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Fee-Based vs. Commissionable Annuities

With the new DOL fiduciary rule in place, more and more insurance firms are launching fee-based annuities to help distributors comply with the regulations. In fact, nearly two dozen fee-based variable and indexed products have been announced in the last 12 months, according to a recent article from Market Watch. Big names like Symetra, Pacific Life, Nationwide, Allianz, and Brighthouse Financial (the annuity provider that recently broke away from MetLife) have all jumped on the bandwagon. So should advisors climb on board too?

The Labor Department’s new fiduciary rule requires advisors to put clients’ interest ahead of their own, in regards to personal financial interest, and experts claim these products are designed to help with that. Previously, advisers earned significant commissions on the sale of annuities, but with these new products, they would simply charge a flat rate.  But some industry experts agree, a commissionable annuity could be cheaper than a flat fee for some clients, especially if the advisor anticipates working with that client for more than six years.

John Olsen, author of “John Olsen’s Guide to Annuities for the Consumer,” said “it depends on the specific provisions of the annuity and the nature of the advisory relationship.”

The details are in the fine print, and as always, it’s imperative advisors make sure clients understand what they are getting into. For example, some of the earlier fee-based products do not include options for living and guaranteed death benefits, however many of the newer ones do. It is the responsibility of the advisor to become familiar with and discuss with clients the pros and cons of fee-based annuities. According to financial advisor and author Stan Haithcock, some pros include the elimination of the perceived high commissions, while cons might include the fees for a fixed annuity as opposed to an actively managed variable one.

“It’s hard for me to see the justification for charging an annual and ongoing fee for managing a fixed index annuity,” Haithcock stated. “They are comparable to certificates of deposit, not ways to get market growth, and because the index option can usually be changed just once a year, there’s little reason for a fee. The industry disagrees with me on this, but this is a perfect example of trying to put a square peg in a round hole.”

Variable annuities are a different story, in Haithcock’s opinion.

“That’s a tough job, and charging a fee for that work makes sense,” he added. “And if you do that then manage the ‘heck’ out of it. Don’t just ‘set it and forget it.’”

In an effort to help clients decide which product is better for them, either commissionable or fee-based, Scott Stolz, president of Raymond James Insurance Group offered the following four questions to be answered:

  • How does a product’s contract costs, such as its mortality and expense charges, compare to the advisory fee? If the contract is 1% cheaper and the advisor charges a 1% fee, a policyholder would probably prefer a fee-based option, which would offer a lower, if any, surrender charge (money paid if withdrawals are made before a certain time).
  • Is there a difference in the costs of the underlying annuity subaccounts? If the answer is yes, does that affect the answer to the first question? Some insurers are bringing out fee-based variable annuities with lower cost sub-accounts or without the 12b-1 fees for marketing and distribution which other products include.
  • How likely is it that the policyholder may need to access some of their principal to handle unplanned life costs? If this is a likely scenario, a fee-based product will be more attractive because of the lower surrender charges.
  • Is a living benefit, which guarantees certain benefits and terms in exchange for a fee, being added? If so, a commissionable product  might be more cost effective if a client is expected to hold the product for a long period of time. Consider doing a cost-benefit analysis comparing the size of the advisory fee to the cost of the contract.

Consider this, the average commissionable variable annuity has an annual cost of 1.3% while fee-based variable annuities usually cost 0.3% to 0.6%. If the advisory fee is 1% and a fee-based annuity costs 0.3%, the product choice may not matter. But if fees or expenses are higher, the commissionable product could be the better option.

Bottom line, it’s worth taking the time to explore all options, ensure complete understanding and make a decision based on a well-thought out and communicated process. Not all products are created equal and no two clients are alike. As cliche as it may seem, it doesn’t have to be any more complicated than that.

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