Help me understand “commission free annuities”

[confuzzled]

Can someone explain how the business model of “commission free annuities” differs from traditional annuities?

One supposed benefit is that it “expands the market for annuities” by enabling them to be offered to clients by fee-only financial planners.

But in what ways (if at all) are they actually better for the consumer than purchasing them from a commission-based insurance broker? In what ways does the consumer achieve a better financial outcome? How and by how much? Who are the middlemen between the insurance company and the consumer and how are they compensated?

There are people out there pitching these things. I searched the site and the web for objective info on this and came up empty. I’m sure some of you folks know. 8^>

[mhalley]

The retirement and ira show podcast has a discussion of fee vs commission based annuities here
https://www.theretirementandirashow.com ... annuities/

[JoMoney]

https://www.thinkadvisor.com/2021/04/27 ... or-it-too/
What’s significant about RIAs selling annuities?

[As fiduciaries], RIAs couldn’t sell annuities before [our way]. Annuities weren’t products built for their business model because the carriers [offered] only annuities that were built with commissions. RIAs can’t accept commissions; so they couldn’t use the product. And many aren’t insurance-licensed [anyway] — they had no need for that license since they couldn’t sell annuities.

Please explain how your firm enables RIAs to sell annuities.

In essence, they’re referring their clients to us. We analyze the available annuities based on the client’s particular circumstances and needs, and find the most efficient one. Then we sign as the agent of record [with our insurance license] to issue the policy. From there, the advisor can manage the annuity as part of the client’s portfolio.

And that’s the way the advisors make money selling annuities?

Yes. They allocate a certain portion of the client’s portfolio to the annuity and get paid a normal assets-under-management fee, as they would with any other asset. So, the client is paying them. Typically, it’s the insurance company paying a salesperson a commission for selling the product. With [our model], it’s the client paying their financial advisor for the financial advice of providing an annuity that’s in their best interest.

If what OP is looking at is the same as what's being talked about above, it sounds like it's a way for a financial advisors that aren't otherwise licensed to sell insurance products or sell products that pay them direct commissions, to back-door refer their client to an insurance agent, and then charge their client an AUM fee to "manage" the insurance product as if it was part of the portfolio.
It doesn't sound like a benefit to consumers to me, but I'm a DIY investor, I suppose some people may really like their advisor and maybe consider whatever advice they're getting from them a benefit regardless of the cost.

[Stinky]

Can someone explain how the business model of “commission free annuities” differs from traditional annuities?

One supposed benefit is that it “expands the market for annuities” by enabling them to be offered to clients by fee-only financial planners.

But in what ways (if at all) are they actually better for the consumer than purchasing them from a commission-based insurance broker? In what ways does the consumer achieve a better financial outcome? How and by how much? Who are the middlemen between the insurance company and the consumer and how are they compensated?

There are people out there pitching these things. I searched the site and the web for objective info on this and came up empty. I’m sure some of you folks know. 8^>

“Commission free annuities” are just rearranging how the financial advisor is getting paid. Here’s a short article explaining the concept. https://www.thinkadvisor.com/2021/04/27 ... too/?amp=1

In a traditional annuity sale, the insurance company pays the agent a commission. The cost of that commission is factored into the economics of the annuity - so the policyholder is indirectly paying the commission.

In a “commission free” sale, the policyholder directly pays the financial advisor through the AUM fee.

Neither type of financial advisor compensation method is necessarily “good” or “bad”. I’d suggest just comparing the overall economics of the situation with alternatives.

Bogleheads generally view many types of annuities, especially indexed annuities and variable annuities, as being unattractive economic values. I expect that this would carry over to the commission free annuity market.

I don’t know if products that many Bogleheads view positively, such as MYGAs and SPIAs, are sold in the commission free space. If they are, Bogleheads should line those products up with others sold in a traditional way.

[JoMoney]

...
I don’t know if products that many Bogleheads view positively, such as MYGAs and SPIAs, are sold in the commission free space. If they are, Bogleheads should line those products up with others sold in a traditional way.

While interest rates in everything else was near zero, I would have much rather had MYGAs than bonds or CDs. In the current interest rate environment bonds/CDs are more competitive and MYGAs are less of a slam-dunk.
For retirement income purposes, in most situations I've seen, a SPIA looks better than drawing down a bond portfolio earning current interest rates amortized out to one's life expectancy.
If I was using a financial adviser to manage my portfolio, I would certainly like the option of MYGA or SPIA to be available to them, but I would despise the idea of them trying to put my money into most other types of annuities... I can however imagine a scenario where a prudent fiduciary financial adviser has a client that somehow fell into the clutches of a variable annuity salesman, and the client insists on withdrawing their portfolio money to put into the annuity, the advisor might throw up their hands and say something to the effect of, "I don't recommend it, but if you insist on having it, I can direct you to someone that will sell it to you and allow it to remain under the umbrella of financial services you get through me."

[confuzzled]

Thanks for the responses so far.

I had found and read the ThinkAdvisor article linked above prior to posting and found it lacking in details that would answer my questions. How is the licensed agent compensated, if not by commission? Can having two intermediaries between themselves and the insurance company be any better for the consumer than one?

I will check out the linked podcast and see if there are any answers there.

[Stinky]

Thanks for the responses so far.

I had found and read the ThinkAdvisor article linked above prior to posting and found it lacking in details that would answer my questions. How is the licensed agent compensated, if not by commission? Can having two intermediaries between themselves and the insurance company be any better for the consumer than one?

I will check out the linked podcast and see if there are any answers there.

In the cited article, I expect that DPL is being paid by the RIA.

I expect that the RIA is being paid through his AUM fee, and that DPL (as licensed agent) is getting compensation of some sort from the RIA. DPL's compensation is probably nominal, and well less than the "normal" commission on an annuity.

At the end of the day, all that the consumer should care about is the value that he gets from the arrangement, considering how the product performs and any direct fees that he pays.

[confuzzled]

I listened to the podcast episode recommended by mhalley (recorded June 2022) which does have a lot of discussion on the subject that is mostly focused on variable annuities. The same podcasters have a previous episode focused on fixed annuities that has even better information (it starts at the 42 minute mark in https://www.theretirementandirashow.com ... annuities/).

I will summarize my learnings from this podcast, some of which contradicts the information given in prior responses in this thread.

• The insurance broker (e.g. DPL) is paid by the insurance company for "distributing" the annuity. This is a smaller amount than the commission that the insurance company would typically pay for "selling and distributing" the annuity under the traditional commission-based model and allows the insurance company to offer the consumer a "better" (i.e. higher return) annuity.

• The insurance broker (e.g. DPL) will only sell a commission-free annuity through an RIA. They will not (cannot?) sell them directly to consumers.

• RIAs are permitted under existing regulation to charge the consumer an annual AUM fee of up to 1.5% based on the total amount invested in the "commission free annuity". They have flexilbiity in this, though and might charge the consumer more or less than their AUM for other investment types stocks, bonds, etc.), a fixed fee, or no fee at all. For this reason, the podcasters argued that "commission free annuity" is a misnomer and that the products should instead be called "fee based annuities".

• As I understood the podcast (they weren't 100% clear on this), it sounded like RIA fees on a "commission free annuity" could be paid to the RIA directly by the insurance company independently from annuity distributions to the consumer or could be paid to the RIA from the consumer's other assets. Apparently the IRS provides exceptions to normal rules that would apply to the consumer for early withdrawals and taxable income with respect to fees distributed directly to the RIA.

• Insurance companies treat commission-free annuities and traditional annuities as different products and price them differently in a variety of ways. For simple products (e.g. fixed annuities), the payouts spreads are generally small (e.g. less than 0.5%) because the commissions for these products are generally small (e.g. 1-3%). For complex products (e.g. variable annuities), the spreads can be larger because the commissions are larger (e.g. 3-7%) but can can be extremely challenging to compare the spread in practice of the two products because it may depend on many unpredictable factors and nonlinearities in the return (e.g. market performance, investment options, caps, etc).

• For fixed annuities, it is hard to justify asking a consumer to pay an AUM fee since there is really no related service being provided on an ongoing basis. A Boglehead/"do it yourself" or Vanguard/"fee sensitive" investor is almost certainly going to have a better outcome buying a traditional commissioned fixed annuity unless they are working with an RIA on a fixed or capped fee basis.

• The calculus for variable annuities, where there may ongoing investment decisions made for the product, or for folks who view the total AUM fees being paid to their RIA as justified based on a broader portfolio of services being provided (e.g. tax, estate, financial planning, elder, etc.) are more complex. In these cases, one can envision cases where this model could make sense. But this path provides no additional safety or certainty to the consumer than any other path of purchasing a complex annuity product and an AUM fee can easily cause the "commission free annuity" to significantly underperform the traditional sibling of the same product. Caveat emptor.

It is of course possible that I missed or misunderstood some important points so I invite corrections, clarifications, and discussion of my summary of the podcast and the facts about these products.

In any case, the podcast provided answers to a lot of my questions. Thank you, mhalley, for the pointer.

[Stinky]

In any case, the podcast provided answers to a lot of my questions. Thank you, mhalley, for the pointer.

I’m just curious. Do you plan to buy one of these annuities?

Do you have an opinion as to whether they provide a better all-in consumer value than an annuity sold through normal commissioned channels?

[confuzzled]

I’m just curious. Do you plan to buy one of these annuities?

Do you have an opinion as to whether they provide a better all-in consumer value than an annuity sold through normal commissioned channels?

I am not planning to buy anything right now - just learning. I don't have enough info yet to form an opinion but based on what little I know, the ostensible benefits of a "commission free annuity" don't appear to be easily accessible (or necessarily accessible at all) to a diy/fee-averse consumer.

Suppose I adhere to a BH/dyi investing philosophy, am in retirement, and want to use a SPIA or DIA with lifetime benefit as longevity insurance. I would need to find an RIA who will provide me with access to a commission-free fixed annuity on a fixed-fee basis for which the discount provided by the insurance company (relative to the best available traditionally commissioned annuity of the same type) is greater than the fee that I pay the RIA. I don't know how do-able this is.

[Stinky]

I’m just curious. Do you plan to buy one of these annuities?

Do you have an opinion as to whether they provide a better all-in consumer value than an annuity sold through normal commissioned channels?

I am not planning to buy anything right now - just learning. I don't have enough info yet to form an opinion but based on what little I know, the ostensible benefits of a "commission free annuity" don't appear to be easily accessible (or necessarily accessible at all) to a diy/fee-averse consumer.

Suppose I adhere to a BH/dyi investing philosophy, am in retirement, and want to use a SPIA or DIA with lifetime benefit as longevity insurance. I would need to find an RIA who will provide me with access to a commission-free fixed annuity on a fixed-fee basis for which the discount provided by the insurance company (relative to the best available traditionally commissioned annuity of the same type) is greater than the fee that I pay the RIA. I don't know how do-able this is.

When you get ready to start shopping, you might also look at insurance companies that operate on a “direct to consumer” basis.

There are two companies, Clear Spring (through Gainbridge) and Puritan (through Canvas), that sell MYGAs outside the multi-company agencies. Their MYGA interest rates are among the highest available. I believe that both companies sell SPIAs.

I have not compared SPIA rates from those two companies with those offered on other sites, but it’s probably worth a look.

It’s possible that more companies will adopt a “direct to consumer” model by the time you decide to buy a SPIA.

[JoMoney]

...
There are two companies, Clear Spring (through Gainbridge) and Puritan (through Canvas), that sell MYGAs outside the multi-company agencies. Their MYGA interest rates are among the highest available. I believe that both companies sell SPIAs...

Thanks for mentioning these
https://www.gainbridge.io/
https://canvasannuity.com/

The current SPIA quotes I'm seeing on gainbridge appear to be higher than what I'm seeing quotes for with companies through blueprintincome.com , although blueprint doesn't show any SPIA quotes for companies rated less than (A), "Clear Spring" appears to be rated (A-)
I don't see Canvas offering SPIAs

[Tdubs]

Can't see where I'd buy one, but isn't this collecting of the fee through AUM more transparent and honest? A relative who bought an index annuity was delighted when her advisor told her she would not charge her. She was unaware that her advisor collected a commission from the insurance company.

[confuzzled]

Can't see where I'd buy one, but isn't this collecting of the fee through AUM more transparent and honest? A relative who bought an index annuity was delighted when her advisor told her she would not charge her. She was unaware that her advisor collected a commission from the insurance company.

It would appear to be more transparent but it's not clear that it is necessarily more honest or in the consumer's best interest.

One of the points emphasized in the podcast linked above is that the "commission free annuity" presents a potential moral hazard for RIA advisors. They argue that "commission free annuities" are marketed to RIAs as a way to "keep more of your clients assets subject to their AUM fee" and that a typical AUM fee is 1%. Given the small spread that they observed between the payout rate of "commission-free annuities" and the traditional annuities (<1%), an RIA has a financial incentive to sell the consumer a "commission free annuity" that will pay them less, net of the advisory fee, than a traditional annuity that they could purchase from an insurance agent. The fact that the fee is "transparent" might be of limited comfort to the consumer if this were to occur.

[Tdubs]

Can't see where I'd buy one, but isn't this collecting of the fee through AUM more transparent and honest? A relative who bought an index annuity was delighted when her advisor told her she would not charge her. She was unaware that her advisor collected a commission from the insurance company.

It would appear to be more transparent but it's not clear that it is necessarily more honest or in the consumer's best interest.

One of the points emphasized in the podcast linked above is that the "commission free annuity" presents a potential moral hazard for RIA advisors. They argue that "commission free annuities" are marketed to RIAs as a way to "keep more of your clients assets subject to their AUM fee" and that a typical AUM fee is 1%. Given the small spread that they observed between the payout rate of "commission-free annuities" and the traditional annuities (<1%), an RIA has a financial incentive to sell the consumer a "commission free annuity" that will pay them less, net of the advisory fee, than a traditional annuity that they could purchase from an insurance agent. The fact that the fee is "transparent" might be of limited comfort to the consumer if this were to occur.

Not making a case for these products, but I was shocked that my relative was fooled into thinking her advisor was operating a charity. It must be a pretty standard pitch. Anything that surfaces these invisible charges to customers has to be an improvement, marginal as it may be.

[retireIn2020]

...
There are two companies, Clear Spring (through Gainbridge) and Puritan (through Canvas), that sell MYGAs outside the multi-company agencies. Their MYGA interest rates are among the highest available. I believe that both companies sell SPIAs...

Thanks for mentioning these
https://www.gainbridge.io/
https://canvasannuity.com/

The current SPIA quotes I'm seeing on gainbridge appear to be higher than what I'm seeing quotes for with companies through blueprintincome.com , although blueprint doesn't show any SPIA quotes for companies rated less than (A), "Clear Spring" appears to be rated (A-)
I don't see Canvas offering SPIAs

Make sure you're comparing apples to apples.

From the Gainbridge site

LIFE ONLY: Provides fixed modal payments for the life of the annuitant. Upon the death of the annuitant, payments will cease and there will be no payments made to the named beneficiary(ies).