Moore Commentary. Annuity Compensation: Commission vs. Fees
September 20, 2020 by Sheryl J. Moore
“Social influencer creates social unrest with controversial article!” That could be the story of my life. Many read my article in the previous issue 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 that 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 value1? Assuming our same 1.50% average AUM fee is applied to the fee’d annuity, the commissioned annuity contract2 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 that 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 is also very unlikely. It is 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 while I demonstrated in our last article how two annuities’ cash accumulation varied, as a result of more advantageous rates on fee’d products,] a friend who sells annuities through commissioned transactions suggested that I didn’t plainly point-out that the higher the cash accumulation is on a fee’d annuity, the greater the AUM that is being collected by the fee’d advisor. So, there is that.
Who wins here?
A 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 market research with 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 issue. Results still indicated that 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 that 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 at this point?
[I believe we have about exhausted this issue. I don’t feel confident that my exploration of the matter will help to further any constructive discussions between fee’d advisors and commissioned advisors. Respectfully, my experiences with all of you have revealed a strong passion, from both sides, that show that each type of advisor truly feels that they are doing what is best for the client, in how they are compensated for their annuity sales. While that may cause conflict for those selling annuities, it is actually a good thing when we consider the perspective of the client.]
After all- isn’t the bottom line an argument about who is acting in their client’s best interests?
Until our next constructive debate, let’s channel all of that passion we’re utilizing in fighting with one another over “who is better,” into a passion for educating our nation on these important retirement income vehicles.
1Assumes 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.
2Assumes a 5.57% average heaped commission option for an independent agent commission on a 65-year old annuitant
Sheryl Moore is President and CEO of the life and annuity market research firm of Wink, Inc. Her company provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at firstname.lastname@example.org.