Surrender charges and commissions on FIAs

A commonly misunderstood connection between surrender charges and commissions is the belief that fixed index annuities pay higher-than-usual commissions. Currently the average commission on FIAs is about 7.2%.

Common misstatements regarding “high commissions” imply that they are used as inducement to sell very elderly people annuities that are inappropriate for them. The fact of the matter is that commissions are commonly reduced, generally by as much as 50%, for annuities sold to older individuals. This is very dissimilar to MFs or other market risk products that do not waive surrender charges or guarantee certain minimum positive returns in the event of death, nursing home confinement, terminal illness, RMDs, creation of a lifetime stream of income, etc. I am unaware of any other financial instrument that reduces surrender charges (or contingent deferred sales charges) due to age.

Commissions for FIAs were higher in the early years of the products than they are today. As the products have gained in popularity, surrender charge periods and commissions have been significantly reduced and are now quite similar to the duration and commissions for other fixed and variable annuities.

A no-surrender charge product with a typical 1% annual asset fee as opposed to say a 7-year surrender charge product with a 7% street level commission will actually have a higher cost to the client and will thus reduce the potential return to the client, not increase it. This is as true of mutual funds and other vehicles as it is true of fixed and variable annuities. An asset based trail must recover an increasing cost over time from the spreads and since the spreads cannot be increased (in most cases), they start out higher at the outset than spreads on products with traditional stacked front end commissions and contingent deferred sales charges. Just as a typical “A” share mutual fund will actually cost a client less if the asset is held for a longer duration than a “B” share mutual fund will, so will a stacked front end commission on the annuity cost less than the asset based trail over the same duration.