By Frederick A. Van Den Abbeel
Undoubtedly, you have noticed the trend in this industry of moving to a fee-based model for running a financial-planning practice. With more and more prospects and clients demanding fee-type services, I think it is wise to take a look at what this might mean for your business.
As part of this shift, I encourage you to explore fee-based annuities. Although I am not advocating you simply kick commission-based annuities to the curb, fee-based annuities may be a good way to begin this shift in your practice. Here are some reasons that fee-based annuities deserve your attention:
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Commission-based annuities have significantly higher mortality and expense charges than fee-based annuities. |
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Lower expenses. One of the primary differences between the two types of annuities deals with mortality and expense charges. Commission-based annuities have significantly higher mortality and expense charges than fee-based annuities. The higher the mortality and expense charges, the less your client receives, thus affecting their rate of return. It should also be noted that the internal portfolio-management fees in a commission-based annuity sub-account can be significantly higher than those in a fee-based annuity.
More balanced compensation. Commission-based annuities tend to provide you, the advisor, with either a large up-front commission or a smaller up-front commission with service payments after the sale is made. With a fee-based annuity, you negotiate a management fee with your client, depending on the needs and services you will be providing.
Since each client’s needs are unique, fee-based annuities allow you to be properly compensated for your time. With fee-based annuities, you can adjust your ongoing management fee to the expected servicing needs of your client. This provides you with greater flexibility rather than just receiving what the insurance companies’ commission schedule provides.
No surrender fees. When commission-based annuities are sold the agent or broker receives a commission, which is a primary reason the insurance company places a surrender penalty on the annuity. By contrast, fee-based annuities pay no commissions. Therefore, there are no surrender penalties—a big plus for your client. As mentioned above, you negotiate a management fee with your client.
No unnecessary bells and whistles. Commission-based annuities tend to have a lot more bells-and-whistle riders than fee-based annuities, which can be very expensive. And my question is: Does your client really need them—and at what cost? It is important to find out if a particular rider is absolutely required to help you determine the appropriate course of action. In my research and experience, fee-based annuities have evolved well over the years, and the companies are offering more options, making them more comparable to commission-based annuities than they previously were.
A word of caution
Selling commission-based annuities does not automatically qualify you to sell fee-based annuities. You may not be properly licensed and/or registered or authorized by your firm to sell them. Generally speaking, you will need to obtain either a Series 65 or Series 66 license, or receive an exemption of some type (perhaps due to a professional designation you may hold) before you can use a fee-based annuity product with your clients. You should also check with your broker/dealer to find out what specific policies it has as well.
This is just a brief overview of some of the benefits of selling fee-based annuities. If you have not already done so, start researching and seek to understand why this is the fastest-growing segment of the financial-services business. I caution you, however, not to seek advice from someone who just dabbles in this area—go to an industry expert.
Frederick Van Den Abbeel is a consultant and a board member of Tampa AIFA. He can be reached at 727-490-5427 or by email at fvandenabbeel@knology.net.
September 2007
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