Fee-Based Annuities May Not Be Your Best Bet
November 30, 2017 by Eleanor Laise
Annuities have long had a reputation for generating rich commissions for salespeople. Now, a new generation of annuities that are free of commissions promises to alter that perception—but the trend isn’t a clear win for investors.
Insurance companies including Lincoln Financial Group, Pacific Life and Great American Life Insurance in the past year have launched new “fee based” variable and fixed-indexed annuities for use in brokerage accounts where investors pay an annual asset-based fee. Rather than be rewarded with an up-front commission, the adviser charges annual fees on the assets.
Fee-based annuities have some advantages for investors. When advice fees are charged separately—rather than as commissions baked into the annuity contract—investors have a better sense of how much they’re paying for advice and how much for the investment. And by removing the temptation for an adviser to recommend the annuity that pays the juiciest commission, fee-based annuities should better align advisers’ and clients’ interests.
But you won’t necessarily come out ahead. If you’re buying an annuity you plan to hold for the rest of your life, and there’s little for the adviser to do other than recommend an appropriate product at the outset, it may be hard to justify paying an annual asset-based fee.
The new products are a response to the U.S. Department of Labor’s fiduciary rule, which requires financial professionals offering advice on retirement accounts to act in their clients’ best interests. Although some of its key elements have been delayed until mid 2019, the rule is already having a significant impact on how investors pay for investment products and advice. Some brokerage firms, for example, are eliminating commission-based IRAs in favor of fee-based accounts.