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‘Watch Out’ Is The Theme Of Fee Discussion


Variable annuities received a few mentions in a bulletin for investors that the Securities and Exchange Commission (SEC) published recently about “How Fees and Expenses Affect Your Investment Portfolio.”

These are “mentions,” not accusations, and they don’t have the force of law.

Still, the document is an “investor bulletin” from the SEC’s Office of Investor Education and Advocacy (OIEA). Such bulletins focus on topical issues “including recent commission actions,” according to the SEC website. For that a reason, industry practitioners will want to know that the document is out there — and what’s in it.

The bulletin urges investors to be sure to “understand and compare the fees you’ll be charged. It could save you a lot of money in the long run.”

It also suggests that investors ask questions about “what you will be charged, when and why” and about “your financial professional’s compensation.”

Worth noting is that the discussion is not limited to fee disclosure in 401(k)s, which has been a hot-button issue over at the Department of Labor. The 401(k)s do get a mention, but this bulletin is not limited to those products any more than it is limited to variable annuity products.

About fees and costs

The bulletin says it is about “fees and costs associated with investment products and services.” However, it references variable annuity products to illustrate certain points. These discussions are informational in tone and broad in scope.

For example, the bulletin describes surrender charges — a type of “transaction fee” — in variable annuities this way:

“Early withdrawal from a variable annuity investment (typically within six to eight years, but sometimes as long as 10 years) will usually result in a surrender charge. This charge compensates your financial professional for selling the variable annuity to you. Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years.”

Similarly, it describes annual variable annuity fees — a type of “ongoing fee” — this way:

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“If you invest in a variable annuity, you may be charged fees to cover the expenses of administering the variable annuity. You also may pay fees such as insurance fees and fees for optional features (often called riders).You will also be subject to the annual operating expenses of any mutual funds or other investments that the variable annuity holds.”

The document notes that some investment products or services commonly include both transaction and ongoing fees. Examples cited include not only mutual funds and exchange traded funds (ETFs) but also variable annuities. These fees are included “as part of the structure of the product or service,” the bulletin says.

Watch out

None of the above statements mention variable annuities in ways that malign the products or their distribution. But the overall thrust of the fee discussion is “watch out.” Industry practitioners may worry that this may carry over to the annuity industry, causing reputational harm to the products.

In the opening paragraph, for example, a bold-face, italicized sentence cautions that “These fees may seem small, but over time they can have a major impact on your investment portfolio.”

The illustration shown in the discussion shows the impact on performance of a $100,000 investment portfolio with a 4 percent annual return over 20 years if the portfolio has an ongoing fee of 0.25 percent, 0.50 percent or 1 percent.

“In 20 years, the annual fee of 0.50 percent will reduce the portfolio by $10,000 compared to a portfolio with a 0.25 percent annual fee,” the bulletin says. If the fee were 1 percent, the portfolio value would be reduced by nearly $30,000 compared to a portfolio with the 0.25 percent annual fee, it says.

Practitioners may want to prepare responses to client inquiries that may arise along those lines.

They may also want to have answers ready for the questions that the bulletin suggests investors ask, particularly as regards compensation. These questions do not ask how much the advisor gets paid, but they do probe beyond the typical curtain:

  • How do you get paid? By commission? How are commissions determined? Do they vary depending on the amount of assets you manage?
  • Do you get paid through means other than through commissions and amount of assets you manage and, if yes, how?

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  • Do I have any choice on how to pay you?

Incidentally, the bulletin could lead to some confusion concerning commissions. In advisor circles, the terms commission and fee are separate ways of receiving compensation, with advisors working on one or the other basis or on a fee and commission basis, depending on products sold and work done. But the bulletin identifies commissions as a type of transaction fee. Clients who have read the bulletin may later come in asking about fees, meaning commissions, or the other way around. The advisor will need to ask some pointed questions to clarify meaning. That should be a cake-walk for most securities-licensed professionals, but given the arrival of this bulletin, it might pay to provide clarification upfront, even to established clients.

A caution on fee trends

In a recent speech in Arlington, Va., Andrew J. Bowden shed some light on the SEC’s interest in fees.

The SEC has been looking at the trend of dually registered firms moving client assets from commission-based brokerage accounts to fee-based wrap accounts that offer advice and no-commission trading for one bundled asset-based fee, said the director of the Office of Compliance Inspections and Examinations.

“The dual-registrants we examine can pretty quickly explain why the migration to fee-based accounts is good for them,” Bowden toldthe Investment Adviser Association Compliance Conference, according to the text of his speech posted at the SEC website.

“Their commission-based business is under pressure from decreasing trade volumes and declining commission rates. They can transform choppy, transaction based-compensation into a steadier, more reliable, and predictable revenue stream. They no longer have to make a sale to collect a fee.” He cited several possible advantages for clients, too.

But the SEC is also seeing instances where the value proposition to clients is not clear, Bowden cautioned.

One example he gave is when securities are purchased, and portfolios are constructed or reconstructed, in commission-paying brokerage accounts “at significant expense to the client,” and “then promptly transferred to a fee-based wrap account in which they could have done the same trades without paying commissions.”

Another example is transferring primarily cash or cash-equivalent accounts that are earning a few basis points into “a fee-based wrap account charging up to nearly 3 percent of AUM (assets under management)” while continuing to keep the assets invested in cash.

Hence, the SEC's focus on fees. Hence, the Investor Bulletin on fees.

Ultimate IUL Client Presentations For fee-based advisors and for those considering moving into a fee-based practice model have a lot at stake in this area, and so do commission-based advisors when they discuss fees along with other disclosures.

, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at

© Entire contents copyright 2014 by Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from



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