Everyone either asks about it or thinks about it. Journalists write about it and competitors criticize it. Annuities pay commissions to the agents who sell them and that’s just how this part of the industry works. It’s ok to be concerned about this because the amount of money a salesperson gets does make a difference in the products and options you are given.
I’ve met agents in the past that refuse to sell anything that pays less than 8% commission which clearly shows a person who is primarily focused on self-gratification. Not everyone is greedy even if the critics claim that anyone who sells an annuity is only in it for the money. But there are very few people who put the importance of consumer value at the forefront of a proposal.
If you want to understand how commissions affect the products you see then you have to understand first what the pot looks like and then see who has a hand in it. Agents are not the only ones who control product options and in a lot of cases that’s the main reason why so many people sell certain products more than others.
The source of the issue is what’s called Insurance Marketing Organizations (IMOs). Most insurance companies have outsourced their sales and marketing departments to third party companies like these that handle product distribution and assist agents with consumer sales. The payoff comes in the form of additional commissions paid to the IMO on top of what’s paid to the contracted agent.
It’s a necessary evil on this side of the business and I don’t feel as though IMOs add any value to my business and definitely don’t add value for the consumer. Essentially what this means is a third party determines in part what contracts are appropriate for your situation.
IMOs compete aggressively to get an agent’s business. I get three or four new calls every week with offers of free leads, fancy vacations or extra commissions and bonuses if I switch to the other company.
I get more pitches than you do which is one of the reasons why I don’t call people endlessly. I understand what it’s like to have someone relentlessly bother me for business.
Incentives offered by IMOs are too numerous to list but for purposes of this article I’m going to focus on additional commissions. Products with the highest commissions are usually the flashy ones with a big bonus and longer surrender periods. The agent gets what is called street-level commission and the IMO gets an override. Some overrides are bigger than others and typically that additional compensation comes alongside the products with big street commissions. IMOs have no direct responsibility to you so money rather than ethics dictate product recommendations.
Bigger overrides mean a better bottom line, or more money to entice agents to do certain types of business. You can call it my opinion but I am positive this is the reason why some annuities are more widely used than others. I’ll give you an example that will make it pretty clear.
Allianz is a company I pick on a fair bit mostly because the motives are obvious. They have a list of annuities that are considered “preferred products.” In order for an IMO to distribute products from the preferred list they need to be able to hit some pretty high sales targets. The benefit of selling Allianz preferred is that Allianz does not allow an IMO to share overrides on those products. So when an IMO gets an agent to sell preferred there’s more money in it for the IMO and the high distribution requirements mean they push those products hard.
An exact reason why those products are so widely distributed is because that’s what the IMO wants agents to see for the two major reasons mentioned above. I’ve met a lot of advisors who say those products are the only options they have to sell. If so they are working with the wrong IMO but at least you can begin to see that it can be just as hard for agents to find good products as it is for consumers.
I had the same problem several years ago when I first started investigating index annuities. The IMO I was using limited my options to one or two companies they had a good contract with. As a result I wasn’t able to recommend a truly unbiased product recommendation. It didn’t take me long to figure it out so I fired the IMO and decided never again to take their suggestions as fact. Rather than rely on them to educate me I opted to pay for access to a database of all products so I can see the entire market and use a detailed search to identify the best value.
I’ve always believed that a small percentage of something is far better than a big percentage of nothing. After looking at my books from 2018 I can see that my average commission was just under 4%. It’s not that I’m better than anyone who sells for bigger commissions, that’s just the result of being involved in competitive situations and keeping the focus on finding the best solutions for people.
Commissions will always hold some people back from making a big purchase but it shouldn’t. Someone makes money off of everything you buy so it’s up to you to make sure you are getting as much value as you can. The cheaper it is for a company to manage an annuity contract, the more you will get out of it.
Large commissions happen to come along with the most commonly sold products and that is part of the reason why I spend so much time trying to get people to avoid them unless it’s an absolutely perfect fit. Making strategic financial decisions based on fundamental analysis will allow you to naturally find the best contracts with the most benefits. For those of you willing to look a little deeper at that type of approach, the result will be a more profitable retirement.
All my best,