By David Blanchett and Michael Finke

Overview

Whereas compensation in the financial services industry varies significantly across financial advisors and products, it’s often a one-time commission for annuities. A financial professional may collect 6% of the initial purchase price as compensation for the sale of a variable annuity, which is paid by insurer (versus a deduction from the premium). In contrast, investment advisers often levy an annual 1% fee on the balance of a retiree’s investment portfolio.

At first glance, a financial professional’s compensation via a 6% one-time commission from the insurer appears considerably higher than an annual ongoing 1% fee, which is why annuity critics often compare this one-time fee to the much lower ongoing fee applied to investment assets. However, this comparison is misleading. An ongoing fee deducted from client assets continues throughout retirement and, in present value terms, can be considerably higher than the up-front commission paid by the insurer from its general revenue on an annuity.