By Warren S. Hersch
On a subject that is near and dear to annuity producers–the compensation they receive on the sale of a product–more is not necessarily better. That's because a higher payout will almost always result in less attractive benefits for the client.
Thus, a judicious balance has to be struck, sources tell Annuity Sales Buzz. There should be adequate payout for the producer's labor plus features that are suitable to the client, given his or her financial objectives.
"There is a fundamental trade-off between how much an advisor is compensated and the benefits the client receives," says Michael Kitces, a certified financial planner and director of research at Pinnacle Advisory Group, Columbia, Md.
In most cases, sources say, the surrender charge period–the period during which surrender charges will be subtracted from an annuity's account value if funds are withdrawn from the product–will lengthen in tandem with progressively higher payouts. A fixed deferred annuity that comes with a surrender period of, say, 7 years and that pays the producer a 3% commission might be lengthened to 10 years if the commission were to be increased to 6%.
How else might increased compensation be to the client's detriment? Christian Clark, an a producer at Successful Solutions, San Diego, Calif., says contracts with higher commission schedules may also include a market value adjustment if the client fails to annuitize the contract.
Another factor is the interest earned in the annuity, a key variable that could clinch or sink the sale. All else being equal, the greater the compensation paid to the producer, the lower the interest credited to the client's account. This is frequently true, sources say, of products that offer a bonus in the form higher "teaser" rate during the initial year of the contract, with the rate then dipping to a standard rate in subsequent years.
"From a pricing perspective, the interest paid to the client is absolutely affected [by the commission payout]," says Kitces. "If the insurer receives a dollar from the client and immediately writes the agent a check for 10% of that amount, then the carrier only has 90% of that money to invest," he adds. "To get its money back, it will pay out a reduced interest rate."
What commission rate on fixed deferred annuities do producers think appropriate? Given currently low market rates, compensation ranging from 2% to 5% of the value of the contract is generally considered the norm.
