Annuity IQ

While there are some good fee-based planners in the world we find it rather odd that everyone just assumes that they are the best choice for everyone. The selling point of the fee-based planner is the fact that they do not collect commissions from product sales and therefore they must be unbiased. While this seems reasonable enough to the average person are these advisors really the way to go?

The idea that a person can be unbiased just because they do not collect a commission from product sales, but collect a fee no matter what you buy, is ridiculous. Every time you read an article and the author was asked a question they tend to always recommend that you speak to a fee-based planner before you make that investment. Now, here is the problem, fee-based advisors are still earning commissions, sorry, I mean fee, for the amount of money that is invested, or my favorite, they get paid $200 an hour for their time.

By the time the average person gets done with a fee-based planner they end up paying way more than any sales load or CDSC on a regular broker sold mutual fund.

Here’s an example:

A client wishes to invest $100,000 and a commissioned broker recommends an A share mutual fund with a load of 4.25%, or $4,250 in commissions. That is all the client pays, besides annual expenses, in commissions. Now if the same client went to a fee-based planner they would recommend index funds and then slap on a 1.5% annual fee for their services. Assuming the investor holds the mutual fund for 5 years, not an unreasonable assumption, then the fee based planner would have made $7,500 in fees as compared to the $4,250 the commissioned broker would have made. What is worse is the fact that the planner probably did recommend index funds and they still have the stones to charge a fee, seriously, a trained monkey can pick an index fund. Based on this assumption, which is very fair and reasonable, it is pretty clear that at the end of the day everyone gets paid.

By the way, even if the commissioned broker sold the investor an annuity they would have only made a 6.5% commission or $6,500 from the investment which is still far less than the fees the planner charged. It is really odd that all of these magazines talk about high commissioned annuities and mutual funds while the fee-based planners get a free ride because they do not collect a commission, but charge a fee. The average fee-based planner client is paying the same amount of money per year as the variable annuity client, roughly, with no guarantees or tax deferral.

Just because someone charges a fee instead of a commission it does not make them smarter or any less human. Well, may be they are smarter as they know by chargeing fees they will make more money over the long-term, but none the less they are still sales people. We do not care how people choose to make a living, but just be honest about it and the media should be ashamed of themselves for not recognizing the obvious.

One last note, I recently read an article by Humberto Cruz who quoted a fee-based planner who said that any variable annuity that guarantees the client their money back sounds “fishy” to him. This is the other problem with both the media and the fee-based planners, they have no idea how variable annuities work and what the living benefits ultimately do. If that planner who Mr. Cruz quoted did not understand what a guaranteed minimum accumulation benefit was then he should not have even commented on it.