The Department of Labor will start enforcing compliance with “REG BI”, or Regulation Best Interest, in 2022. This has been a hotly debated subject for years. Basically, annuity agents like me will have to justify why we are making a certain recommendation for the funding of an annuity from a Qualified Account (i.e., 401(K), IRA’s, 403(B), etc.).
This has never been an issue for me because I started this company with the purpose of wanting to know what happens on the ‘other side of the table.’ It was my experience that you could never get a straight answer from traditional advisors about fees or potential growth. Therefore, I wanted to own a firm that would tell a client in plain English, “This is what it cost, and this is what you can expect.”
Fortunately, I found many other agents like me. They always act in the best interest of their clients. But, as in any industry, there are some bad apples. Those are the guys who will recommend you surrender an annuity to fund a different annuity. This is a big “no-no” in our industry. Luckily, these types of transactions have been clamped down by the carriers themselves.
Since I have been in the industry, I have always had to explain my reasoning for my recommendation for a certain product in the application. Then the client must sign off on that. Another aspect that is always disclosed in the application, are the fees. If there are any fees at all. Certain expenses that may be found in an annuity include an “Income Rider Fee” or the “Surrender Charges”. If you are looking at a Variable Annuity, there are several more fees that could be incurred.
The one thing that was not disclosed on the application was commissions. I never thought that this should be hidden, nor should it be something to be embarrassed about. Everyone gets paid when they provide a product or service of value. And the commission I make never comes out of the pocket, or the account value, of my clients. I always thought it would be more shameful to collect a management fee from a client after money was lost in their account.
If a client asked me what I was paid, I would just say, “X%” (Normally, I would have to look it up first. I don’t recommend products based on the amount of commission that I’ll be paid).
To frame it correctly, I would ask, “When you bought your home, would you have rather paid the commission to the real estate agent once, or pay them 2% every year on the ever-increasing value of your home?”
After that visual, I explain that none of the money comes out of their pocket. It is paid by the annuity company’s general fund. I have never had a single client balk at that explanation.
What this new enforcement from the DOL will require, is not only justification for the recommendation of a certain product, but also disclosure of the percentage of commission.
This is just a broad overview of the commissions annuity agents are paid and should not be taken as gospel or as a legal disclosure:
MYGA’s or Fixed Interest Annuities:
1% – 3% of the total premium. Depending on the length of the term. The longer the term, the higher the percentage the agent is paid. Also, if a client is over the age of 75 or 80, the commission is normally reduced significantly due to the increased risk that the annuity company would be paying out the death benefit before the end of the term.
Example: If you rollover $100,000 from a Qualified Money Account, I would be paid a one-time commission of $1,000 – $3,000 from the annuity company’s general fund. Your entire $100,000 would be calculated to earn interest. None of that commission is paid out of your pocket. I cannot stress that enough.
If we compare that to managed money with a 1% management fee, plus a 0.5% fund fee, you will have $1,500 deducted from your $100,000 every year. And that’s if the money did absolutely nothing. If your value went up, you would pay more. If your value went down, you would pay less…but you would still pay…out of your pocket. Out of your future income.
When we compare guaranteed values at the end of a term, let’s say 5-years, you would have the guaranteed interest rate that compounded for 5-years. In a managed money scenario, you have no guarantees of what your account value will be, but you know you if you earned 0% during that 5-year period, you would only have $92,500 returned to you after management fees. ($1,500 x 5 – $100,000)
Fixed Indexed Annuities (FIA’s):
2.5% – 7% of the total premium. Depending on the length of the term. The longer the term, the higher the percentage the agent is paid. There is no extra commission paid for adding an Income Rider. Also, if a client is over the age of 75 or 80, the commission is normally reduced significantly due to the increased risk that the annuity company would be paying out the death benefit before the end of the term.
This is where you really need to trust your gut and pay attention to your personal time frames. If an annuity advisor is trying to push you into a longer-term, and they cannot give you a reasonable explanation of why, they are probably trying to make a bigger commission. This totally violates the legal and moral standards of the industry. You should find someone else to work with.
There are some 10+ year FIA’s that will pay up to 8.5%, but I have yet to see a client scenario where using a product for more than ten years makes any sense whatsoever. Do not get yourself wrapped up in a 12-, 14-, or a 16-year annuity. I just cannot see the reasoning behind it.
Example: If you rollover $100,000 from a Qualified Money Account, I would be paid a one-time commission of $2,500 – $7,000 from the annuity company’s general fund. Your entire $100,000 would be calculated to earn interest. Again, none of that commission is paid out of your pocket. I cannot stress that enough.
If we compare that to managed money with a 1% management fee, plus a 0.5% fund fee, you will have $1,500 deducted from your $100,000 every year. And that’s if the money did absolutely nothing. If your value went up, you would pay more. If your value went down, you would pay less…but you would still pay…out of your pocket. Out of your future income.
Again, when we compare guaranteed values at the end of a term, let’s say 10-years, you would have the guaranteed downside protection from market loss and your full amount of $100,000 would be returned to you. In a managed money scenario, you have no guarantees of what your account value will be, but you know if you earned 0% during that 10-year period, you would only have $85,000 returned to you after management fees. ($1,500 x 10 – $100,000)
The point of this article is not to demise the value of managed money, but to put some context into how fees and commissions work in the financial world. I know that a traditional advisor criticizing the amount of commission an annuity advisor will be paid can sway an individual from protecting their money if there is no understanding that the money does not come out of their pocket. Just always try to keep someone’s motives in the back of your head when you are being offered advice. That’s just good sense no matter the subject that is being discussed.
I hope this article shines some light on a topic that is normally shrouded in darkness. If you have any questions or concerns, you can always reach out to me at 636.926.6500 or click the “Schedule A Call” button. Plus, if you have not taken the time to watch my video series on “20% More Guaranteed Income in Retirement”, I would highly recommend it! The link is below this article. It is broken down into several short videos and is packed with useful information that shows how you can spend more of your money in retirement while having the peace of mind that you’ll never run out of income.
All the best,
Marty