If you work in the financial planning or wealth management industry, you no doubt have more than a passing familiarity with annuities. These popular investment vehicles have long been used to reduce individual tax burdens, mitigate stock market risks and provide a steady stream of reliable lifetime income. Whether you work as a stockbroker for a major brokerage firm or own your financial advisory firm, you have probably recommended your share of annuity products, but how much do you know about the commissions these products generate and how those commissions are paid?
It is important to note at the outset that the commission landscape is changing rapidly at many firms, thanks in part to the upcoming implementation of the Department of Labor Fiduciary Rule. That rule is slated to take effect in April of this year, and it requires financial professionals to put the best interests of their clients first when making recommendations and choosing investments for retirement accounts.
That best interest requirement could have a significant impact on the commissions paid to annuity salespeople, especially in cases where one type of product pays a higher commission than another. Many firms are still busy determining the implications of the DOL fiduciary rule, so the impact on annuity commissions is not yet fully known.
That said, it is helpful to begin our discussion of annuity commissions with a look at two of the most popular investment vehicles on the market, namely fixed and indexed annuities.
The commission structure for fixed and indexed annuities is widely misunderstood, even by professionals in the financial industry. The basic commission paid on such products is known as the street level commission, and it represents the company advertised commission schedule. As such, the final commission can be negotiated to provide financial advisors with a better deal.
You may also encounter a so-called commission override as you research annuity products for your clients. The commission override is the portion of the excellent that will be paid to the marketing group, and it can apply to both fixed and indexed annuity products.
It is also important for financial professionals, and the clients they work with, to understand what heaped commissions are and how they work. Unlike some other types of annuity commissions, heaped commissions are paid to the producer in a single lump sum, typically at the time, the annuity contract is issued to the buyer. On a percentage basis, heaped commissions are generally larger and more lucrative than other commission structures.
More typical is the continuous commission, an annuity commission structure in which the producer is paid over a period of years. There is a single commission payment made when the annuity is purchased, and subsequent additional payments on a set number of anniversary dates.
Levelized annuity commissions are typically less generous than their heaped counterparts, providing a lower percentage payment to the individuals who sell them. Under a levelized commission structure, payments are smaller, but they extend for a greater period.
As the name implies, trail commissions are paid after the annuity contract is issued. These trail commissions are based on the value of the annuity, and they are offered in addition to a heaped commission structure, i.e. trail commissions are not typically the only form of compensation for the seller of the annuity.
There are some different types of commissions paid to annuity salespeople, and in some cases, a combination of two or three commission structures may be used. The exact nature of the compensation will depend on many factors, including the competitiveness of the market and the nature of the annuity product itself.
There will also be differences in compensation depending on the distribution channel of the annuity product. An insurance agent working as the employee of a large firm may be paid a lower commission on each annuity he or she sells. On the other hand, that employee trades a potentially higher annuity commission for the security of a steady job and the presence of lucrative fringe benefits.
At the other end of the spectrum are the independent insurance agents who run their own firms and make their own investment recommendations. These independent agents may be eligible for higher commissions on the annuity products they sell, but they also face higher costs in the form of individual health insurance plans, self-employment taxes, and other expenses that come with self-employment and business ownership.
The nature of the annuity products themselves can also play a role in the commissions paid to the salespeople involved. Variable annuities, which invest a portion of their assets in the stock market, typically pay a commission every year they are active. That commission is based on the value of the annuity contract, thus encouraging the producer of the annuity to provide good service and ongoing support.
The commission structures used to compensate the sellers and producers of fixed and indexed annuities are different since those products do not decline in value when the performance of the market changes. As a result, most fixed and indexed annuities pay a one-time commission, issued when the annuity is first sold.
That does not mean that indexed annuities cannot offer additional compensation even after the initial sale goes through. Since many indexed annuities provide for additional premiums after the initial contract, there may be additional commissions paid on that basis. Those subsequent commissions are typically much lower than the initial payouts, but they do offer additional compensation to insurance companies and their salespeople.
Annuity products offer a number of advantages for investors, and for financial professionals as well. From the consumer standpoint, quality annuities can provide a steady stream of investment income, protection from the ups and downs of the stock market and a shelter from high taxes. At the same time, the independent agents who sell annuity contracts can earn handsome up-front commissions and enjoy ongoing annual commissions in compensation for their hard work and ongoing investment advice.