Why Fee-Only Isn’t Always the Best Interest

Why Fee-Only Isn’t Always the Best Interest

Recently, several industry publications have looked at the distribution of fee-based products. These are annuity products with no commission. In theory, the design allows a fee-only planner to place products while adhering to their business model, charging an advisory fee for all assets under management. I caution advisors – and consumers alike – to be weary of the false promises around fee-only product development. 


While I remain a huge proponent of consumer value, the distribution of these products remains in its infancy, with many faults in the initial distribution strategies. Recently, we have seen firms that offer a subscription-like service for those fee-only planners. The pricing is based on the planner’s assets under management and provides access to a suite of annuities with no commission earned on the amount purchased. 


Two things are most concerning:

  • The structure. What’s not fully disclosed or understood is how much money the subscription firms are receiving from the carriers in order to have the products on their platform. Like any distributor, the firms focusing on those fee-only advisors earn an allowance based on the amount of the annuity purchased … similar to a commission. So these firms earn revenue twice – by charging the planners and taking a portion of the sales from the carriers. 


  • The impact on the end-client. The net client value is suspect, at best. We ran a quote for a fee-only product and compared it to a commissioned-based product. On a $100,000 single-premium immediate annuity for a 65-year-old male with a life-only payout, the increase in income was $21 per month. On a $500 monthly income that is a sizable increase, to be clear. However, net of the 1 percent fee that the advisor will charge, the client loses $748 annually.


Don’t misunderstand me. I think the value of guaranteed income is extremely important. However, clients must be aware that the net benefit must be an increase in their net income above fees and expenses. In many cases, it seems to be in the best interest of the client to take the annuity purchased out of a fee-only or assets-under-management model and purchase a fully commissionable product. The net growth in income would be higher versus sticking to a rigid, fee-only business model. 


Winning Strategy

Look at the value of both fee-based and commission-based product selections. Don’t be locked into your business model so much that it hurts your client. 


About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.