By Jim Poolman

Myth: Indexed annuities pay unusually high commissions to sales agents that lead to abuses in the sales process.

Truth: All financial vehicles have to cover the provider’s sales and marketing expenses. Over time, the margins built into an annuity to cover commissions are not necessarily higher than the sales and marketing expense margins built into competing financial vehicles.

Consider, for example, the typical fee-based financial advisor. Such an advisor will often charge a fee of around 1% of assets annually, in addition to the expenses and fees built into the product itself. Now compare this to one of the best-selling fixed indexed annuity in the marketplace, which gives agents a choice of being paid a 7% commission in year 1, or a 2.25% commission in year 1 followed by a 1% annual trail commission. The 7% commission is hardly egregious, as it is about the same as the present value of fees charged by security advisors.

Despite the fact that fixed indexed annuities pay no more and no less than fee-based financial products over comparable time horizons, the state insurance departments’ standards for suitability determination leave no room for abuses resulting from commission-driven sales. The regulation states that “an insurer shall not issue an annuity recommended to a consumer unless there is a reasonable basis to believe the annuity is suitable based on the consumer’s suitability information.”

Tomorrow, see the final post in this series about the so-called complexity of indexed annuities.