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Our MissionTo provide unbiased accurate information on variable annuities, by providing a third party evaluation and ranking of the major variable annuity provider's contracts.
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Annuity IQ
What You Need to Know About Captive Agents
September 25th 2006
By: Scott DeMonte
I recently received an email from an investor inquiring about working with their captive agent. They asked:
Q: I work with an advisor at (deleted to protect the innocent) company. I have been happy with their service and my account’s performance, but I have a question. All of my mutual funds and annuities are from the same company (the same company as the advisor worked for, name deleted) why is that?
A: Well, when you work with a captive agent they are usually limited to what they can offer. Although, not always a bad thing, it is not exactly unbiased advice that you are receiving. What you need to know about captive agents, people who can only sell their firm’s investments, is that they cannot sell whatever they like. They can only sell investments offered by their company.
The issue we have with captive agents is that they are trained to believe that their products are superior to all others, this may be true, but it is unlikely. Even if they can sell other firms’ products, often times their own company’s product pays them a higher commission or they have other incentives to sell their proprietary products.
Typically, you find this is true at firms that are owned by insurance companies. Firms entirely owned by insurance companies will not always allow other products to be sold. Therefore, if they can even sell outside products, the compensation can be significantly less than if they sold the mother company’s product.
You should not work with someone who only sells their company’s product. It just doesn’t make sense, and they are limiting your ability to shop for the best product. Usually, the only way you can shop for a product is by being offered several options or by doing the research on your own. Most people, though, only listen to their advisor, and if you just buy the company’s offering, you may be helping the agent out more than yourself.
After you buy the product, you may become dissatisfied with your advisor or agent and decide to move firms. This is when you find out that your investments cannot move from the firm without being liquidated. This happens because some firms will not let other brokerage firms carry a selling agreement for their product. This policy makes the product non-transferable, and unless you sell it, your investment will stay right where it is.
Some major brokerage firm have a similar policy where their proprietary mutual funds cannot be transferred unless it is liquidated. Some of these firms also have private label annuities offered by multiple insurance companies, sometimes making them difficult to transfer to other advisors.
We are not saying proprietary products are bad, but we are saying that you need to know how these proprietary products work. We do not like the fact that many of these funds cannot be transferred to other firms, making you a quasi captive client. We recommend thoroughly investigating the proprietary product you are being sold.
To be a better consumer and investor requires a lot more work than some will suggest. It is a very complex world out there, and knowing how things work before you buy will save you many headaches down the road. Remember proper advice is key and cannot be substituted by just an article or TV talk show host.
September 25th 2006
By: Scott DeMonte
I recently received an email from an investor inquiring about working with their captive agent. They asked:
Q: I work with an advisor at (deleted to protect the innocent) company. I have been happy with their service and my account’s performance, but I have a question. All of my mutual funds and annuities are from the same company (the same company as the advisor worked for, name deleted) why is that?
A: Well, when you work with a captive agent they are usually limited to what they can offer. Although, not always a bad thing, it is not exactly unbiased advice that you are receiving. What you need to know about captive agents, people who can only sell their firm’s investments, is that they cannot sell whatever they like. They can only sell investments offered by their company.
The issue we have with captive agents is that they are trained to believe that their products are superior to all others, this may be true, but it is unlikely. Even if they can sell other firms’ products, often times their own company’s product pays them a higher commission or they have other incentives to sell their proprietary products.
Typically, you find this is true at firms that are owned by insurance companies. Firms entirely owned by insurance companies will not always allow other products to be sold. Therefore, if they can even sell outside products, the compensation can be significantly less than if they sold the mother company’s product.
You should not work with someone who only sells their company’s product. It just doesn’t make sense, and they are limiting your ability to shop for the best product. Usually, the only way you can shop for a product is by being offered several options or by doing the research on your own. Most people, though, only listen to their advisor, and if you just buy the company’s offering, you may be helping the agent out more than yourself.
After you buy the product, you may become dissatisfied with your advisor or agent and decide to move firms. This is when you find out that your investments cannot move from the firm without being liquidated. This happens because some firms will not let other brokerage firms carry a selling agreement for their product. This policy makes the product non-transferable, and unless you sell it, your investment will stay right where it is.
Some major brokerage firm have a similar policy where their proprietary mutual funds cannot be transferred unless it is liquidated. Some of these firms also have private label annuities offered by multiple insurance companies, sometimes making them difficult to transfer to other advisors.
We are not saying proprietary products are bad, but we are saying that you need to know how these proprietary products work. We do not like the fact that many of these funds cannot be transferred to other firms, making you a quasi captive client. We recommend thoroughly investigating the proprietary product you are being sold.
To be a better consumer and investor requires a lot more work than some will suggest. It is a very complex world out there, and knowing how things work before you buy will save you many headaches down the road. Remember proper advice is key and cannot be substituted by just an article or TV talk show host.
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