I have been reading more and more lately about “no-load” variable annuities offered by the likes of Vanguard, Fidelity and Schwab. The term “no-load” is so attractive, yet so misleading. Let’s examine the term. There are a couple of different types of “no-load” variable annuities, a broker sold “no-load” product, which carries no backend charges. This product, however, does still pay commissions and an ongoing trail commission, usually 1% up front and a 1% trail which is forever. Then there are the “no-loads” sold by Vanguard, Fidelity, T. Rowe Price and Schwab.

First and foremost there is usually never a load attached to a variable annuity. 95% of variable annuities sold are back-end loaded, not front-end loaded. There truly is no such thing as “no-load”, and a more accurate term would be “no up-front commissions paid”. There will always be costs associated with any investment. If you think Vanguard, T. Rowe Price, Schwab, Fidelity or whoever you are buying the annuity from is not making any money from the sale, you are crazy. Now, I am not talking commissions, I have no idea if these “no-load” products pay any commission to these companies (i.e. Vanguard, etc.), but I do know that no one offers something for nothing.

If a broker tells you they are selling you a “no-load” product, they are being compensated in some form. Even if it is a Vanguard variable annuity, they are making money on it somehow. They usually will make their money from charging a fee, and that negates the “no-load” philosophy and drives the cost up to a “loaded” broker-sold product. Also, paying management fees can pay the planner or advisor more in commissions than if you bought a regular variable annuity from a regular broker.


What do you get from a “no-load” variable annuity? Not much. You get some kind of death benefit, which is less than average as compared to the rest of the variable annuity universe. You usually get no advice. Go ahead and call any of these companies and ask them for advice. Unless you are part of their Private Client group, you will usually get this answer, “Sir/Madam, I am not licensed for that kind of service”. There is no living benefit; which are the main reason variable annuities are purchased to begin with. You will get a handful of mutual funds to choose from, usually all from one family.

All of that for a little less than the average variable annuity contracts you can buy from a broker.

Let’s talk about “loaded” variable annuities. Again, this term is wrong and should not be used. You should say, instead of “loaded”, no-upfront commissions paid”, sound familiar? Most variable annuities are sold with back-end charges, not up-front commissions. Yes, the broker collects a commission from the sale, but so what. The broker can choose either an up-front one time commission or they may choose a smaller up-front commission with a residual annual commission, either way the fees to you do not change.

Here’s how commissions usually look for a “loaded variable annuity:

Up-front, no trail: 5% to as high as 7.75%

The B option, smaller up-front commission: 5% up-front with a .25% trial. The trail is paid annually to the advisor.

The C option: 2% up-front with either a .75% or 1% trail option. The trail option is paid annually.

I think you will find that the commissions earned for an advisor from the sale of a variable annuity is less than if you are using fee based planning. When we look at fee based planners, they will charge 1 to 1.5% for managing your money. Over a 6 or 7 year time frame the fee based planner will earn more in commissions, or fees, than the advisor who takes the annuity commission up-front.

So your broker is being compensated for advising you in purchasing a variable annuity, how does that affect you? It doesn’t, except you will now get advice and a better product. You will get some features and benefits that are far superior to what “no-load” annuities offer. Most variable annuities that are broker sold will have living benefits, death benefit options and they offer more sub-account choices for you to invest in. These benefits can guarantee you income, your money back or lifetime income, without annuitization. “No-loads” can only offer you lifetime income with annuitization, which means you can never do anything with the asset again.

The point is, if annuities are so bad, why are Vanguard, T. Rowe Price, Fidelity and Schwab selling them? Oh, yeah, they fit a need, a very important need. Income for as long as you live, but these “no-load” variable annuities are selling you short. There is no such thing as “annuity rescue”, as Schwab calls its annuity unit. If anything, investors need to be saved from these “no-load” products, they offer one value, tax deferral.

You have two choices; you can listen to the companies selling these products. They’re hoping that you will by them so they make more money. Or, you can listen to someone who is unbiased, knows the business, has done the research for you and will tell you what is good and what is not good. The kicker is, I do not even care if you buy a variable annuity or not, but these “no-load” companies care if you are buying their product.

Not everything these “no-load” companies say is in your best interest. They get paid by gathering assets, period. They have good funds, I will not take that away from them, but when it comes to annuities, they know very little. This is all about doing your research and knowing what you are buying and simply saying; “Well, its Vanguard it has to be good” is incredulous, after all, you get what you pay for.

Get informed; use The Annuity Report to your advantage. I have gathered the information, laid it out in an easy to read format so you can choose for yourself what product or feature is best for your needs. It seems we are living in a time where bulk advice given out by screaming commentators somehow trumps individual advice meant to meet your needs. Do yourself a favor. Watch them for their entertainment value, but use advice from professionals to actually meet your needs. Like it or not, this is rocket science and variable annuities can be tricky, so get the facts at Annuity IQ.