I believe in full transparency when presenting solutions to my clients for their goals and needs.
There is no one perfect product for everyone, and so we need to do a complete fact-finder to find the right product to satisfy the situation. Sometimes there is no solution that I can offer, and I will state that immediately, so we don’t waste each other’s time. But most of the callers from my radio show are people who could benefit from what we have to offer.
Part of transparency, and what I like about our products, is that you know right up-front if there are any fees, and if so, how much they are. I do a lot of business with annuities, never with variable annuities, but with fixed annuities (similar to CDs), and Fixed Indexed Annuities.
These products do not have any fees at all. But there are optional features that you can add, such as income riders, that generally do have fees that range from 0.00% (no fee riders) to just over 1%- usually in the 0.95% to 1.10% range. Other than that, there are no fees in most of these products other than surrender fees, which I will discuss later in this article.
I find it amusing when I have demonstrated how these optional features would benefit the client substantially (i.e., having guaranteed growth of 7% a year until starting lifetime income, having increasing income in retirement, home health care multipliers, guaranteed growth for death benefit and wealth transfer, access to principal after starting income etc.) and they are eager to have those benefits. Still, then they have reluctance because they are paying a fee for that benefit. Usually, these are people that have their money in the market in brokerage accounts or 401(K)s or IRAs. When I point out that those accounts have added hidden fees inside of them, many of these people are shocked. The 401(K)s have administration costs as well as all of the internal fees in the products themselves.
Managed accounts are really like an annuity for the brokerage houses, as they get paid a fee, usually between 1-2%, to manage the account. That does not take into account the internal fees inside mutual funds, as well as all the transactional fees that go into buying and selling in the account. These types of accounts are anything but transparent, and finding all the fees is virtually impossible as CA Representative George Miller discussed on 60 Minutes on 9/2/2015. He pointed out that there are over a dozen hidden fees in the average 401k, and the quality of the funds in these accounts was “Mediocre at best.” I point out again that the only fee in these products is an optional one, and they are getting something for their money, not just paying someone to guess what the market is going to do!
Finally, I like to explain that surrender fees are there to protect both the Insurance Company and the client. They protect the Insurance Company because the Insurance Company decides what benefits they can offer the consumer based on current interest rates etc. as well as knowing that they can hold on to that money and gain interest and remain solvent and profitable for that period. If the consumer changes their mind and surrenders the policy early, then the insurance company has to recover from the loss of those funds as well.
The client wants the insurance company to remain in business as well, of course, as they are counting on the benefits they were promised to be there for them. Additionally, though, the consumer knows upfront what the worst-case scenario would be if an emergency came up, and they had to pull out a large portion or all of their funds. In most cases, it starts out at a 10% penalty for anything over 10% withdrawal and then declines to no surrender charge within ten years or less.
Contrast that with money in the market, which is always at risk. No one knows when the market is going to go down and have another 30-40-50% correction like we’ve experienced twice since the year 2000. And if you need your money for an emergency in that situation, you could lose half, or more, of your account value.