Are fees better than commissions?

By Alex Kim

Are you of the mindset that fees are better than commissions? Or do you fall into the camp that believes commissions are better than fees? Either way, you’re wrong.

The right answer is that there is room for both if the objective is to ensure more people have access to holistic financial advice so they can achieve financial security for themselves and their families. And given how many millions of people have a tremendous need for financial security today, we all should be firmly in the all-of-the-above category.

The need for financial security is staggering. LIMRA research finds there are an estimated 60 million uninsured and underinsured American households, with an average coverage gap of $200,000. In total, that equates to roughly $12 trillion. Add this to the serious problems looming with Social Security, which the Congressional Budget Office projects will become insolvent in 2034 — at which point, without reform, the finances will require a 25% cut in benefits. Clearly, more planning and advice, not less, is the solution.

For those of you who aren’t familiar with it, Ernst and Young did a study comparing investment-only strategies with those that incorporate permanent life insurance and annuities. The conclusion was notable. By deploying 30 cents of every dollar saved into permanent life insurance and annuities, consumers achieve better outcomes — for both retirement and legacy goals.

We also know that the best way to achieve holistic financial security is by working with a financial security professional. The trusted human guide is the indispensable ingredient.

A few months ago, Shlomo Benartzi — a former UCLA economics professor who is doing research to quantify the value of professional financial advice — published an article in The Wall Street Journal in which he noted “there is little data on holistic financial advice.” But his initial research has concluded that such advice could equal a 7.5% pay raise.

So despite what some may believe, the simple truth is that the commission-based model is a more effective tool in some instances. The reality is consumers must be allowed to make the choice for themselves as to which path they will pursue.

Get the regulatory framework right

This is why it is so important that we get the regulatory framework right on this issue. As we’ve already seen because of New York’s Regulation 187, consumers can be hurt when we get the regulations wrong.

For us, a metric that clearly points to the harmful effect of the regulation is the decline in the number of people covered by individual life insurance. In 2021, for example, the policy count in New York state was down 15% from 2018, the year before the rule took effect. Over the same period, however, the policy count nationally increased by 3%. So, fewer people were getting life insurance in New York at a time when New Yorkers and the rest of the country clearly needed far more of it.

Another thing to remember is that financial professionals who are compensated by commissions reach a broader spectrum of Americans of different incomes, ages, genders and ethnic backgrounds. To reach our goal of financial security for all, we certainly need more of that too.

The next time you hear someone trying to argue for one form of compensation or another, please encourage them to remember that consumers should make the choice that best fits their need. And regardless of which option they pick, we should celebrate everyone who takes the steps to get themselves and their families to a place of financial security.