Monday, February 27, 2017

Annuity Compensation Conflicts

Compensation conflicts with annuities abound. Most of the time the conflict is in selling one annuity over another to earn a higher commission or to earn a trip to a tropical paradise. However, there are also conflicts that exist once an agent has settled on a product to sell you - should they take their money now, or over time? I recently came across the following over at and found it interesting:

What's so extraordinary about this agent advertisement is the different options available to the agent for receiving their commission. They have three options:

Take a big commission up front (6.50%),

A smaller upfront commission and ongoing smaller commissions for a few years, or

Structure their commissions to look like an investment advisor (except that the commissions are not disclosed and there is no fiduciary responsibility)

You'll notice that the third option produces the highest long term compensation to the agent, though it takes patience to collect. One must wonder why you would pay a 2.5% commission to a salesperson plus an ongoing 1% commission when there is nothing to manage. Investment advisors are at least getting paid to manage the money, the agent isn't managing anything and has no fiduciary or planning responsibility. As long as they keep the client in the policy, the insurance agent gets paid. This seems similar to the C-Share problem mutual funds have, in other words, even if the compensation is paid as a commission, if it's structured to look like a fee-based, fiduciary relationship, it should be regulated as one. If it walks and talks like a duck...

I'd like to point out one more thing. In glancing at the 10 year commissions on each option the numbers for the third option (labeled Trail) looked off to me. I setup a simple spreadsheet and sure enough, the 14.31% is incorrect, that's the total commissions paid over 11 years, not 10. They got their own compensation advertisement wrong.

Not only is there a conflict in choosing which annuities to use, there is a conflict once you've decided upon an annuity. The sale of annuities are literally conflicts wrapped within conflicts, wrapped within a conflict. I'm not one of the advisors who says that all annuities are bad, but you can understand why many would simply shake their head at a system that is so adverse to the customers the agents and insurance companies are supposed to be serving.

Scott Dauenhauer, CFP, MPAS, AIF
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