Do Your Homework on Fee-Based Annuities
August 30, 2017 by Barron's
Insurers have been scrambling recently to introduce fee-based annuities with the aim of helping advisors comply with the DOL’s fiduciary rule.
But annuity experts say an advisor needs to don the proverbial eyeshade before selecting one of these products for a client, writes MarketWatch.
John Olsen, author of “John Olsen’s Guide to Annuities for the Consumer,” says the decision depends on the provisions of a specific annuity and the nature of an advisory relationship. In general, though, a commission-based annuity will be cheaper for a client than a fee-based one if the advisor plans to work with the client for more than six years, he says.
Details matter. Scott Stolz, president of Raymond James Insurance Group, notes that some early fee-based annuity products didn’t have living and guaranteed death benefits. Although newer ones typically have these benefits, they also have higher fees to cover them, according to Stolz.
Stan Haithcock, a financial advisor and author, says the benefits of fee-based annuities include the elimination of perceived high commissions. The downside comes when fees are used for fixed annuities. “It’s hard for me to see the justification for charging an annual and ongoing fee for managing a fixed index annuity,” Haithcock tells MarketWatch.
On the other hand, Haithcock recommends that variable annuities, which are actively managed, be fee-based. “That’s a tough job, and charging a fee for that work makes sense,” he’s quoted saying.
In the end, Stolz says that advisors who offer both fee– and commission-based annuities need to know enough to determine which of two products with identical features will cost the client less over the expected life of the product.