and experts think that the Department of Labor made a big mistake with their fiduciary rule. Some don’t agree that indexed annuities should have been included with variable annuities, while others think that the BICE guidelines will not really be in the best interest of consumers. Kim O’Brien wrote an article about this for Insurance News Net called “The Compensation Conundrum: Why the DOL Got It Wrong.” O’Brien’s group, Americans for Annuity Protection, has had multiple meetings with the DOL since the finalized rule was announced in the late spring. One of the DOL deputy assistant secretary’s said that the department is willing to make changes and adapt the rule if there are problems implementing the changes. The AAP says that the rule needs further clarification before it goes into effect and points out how much more efficient it is to make the changes now and avoid tremendous litigation in the future.

The AAP has issue with the way that commission-based compensation was treated in the final rule. They argue that consumers benefit from commission-based annuity structures and they worry that people will end up paying more for the same annuity under the new guidelines. Both annuity commission structures and their distribution channels are well-established and regulated. The AAP says that annuities are now at an unfair disadvantage against their competition. Commissions, which are paid out by the insurance company, are actually the preferred advisor payment for many consumers. Not everyone likes to pay their advisor directly with a check or out of their proceeds.

Advisors already follow strict guidelines when selling annuity products. FINRA suitability standards apply to all variable annuity sales and fixed annuity sales must follow the NAIC Suitability Model. These put strict standards in place to make sure that advisors are selling products that are best for their clients, are well educated about the annuities, and are licensed in each individual state they sell in. These suitability guidelines help consumers match an annuity product and level of risk tolerance to their specific needs and determine if they need to add on any optional benefits. The job of an advisor is to help their clients understand annuities, because many do not, and use annuities to meet their unique goals of income guarantees or protection.

Annuity products are sold as a one time transaction. The AAP argues that a fee for service model does not make sense with most annuity products. Fee for advice models pay for ongoing management by an advisor. But once an annuity is purchased, the insurance company follows through with the annuity contract. O’Brien says that consumers will pay more if they are using a fee for service model with their annuity advisor because it doesn’t make sense to pay an ongoing fee in these types of transactions. The AAP says that a lot of annuity buyers will end up paying more in a fee based annuity compensation model than they do in a commission-based model. This could push many people at the lower end of the income spectrum out of the game because they will not be able to pay for this advice. The article offers an example of the fees paid in both types of structures for a ten year annuity and in this example the fees were far less with the commission-based model.

Different compensation structures are right in different situations, just like different annuity products work for different people. You can find a bad example of an advisor that is fee-based, commission-based, or any other style. But overall, annuity owners are happy with their advisors and their annuity products. Studies from the Insured Retirement Institute and Advantage Compendium found that both fixed annuity and variable annuity owners are almost always satisfied with their purchase. O’Brien and the AAP believe that commission-based models should not be singled out and made nearly impossible to use under the new DOL fiduciary rule. Both fee-based annuity models and commission-based have a place in the annuity industry because both models benefit different consumers and annuity purchases.

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