Variable Annuity – Fee Analysis

I’m biased.

Day-in, day-out I consult a number of the top “safe money focused” advisors around the US. These are not your wire house, hot stock tip, Wall Street types. Many of these advisors view safety and contractual guarantees as top priority, growth and accumulation second. That said, their target market is an older demographic – typically 55+ looking for sleep and income insurance during their golden years.

Now here’s my beef…

Daily I hear about 55+ clients who own variable annuities. That’s not the bad part. I believe variable annuities have a viable place in financial planning (evidenced by$41 billion in 2nd quarter 2011 sales; up 16% from 2nd quarter, 2010). My problem is with how these variable annuities are sold. Over 90% of variable annuities are sold to clients based on the riders you can attach to the base policy. Guaranteed withdrawal living benefit riders, death benefit riders, etc. Then the “wrap up” part of the sale is talking about upside potential, if accumulation of the VA is even discussed at all. For example, about 96% of Prudential’s record $6.8 billion 1st quarter, 2011 variable annuity sales were policies that included a lifetime income guarantee. At MetLife, 80% of their $5.7 billion of products sold in the same quarter carried a guranteed benefit. Which raises my concern…

#1 – If variable annuities are being sold rider 1st, upside 2nd – wouldn’t clients be better served with indexed annuities? Fixed Indexed Annuities offer higher living benefit rider guarantees (think 7%, 8%, even up to 8.2% compounded growth, longer deferral guarantee periods and higher payout bands applied. All resulting in larger lifetime income checks) than VAs. Granted, the upside in a Fixed Indexed Annuity is less than variable annuities, but shouldn’t we cater the product and it’s features to how it’s being sold and what clients are asking for?

#2 – If 90% of variable annuities are being sold with riders attached, do clients understand how that fee structure effects their gains credited? Back to a couple of the hottest VA sellers in Prudential and MetLife, the annual fee of their lifetime income rider is 1.03%. That’s on top of the regular annuity fees, which average 2.51% – producing a total fee structure averaging 3.54%!!! Add a death benefit rider, return of principal guarantee or more aggressive subaccounts and clients have over a 4% annual fee. Do they realize that? I’m betting most don’t and if they did, they’d be pretty ticked off. Back to fixed indexed annuities, most have an annual income rider fee structure at 0.75% – 0.95%; one-quarter that of variable annuities. And most have a 0% fee structure for the base contract.

I’m not stating that fixed indexed annuities are the be-all, end-all for retirees investors. But in today’s economy, aren’t a lot of people looking for: Guaranteed Income 1st, Low Fees 2nd, Growth 3rd? If that’s the case, shouldn’t we match the best product to their situation?
What am I missing?!? I’m all ears.

P.S. A top “safe money focused” advisor I consult (writing $15-20 million per year into FIAs) uses a 1-page Variable Fee Analysis with clients who own one. It totals up all fees within the product, to ensure clients understand what they own. It details expenses for : (1) M&E (2) GMIB Rider (3) DB Rider (4) Administrative (5) Subaccount Funds (6) Other Riders. Next it takes that total fee percentage and applies it against the client’s account value to project out 1 yr, 5 yr, 7 yr and 10 yr total fees. If you’d like a copy and would use it – post a comment and I’ll email it to you. Happy selling.


8 thoughts on “Variable Annuity – Fee Analysis

  1. Matt–

    Excellent article, and so true about VA’s. If the market goes up 7% and their fee is 3%, then they net 4%. However, most people don’t always remember that when the market falls 4%, the fee is still there and now it is down 7%. That is especially true when people have money in the fixed portion, and they find their principal value still dropping. That is when they get most upset i have found.

  2. Great article, I run across prospects all the time who have VAs, and all they remember about the sales pitch is the “upside.” They know nothing about all the fees, and I often wonder if fees were even discussed. I’d love to be able to show them the actual costs. It might help with their pride which keeps them from admitting they may have been duped.

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