The Trend Toward Fee-Based Annuities

There’s been a trend toward fee-based annuity sales --  driven by the Department of Labor Fiduciary rule. And there’s no sign the trend will go away. So that’s why annuity agents need to get up to speed on this trend and annuity buyers need to work with a qualified professional so they make the right decisions for their financial goals. Scott Stolz, Senior Vice President of Private Client Group Investment Products, Raymond James, takes an took an in-depth look into the move away from the commission-based model to a fee-based model in a ThinkAdvisor article.

According to Stolz, the Department of Labor Fiduciary rule allows financial institutions to continue to recommend commission-based products under the Best Interest Contract Exemption (BICE), but in the end will lead to more compliance oversight and paperwork than fee-based sales.

Stolz reports advisors are wary of the fee-based model because they can’t fathom rationalizing the cost of a fee-based product plus an advisory fee to a client. At the same time, advisors are worried about complying with the DOL rule when they recommend either fee-based or commission-based annuities to their clients. 

According to Stolz, the problem is some advisors can recommend BOTH fee-based and commission-based annuities, but advisors offering ONLY fee-based products aren’t faced with the same conflict. That means every annuity they suggest to a client will have the same asset fee. Stolz says for example advisors can recommend a mutual fund or bond fund and a fee-based variable or indexed annuity. 

According to Stolz’s ThinkAdvisor article, advisors who think the commissionable annuity net of fees is more cost effective are usually assuming a 1.00%-plus asset fee in their analysis. Technology and fee compression will make it difficult for advisors to justify that fee, he says.

Stolz says when you use a 0.50% fee rather than a 1.00% fee in your cost analysis, you reach a totally different conclusion.

According to Stolz’s ThinkAdvisor report, advisors poorly document their unbillable services in fee-based accounts  -- for example assisting clients with deciding which health care plan to go with or whether or not to take a pension buyout. Stolz believes the SEC will focus less and less on the number of transactions in a fee-based account as advisors begin to better document their unbillable services.

Stolz says he believes annuity sales will drop dramatically over the next two to four years as advisers adjust to the new fee-based model. He says once the adjustment is made, annuity sales will potentially rise again. Stolz cautions, advisors should relearn the story of tax-deferred growth. He says the majority of growth will come from fixed and indexed annuity sales as baby boomers become more financially conservative. He says overall, the annuity industry is “faced with a rough road ahead.”