Annuity Compensation: Commission vs. Fees

I recently achieved a new status in the insurance industry: social influencer.

And never, in my decades of insurance experience have I witnessed a debate on social media that is more heated and passionate than that of fee-based advisors versus those who are commissioned.

The argument?

“One cannot act in the client’s best interests, unless they are a fiduciary who does not get paid a commission.”

Fiduciaries often argue that because they are not paid commissions, that they are uniquely positioned to offer conflict-free advice. Further, these fee-based or fee-only advisors contend that the lack of commissions on their product offerings, ensure that their clients are receiving maximum value.

On the other hand, commissioned advisors counter that their clients end-up paying less for their advice. In addition, these commission-earning advisors suggest that the product offerings of fee’d advisors may not be superior to their own wares.

I decided, as the third-party/neutral product expert, to test the argument as it relates to indexed annuities.

While there are 504 different indexed annuities available for sale through 67 different insurance companies today, 30 of those products are fee-based annuities that are offered via 12 different insurers. I narrowed-down our study to sixteen annuities, offered by eight different insurance companies. I selected commissioned and fee-based annuities for each company in the study, making careful to match apples-to-apples (as much as possible) in terms of surrender charge periods, indexed interest offerings, and more.

Our study was further-limited by reviewing 5-8-year products, depending on company offerings. Thereafter, we focused solely on annual point-to-point indexing methods, based on the S&P 500 index, subject to a cap rate. The outcomes were enlightening.

The Argument on Rates
Fiduciaries often contend that by giving-up the commission on their annuities, the client can obtain preferential rates. We found that to be true in our study, which illustrated that the difference in cap rates ranged from 0.00% - 1.40% in favor of the fee-based product; the median difference being 0.77%.

That said we put the caps for both annuities into action and tested the products with the greatest difference in caps, in a steadily increasing market environment. Over an eight-year period, the fee-based annuity would have accumulated nearly $10,146 more indexed gains than the commissioned annuity, assuming a $100,000 premium.1 Score one for fee-based advisors.

The Argument on Compensation
A commission fiduciary claim is that his/her compensation for the sale is far less than their commissioned counterpart. We asked my social network of tens upon tens of thousands about the typical asset management fee. The responses suggested that this fee generally ranges from 1.00% - 2.00%, depending on the client/advisor; we will assume a median 1.50% annual asset management fee in our study.

While some may perceive that the commissioned advisor is paid considerably more than the fee-based advisor, our study concluded that “it depends.” We found that the typical fee-based advisor’s total compensation remained less than the commissioned advisor’s until year four of the contract.2 However, when reviewing total compensation at the end of the eight-year surrender charge period, results show that the fee-based advisor received nearly 250% more compensation than the commissioned salesperson over the same period. Score one for commissioned advisors.

The Best Interest Argument
It can be said that fee-based advisors have more motivation to “act in their clients’ best interests,” as they make the same amount of money, regardless of which product/solution they suggest to the client. While that may be true, I have read about plenty of slimy “fiduciaries.” Ever hear of that Madoff guy?

And while commissioned salespeople are not legally obligated to a fiduciary standard, I have met a great many commissioned advisors who always put their clients first. Can commission be a motivating factor? Yes, and I have read about the folks that sold double-digit surrender charge annuities to consumers on their deathbeds. That said, the salesperson may be a crook, regardless of the product that is sold. Commission is not the only thing that helps identify one of the “bad guys/gals.”

There are bad apples in every barrel of the financial services industry.

As you know, I do not endorse any company or product. Therefore, the commission versus fee argument is lost on me. When you get to the bottom of it, my perspective is that both advisors are being paid; one way, or another, as a part of the annuity transaction. It just may be easier to find a commissioned advisor that sells annuities, than a fee-based or fee-only advisor.

And everyone could use better annuity rates right now; caps are just crummy across-the-board. That said, one could absolutely make the argument that consumers could potentially receive more earnings on a fee-based annuity, than a commissioned product.

Ultimately, I am just grateful for any and all opportunities to educate consumers about the existence of annuities, and whether (or not) they may be a viable purchase for their retirement goals. After all, the number one fear of Americans is running-out-of-money in retirement. And annuities are the ONLY financial services instrument that can guarantee the purchaser a paycheck for the rest of their life; even if they live to be 150 years old! ALL of you are financial evangelists: commissioned or fee-based.

So what do you say that we all bury the hatchet, accept our differences, and “play nice in the sandbox” together? If we focus on forging-forward and creating new relationships, as opposed to bashing one another, we could increase the financial IQs of a great many more people! Retirement problem, solved!

1Assumes a 2.55% cap for the commissioned annuity and a 3.95% cap for the fee-based 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 [email protected].