ANNUITIES
Moore commentary
Annuity compensation: Commission vs. fees
Total compensation
at the end of an
eight-year surrender
charge period
illustrated the
fee-based advisor
received nearly twice
the compensation of
the commissioned
salesperson.
“Social influencer creates social unrest with controversial article!” That could be the story of
my life. Many read my article in NAILBA’s Independent newsletter on the different possibilities
for interest earnings and total compensation on annuities. It definitely got people talking!
The earlier article assumed any fees to cover Assets Under Management (AUM) for the fee’d
advisor were deducted from a source other than the annuity. A Registered Investment Advisor
(RIA) suggested this likely isn’t the case in real life. What would it mean for our study, if we
illustrated the effect of fees directly applied to the annuity’s value 1 ? Assuming our same 1.50%
average AUM fee is applied to the fee’d annuity, the commissioned annuity contract 2 has less
cash value than the advisory version for the first couple of years. Thereafter, the commissioned
annuity gains the advantage, as a result of the advisor’s commission being paid by the
insurance company, rather than the annuity purchaser.
So, score one for the commissioned advisors in this scenario.
One commissioned advisor suggested his commissioned annuities were superior to
fee-based annuities because AUM fees can completely wipe-out an annuity’s value in a
steadily declining market. While that is technically true, it’s hard to imagine a 1.50% AUM
fee being charged long enough for the average $124,657 annuity premium to drop to a zero
contract balance IN ADDITION TO the market consistently declining for that many consecutive
years. That said, it IS a possibility.
So, score another one for the commissioned advisors, I think?
And then there’s a friend who sells annuities through commissioned transactions suggesting
that I didn’t plainly point-out that the higher the cash accumulation is on a fee’d annuity, the
greater the AUM being collected by the fee’d advisor. So, there is that.
Sheryl Moore is President and CEO of
the life and annuity market research
firm of Wink, Inc. Her company
provides competitive intelligence,
market research, consulting services
and insight to select financial services
companies. She may be reached at
[email protected].
Who wins here?
Another gentleman suggested a study of just over 1,000 RIAs, illustrating that the average
AUM fee was 1.17%, as opposed to 1.50% that I previously used. While I don’t necessarily
put much credibility in a sampling of only 1,000 fee-based advisors, I ran this lower figure
through the same scenario as the example in last month’s newsletter. Results still indicated
the fee-based advisor’s total compensation remained less than the commissioned advisor’s
until year four of the contract.
However, total compensation at the end of an eight-year surrender charge period
illustrated the fee-based advisor received nearly twice the compensation of the
commissioned salesperson, as opposed to nearly 250% more. Bottom line: the individual
purchasing an annuity from a commissioned salesperson is going to ultimately pay less
than the individual working with a fiduciary, when holding their assets for the length of
the annuity’s surrender charge period.
What’s the score now?
Everyone gets points for their passion on this subject, and dedication to do what’s best
for the client. Until our next time, let’s channel the passion away from debating “who is
better,”and focusing on educating about retirement income vehicles.
1 Assumes a 2.55% cap for the commissioned annuity and a 3.95% cap for the fee-based annuity. Also assumes all AUM fees are deducted from a source
outside the annuity.
2 Assumes a 5.57% average heaped commission option for an independent agent commission on a 65-year old annuitant
36 Perspectives Q3 2020