The Department of Labor’s Fiduciary Rule is fixated on what they believe is negative incentivization caused by commission-based sales models. To address, DOL created a labyrinth of complex requirements to mitigate what they believe are conflicts of interest.
Ignored in the process are consumers who are both familiar and very satisfied with the commission compensation model.
At Americans for Annuity Protection, we know this just by observing the volumes of sales made on commission-based products – homes, cars, insurance, etc. If consumers saw little value in our commission-based model, why haven’t we seen a transition to fee-based Realtors and other commissioned sales people?
In the end, the final purchase decision will be made based on the consumer’s trust of and confidence in the person advising the purchase.
We live in Arizona, where pools are like driveways and we just learned our pool service person recently returned from an award trip for selling the most service plans in his territory. We assumed when we decided to purchase his recommended service plan that he was probably getting a commission to sell us that plan.
We also believed that the more plans he sells, the more competitive our individual price will be. He did not disclose his commission or the fact that this sale might win him that trip -- we hope it did! We bought the plan because it met our needs for our pool maintenance, the price was within our budget and we trusted his knowledge of other plans available and his skills to do the job right.
Put Clients First
Please don’t misunderstand, AAP wholeheartedly supports a best interest standard of care for financial and insurance professionals that puts clients’ interests first. Advisors, for the most part, have been making client-centric recommendations for decades. Providing a better supervising structure for those who have not isn’t a bad intent.
However, there are many corrections that need to be made and research to be completed before we can be sure Americans are not harmed by a bad Rule.
Unfortunately, the inherent bias of the Fiduciary Rule against commissions in favor of fee-only advice is born of a lack of understanding of how the efficient commission-based insurance model impacts product pricing and, as a result, how it benefits consumers over fee-based models.
The insurance industry, including annuities, has a 150-year history of paying commissions to advisors and agents to provide insurance advice in all forms - property, life, long-term care and retirement insurance. The conclusion from mountains of customer satisfaction studies and complaint reports demonstrates that commission-based insurance advice is serving consumers’ best interests.
As experienced annuity product developers and members of the academia, AAP knows that the commission-based payment model is one of the most cost-effective for the consumer and, in turn, provides the best value proposition.
Commission-based models are inherently less expensive to maintain and, therefore, more beneficial to consumers. Because commissions are priced with production expectations, consumers who purchase annuities share the cost of the commission with all consumers who buy that annuity product. Conversely, under fee-based payment models each consumer bears the cost individually.
Compounding the negative consumer impact of paying fees individually, is the fact that in the annuity commission structure, a commission is most often paid by the insurance company only once. Fee-based models lock the consumer into annual fees, every year, for life.
However, the most important element of the life and annuity commission model is that 100 percent of the premium paid to the insurance company is deposited into the consumer’s annuity account. Conversely, the ongoing fees in fee-based models are taken directly from the consumer’s account and accumulated savings.
Taking the fees directly can add up to significant loss of savings potential over time. The value to the consumer of compounding the total premium year after year in an annuity or life insurance contract is lost in fee-based models.
Fees Add Up
Let’s explore why. The total all-in cost to manage a portfolio typically includes the AUM fee, the underlying product costs of ETFs and mutual funds, transaction costs, and various platform fees. A recent financial advisor fee study from Bob Veres’ Inside Information cited by Michael Kitces reveals that the true all-in cost averages about 1.65 percent, not just 1 percent.
Another study of 121 small business 401(k) plans (under $2 million in assets) by Employee Fiduciary last year reports that the average “all-in” fee is 2.22 percent. While the employer may pay some of these fees, the Department itself suggests in A Look At 401k Plan Fees that the majority of the costs are paid by the employee either taken from investment returns (thereby reducing the return in your personal account) or directly from the employee’s retirement account.
In contrast, fixed annuities, including fixed indexed, charge no additional fees other than transparently disclosed fees for additional annuity benefits (e.g., guaranteed income) selected by the customer.
The chart below shows the actual loss in retirement savings resulting from fee-based advice paid every year. It is considerable. We assumed the account value begins at $35,000 with a conservative “average” 1.5 percent management fee for the investment.
The assumed annuity commission paid is a typical 6.5 percent commission on a 10-year product or $2,275. We assumed a conservative investment portfolio would earn 6 percent a year and the annuity 5 percent.
This analysis does not even take into account the newer trend to charge both a retainer and AUM fees to advise customers on how to invest their hard-fought savings. Obviously, if the investment account can make more than 6 percent it will help to offset the savings differential.
However, any losses nearing or in retirement, with less time for recovery and larger net earnings required, is a problem for many needing guaranteed lifetime income.
Fixed annuities and insurance professionals continue to be successfully supervised by state insurance departments and annuities enjoy an unprecedented 98.8 percent satisfaction rate because of their robust and effective enforcement of insurance laws.
The NAIC is currently working on amending their existing Suitability in Annuity Transactions Model Law to incorporate a best interest standard. Utilizing the specialized expertise of the SEC for security products and professionals and requiring insurance products and professionals be supervised by state laws will best leverage the Department of Labor’s work on this issue -- redirecting best interest standards back to the states where they belong.
It will be helpful to both advisers and, more importantly, consumers to apply impartial conduct standards for both insurance and investment products and services -- and for both fee and commission models -- but, regulated by the respective agencies who have the history of effective enforcement and consumer protection.
Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.
This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question.
Contact Kim at [email protected]
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