Annuity Commissions vs Investment Fees
Plenty of advisors like to level accusations or get into a debate over compensation. I get comments all the time because I work on commission and those who get paid by investment fee think they are somehow superior. It’s silly and I’m going to explain why anyone who does it is not being intellectually honest. A well rounded financial plan should include elements of various asset classes, all configured to meet your needs. An advisor who disregards any single asset simply because of the compensation model can not adequately present a viable retirement plan for a majority of people.
Investment fees are not a bad thing and neither are annuity commissions. I’m not stating a case for one over the other, rather encouraging everyone to keep an open mind and realize the value of each. Commissions do not come out of your pocket but investment fees do. Using an annuity that pays the agent a commission, in conjunction with an investment portfolio will lower total fees on the portfolio. Of course the annuity must appropriately meet your needs so there’s no sense in using one just to reduce total out of pocket expenses.
Investment fees need to be studied carefully because it will affect your bottom line over time. In addition to the actual expense, there’s a lost opportunity cost that amplifies the drag on a portfolio. Several years ago I did a simple analysis on this to show the effect and you can see it in a couple of tables in that newsletter. “How Fees Affect Investment Performance” An investment manager makes a pile of money off of your account but it costs you much more in the long run by reducing accumulation.
This doesn’t mean it’s a bad thing but it should get your attention when you see the numbers. In my opinion, investment fees are appropriate for one of three reasons. First, if your manager can beat the market, but no one does that consistently. Second, if your manager is an effective risk analyst who can help you avoid major losses in volatile markets. Third, some advisors specialize in and provide a variety of other services but may prefer the fee-based model of investment management for compensation. Some investment managers use only a model with fees while others use a combination. Someone who claims to not use commission-based products at all is fine but will only be able to act in the best interests of a very small subgroup of those seeking professional assistance. It’s not right or wrong, just appropriate only for a specific type of person.
Commissions are also relevant because in the same way you can use it to determine whether the advisor is self dealing. Annuity commissions range from 1% to about 9% at the top end. I’ve seen a lot of people selling the highest compensation contracts when the contract with lower compensation is more appropriate. That’s why education is so important. Some advisors may avoid annuities that could help a client and some people buy the wrong ones. A commission is not going to hurt you unless you buy something that doesn’t meet a specific need. If done correctly it will only help your portfolio over time. Many investment managers who avoid annuities are missing the fact that it could help them manage larger portfolios in addition to making life a lot easier.
Year to date, my average commission is 3.36% for anyone who is curious. I work with all types of products while selling a substantial amount of SPIAs and MYGAs that are on the lower end of the compensation scale. If anyone wants to question my motivation then it really comes down to specializing in an asset class that people want once they realize how it can help. This should never be a debate and I will never attack another person’s preferred method of compensation. It’s more productive to help everyone understand where either a commission or fee is appropriate. If anyone tells you that one or another is better than you can be sure they don’t know what they’re talking about.
Have a great weekend…
Bryan
Watch Episode 161: Annuity Commissions vs Investment Fees
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Last Updated on November 21, 2024 by Bryan Anderson
