The Good the Bad and the Ugly Why Your Broker May Not Be Recommending The Most Competitive Annuity
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The Good, the Bad, and the Ugly: Why Your Broker May Not Recommend the Best Annuity
With over two thousand life insurance companies offering more than fifteen thousand different annuities, choosing the right one can be daunting. These options range from poor choices (which you wouldn't even recommend to an enemy) to excellent ones (the kind you'd recommend to your own family). In this article, we'll explore how brokers are compensated and how this can sometimes lead to conflicts of interest, leaving you with an inferior annuity and fewer retirement savings.
Understanding Broker Commissions
When you buy an annuity through a broker, they select from various commission structures offered by the insurance company. Consider a scenario where you invest $100,000 in a variable annuity. The insurance company might offer the broker several commission options:
1. 5% Upfront: The broker receives $5,000 right away, with no future earnings.
2. 4% Upfront Plus a 0.25% Annual Trail: The broker earns $4,000 initially and receives 0.25% of your account value annually.
3. 2% Upfront Plus a 1% Annual Trail: The broker gets $2,000 at the start and 1% annually, starting from the 15th month.
While the options with trailing commissions might encourage brokers to provide ongoing support, the potential for greed can sometimes lead to biased recommendations.
Real-World Examples
Example 1: Standard vs. Bonus Products
A common scenario involves a broker suggesting a standard annuity without mentioning a bonus version. Take American Skandia's APEX II and XTra Credit SIX annuities: both have identical features, but the XTra Credit SIX offers an immediate 6.5% bonus, boosting your account to $106,500 right away. Despite similar fees for the first decade and lower fees afterward, brokers might still favor the APEX II due to its higher commission structure.
Example 2: Choosing Based on Commission
Consider two competitive annuities: Allianz High Five and Ohio National Value. While the Ohio National Value offers lower fees and better benefits, some brokers might push the Allianz High Five due to its higher upfront commission, despite the latter's advantages for the investor.
Ensuring the Best Recommendations
To secure the most suitable and competitive annuity, consider these guidelines:
- Understand What You Buy: If you're unclear about an annuity, avoid it. Understanding your investment reduces the risk of being misled.
- Beware of Cold Calls: Avoid purchasing annuities from unsolicited calls as they are unlikely to provide the best advice.
- Seek Experienced Advisors: Ensure your advisor has significant experience with annuities instead of general financial products.
- Check Advisor Records: Verify your advisor’s history, including any complaints or regulatory actions, through resources like the NASD's public database.
- Watch Out for Non-Registered Products: Exercise caution with agents who push products they’re licensed to sell, often while disparaging others.
- Consult an Independent Resource: Before committing, consult independent annuity resources like Annuity FYI to verify recommendations. This opens a dialogue with your advisor and helps identify their strengths and weaknesses.
Choosing the right annuity is crucial for achieving your retirement goals, ensuring financial security, and maintaining peace of mind. By following these tips, you can better navigate the complexities of annuity investments and secure the best options for your future.
You can find the original non-AI version of this article here: The Good the Bad and the Ugly Why Your Broker May Not Be Recommending The Most Competitive Annuity.
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