Fee drag is an under-discussed cost to many financial plans. While I do not condone the many media reports about annuities being bad for clients, I do believe advisors need to fully understand the impact of the fee structure on many of the annuities they sell. Educating clients on how fees work creates understanding and appreciation for the value they are receiving.
When comparing income riders, it is no longer enough to just compare them by cost. For example, if two riders have the same 100bps cost to provide lifetime income, those actual fees may be dramatically different. Some riders charge their fee off the income base, while others charge the fee off the actual account value. So, when the income base has grown from the $100,000 premium to the $200,000 income base, the charge for the rider has grown from $1,000 to $2,000. If you compare riders apples-to-apples, using a zero-growth period, the rider charge has become 2 percent of the premium when calculated off the income base versus staying at 1 percent when calculated off the account value.
More importantly, once that income base grows to its maximum level, the cost of the rider continues at that level. In effect, the rider has doubled the fee drag associated with the income. This adds pressure for the account to yield an additional 100bps of return to provide the same level of benefits to the beneficiaries.
Clients generally appreciate the value that annuities bring to their financial future. However, we must do a better job showing how annuities work for them, today and in the future. By looking deeper into the fee structure, we can all make better decisions for our clients. Annuities remain a long-term funding vehicle for many; therefore, we must look at the long-term impact of fees during income phases. Call Ash Brokerage to look at solutions that make sense for your clients.
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